Unpredictable and challenging is how I would describe the commercial property market in 2020.
But while the future of the office has dominated much of the discussion during this period of unprecedented uncertainty, the suggestion that its days are numbered is overplayed. The occupier market has rallied somewhat over recent months with a number of transactions in Dublin’s city centre showing rents are holding up. There has been a notable increase in enquiry levels in the last two months and take-up levels are expected to be in the order of two million sq ft by year end. I expect the office market to perform better in 2021 as the Covid-19 vaccine is rolled out globally.
The logistics and industrial market got through 2020 relatively unscathed. Take-up figures to date are in line with 2019 performance and rents and investment yields have held up well. Occupier demand remains strong and there is a lot of capital chasing good-quality well-let industrial product. The one negative I foresee is there is likely to be a severe lack of new supply in 2021 to accommodate occupier and investor demand.
The private rented sector continued to perform well in 2020. Long-term leasing of completed developments to local authorities is a relatively new asset class and is in strong demand by investment funds. This market is likely to be well served over the next 24 months, with Government-backed long-term income attractive for many investors as a defensive play.
Affordability
Covid-19 has put increased pressure on the retail sector with high-street and mall retail suffering most. Affordability is a problem for multinational tenants and many are stuck in historic upwards-only rent scenarios. It is likely that rents and investment yields will come under further pressure in 2021. This sector will see the most change in the coming years as consumers continue to migrate from physical to online shopping.
On the investment front, at QRE Real Estate Advisers we have built our business around the analysis of the sub-€20 million investment market. The performance of this sector has been impacted considerably with just 74 transactions completing to the end of quarter three, compared to more than 250 in total in each of the last five years. The total value of this market up to the end of quarter three, meanwhile, stood at €300 million, compared to a total annual spend of €1 billion in both 2016 and 2017 and €700 million in 2018 and 2019. We now expect total turnover for this year to be in the order of €450 million.
The main reason for this dramatic fall off is uncertainty. Another reason is purchasers believe that assets can be “bought on the cheap”. However, unless a vendor is under pressure to sell, they will hold until the market begins to normalise. Having said that, if an investment is fundamentally sound in how it is set up, we are still seeing some transactions completing at pre-Covid levels, which is encouraging.
While it has been a tough year, there is every reason to be optimistic about 2021. The fundamentals of our economy were strong pre-Covid and with a vaccine close to delivery, the bounce back could be equally as strong. Commercial property remains an attractive investment.
Conor Whelan is managing partner at QRE Real Estate Advisers
