Commercial property activity slows to one of lowest levels on record

Activity in the Irish commercial property market slowed to one of the lowest levels on record in the second quarter, reflecting the continued rise in borrowing costs since mid-2022, Sherry FitzGerald has said.

Ireland’s largest estate agent said the trend was evidenced in the volume and value of acquisitions, with only 26 transactions closing. Turnover for the three-month period was €333 million, also close to record lows.

For the first half of the year, capital spend reached €985 million, less than half that seen for the same period in 2022 and similar to the level recorded during the first half of 2020 when the pandemic impeded market activity.

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Sherry FitzGerald senior economist Jean Behan said: “In line with expectations, the rising borrowing cost environment has played its part in muting investor activity in the Irish commercial property market during the first half of the year.

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“This is particularly apparent in the size of transactions during the period, with 58 per cent in the €1 million to €10 million cohort. Only 11 per cent of transactions exceeded €50 million, well below levels seen in recent years. Notably, almost all of these took place in quarter one.”

Residential assets remained the key driver of investor activity, accounting for 43 per cent or €427 million of total capital spend during the first half of the year.

The retail sector is experiencing an uplift in investor interest with a further 20 per cent or €199 million of capital invested in this asset class in the second quarter. Capital spend in office assets remained relatively weak, equating to €130 million or 13 per cent of total capital transacted.

Like previous years, Dublin continued to attract the largest share of investment turnover in the first half of the year at 69 per cent. Galway and Cork accounted for 4 per cent and 3 per cent respectively.

Overseas investors remain key players in the Irish market accounting for at least half of all capital transacted during the period.

Investor activity is expected to remain subdued in the short term as interest rate uncertainty persists in line with the trends seen in the first half of the year, the report said.

“Given the increase in overall costs of funds, investors’ ability to utilise debt and remain competitive in a bidding process has become more constrained, which will likely result in a higher proportion of transactions completing on an all-equity basis,” said Sherry FitzGerald director of commercial and head of residential investment Ross Harris.

Structured investments

Demand for residential assets is expected to remain strong during the remainder of the year, underpinned by current market dynamics. That said, rising borrowing costs coupled with above-average building and construction cost inflation, are likely to continue to dampen forward-funded and forward-commit structured investments in the short to medium term.

Retail is also expected to attract strong investor interest buoyed by the strength of consumer expenditure and the historically high rate of employment.

Investment activity in the office sector is likely to remain suppressed in the medium term as occupiers continue to streamline their space requirements due to more flexible working arrangements. That said, demand for high-quality accommodation remains “very strong”.

In particular, a growing need to achieve environmental, social and governance (ESG) targets and become more carbon-neutral and energy efficient is becoming increasingly important for investors and tenants alike, the estate agent said. This is changing the profile of investment transactions across all asset classes and will remain a feature of the market, continuing to place downward pressure on older stock values resulting in a “brown discount” as opposed to a “green premium”.