Commercial property specialists CBRE today released their latest bimonthly report for July 2022, commenting on trends and transactions in all sectors of Ireland’s commercial property market. According to the property consultants, the performance of the Irish commercial real estate market continues to buck the trend, despite economic and geopolitical headwinds with more than €2.75 billion invested in Irish real estate in the first half of 2022 when the recent Hibernia REIT sale is included. Although investor pools for certain real estate assets across Europe have been thinning and the bid ask spread has been showing signs of widening in some markets, investor appetite for prime real estate in Ireland remains healthy and there has been encouraging levels of bidding witnessed for assets brought to the market in the first half of the year.
According to Marie Hunt, Head of Research & Consultancy at CBRE Ireland, “Depending on the extent of monetary tightening witnessed over the coming months, we could see some softening in property yields. However, as opposed to a significant outward movement in pricing, we can expect to see a widening gap between buyer and seller expectations, particularly for secondary buildings with low ESG credentials. Prime rents are meanwhile expected to continue to rise. Until such time as inflation eases, uncertainty will prevail and this may delay some development projects commencing on site, making existing supply shortages even more acute in some sectors of the market”.
THE OFFICE MARKET
· Office take-up in the capital during Q2 was roughly on par with the 45,000m2 signed in the first quarter of the year. In addition, more than 120,000m2 of accommodation is reserved at the mid-year point, suggesting continued momentum in H2 as these office transactions ultimately complete and some other large requirements are fulfilled.
· Although there is limited supply, good quality fitted accommodation is particularly highly sought after considering the cost and length of time to complete building fit-outs at present.
· Prime headline office rents in Dublin have now reached €672 per square metre (€62.50 per sq. ft.) and are likely to reach €726 per square metre (€67.50) per sq. ft.) by year end.
THE HOTEL MARKET
· Despite an improvement in occupancy year-on-year, increasing running costs are now impacting significantly on hotel performance and this has proven particularly challenging for hoteliers.
· €137 million of hotel trades were completed in the first half of 2022 in eight individual hotel sales.
· Most of the hotel development opportunities being acquired are now being purchased by hoteliers and owner occupiers with developers impacted by build cost uncertainty and rising funding costs over recent months and therefore less active in the market than they have been heretofore. Demand for prime standing stock is therefore stronger than for development opportunities at present despite the fact that the market is so starved of supply of hotel accommodation.
· We continue to see a large number of hotel transactions being conducted off-market with several bid processes underway at present. There are several transactions in various stages of legals, pointing to another strong year of transactional activity in this sector. A number of hotels are due to be launched for sale in the second half of the year.
· More than 1,550 hotel rooms have been completed and opened in Dublin in the first half of 2022 while there are currently approximately 2,950 hotel rooms under construction in the capital and due to open by Q1 2024. Until such time as these new hotels come on stream, hotel capacity will continue to be a significant challenge.
THE INVESTMENT MARKET
· There has been a decline in the number of bids on certain assets as well as some softening in pricing in some European markets in recent months as a result of increasing interest rates and funding costs. Activity levels and pricing in the Irish investment market however have remained healthy.
· Core investors are encouraged by the fact that yield spreads are considerably wider than in many other European markets and that many sectors of the Irish market are severely undersupplied, which in turn is helping to sustain rental cashflows and returns.
· In total, approximately €2 billion of investment trades completed in the Irish market in Q2 when the recent Hibernia REIT sale to Brookfield is included, bringing total investment spend in the Irish market in the first half of 2022 to more than €2.75 billion.
· Investor demand for private and public sector multifamily investment opportunities remains strong with a depth of capital continuing to target opportunities in this sector. There are a large number of multifamily transactions at various stages of negotiation at present, most of which are being conducted off-market.
THE INDUSTRIAL & LOGISTICS MARKET
· The industrial and logistics sector is experiencing extremely low availability and above average demand, which in turn is fuelling pre-letting activity and continuing to support rental growth.
· Some occupiers are compromising on their preferred location in an effort to find suitable accommodation.
· Prime industrial rents in Dublin are now in the order of €121 per square metre or €11.25 per square foot and are expected to rise further during the second half of the year.
· A large number of substantial industrial transactions negotiated over the last three-month period hadn’t signed by the end of June. A bumper quarter of transactional activity is therefore anticipated in Q3 as these transactions complete.
· A number of sizeable requirements have emerged in recent months which will see continued momentum in this sector over the course of the second half of 2022 and into 2023, with particular demand for modern facilities that offer the best ESG credentials. In total, there is demand for almost 275,000 square metres of accommodation at present.
· There has been somewhat of a slowdown in transactional activity in the healthcare sector of late compared to the significant volume of activity recorded in recent years. Nursing home operators are being impacted by rising cost inflation which is feeding through to all parts of their businesses and affecting profitability. Rising wage costs and staffing shortages are causing particular problems.
· Despite the scarcity of standing stock, this is where much buyer attention is focussed at present as most operators will be slow to proceed with site acquisitions or new development projects in the current climate as a result of present uncertainty around build cost inflation. The only new nursing homes likely to be developed in the short to medium term are those where construction has already commenced.
· There is growing evidence of some smaller nursing homes around the country closing down, meaning supply is shrinking as opposed to growing despite significant undersupply of nursing home places.
· A notable trend in recent months is increased appetite for investment in Primary Care Centres.
THE RETAIL MARKET
· Although some retailers may delay decision-making as a result of the prohibitive cost of store fitouts in the current climate, retailers across Europe are continuing to plan store expansions.
· Planning decisions and store fit-outs are proving very lengthy, meaning despite healthy volumes of activity, occupancy levels will take some time to visibly improve in some locations.
THE DEVELOPMENT LAND MARKET
· Transactional activity is still constrained in the development land sector, with the vast majority of trades comprising relatively small parcels of land. There has been a notable increase in the level of off-market trades, and this is likely to continue to be the case for the foreseeable future.
· As debt costs ultimately rise in line with rises in interest rates, demand for sites with the benefit of planning permission will inevitably increase. That said, some schemes with planning may need to go back into the planning process again to secure permission for more efficiently designed schemes.
· August will see some reprieve in activity before there is another push from September onwards when several new sites and development opportunities are due to be launched to the market.