Wall of capital continues to chase the risk premium offered by Dublin property

Total commercial real estate investment in Ireland for the first nine months of 2021 reached €3.5 billion, 15 per cent above where 2019’s record-breaking year was at that point.

Full-year volumes are expected to reach between €4.75 billion and €5.25 billion in 2021, the second strongest year this cycle.

The Irish market continues to be less volatile and increasingly attractive to foreign investors seeking higher risk adjusted returns, as evidenced by their 81 per cent share of turnover volumes in the first three quarters of the year. It is evident that the downward pressure on bond yields has highlighted the attractive spread available on Irish property.

The standout performers of the Irish market so far this year are the living and logistics sectors, which account for a significantly higher proportion (54 per cent and 13 per cent respectively) of total investment than their historic averages. Both sectors are currently benefitting from demographic and technological changes caused or accelerated by the pandemic.

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The Dublin private rented sector (PRS) market is characterised by structural undersupply of housing, which has led to continued rental growth over the past few years.

Affordability

Currently, affordability has become a critical issue in segments of the market, and rent controls are tightening. Nevertheless, the stable income streams that the sector offers remain the key point of attraction. Key deals in 2021 include Greystar’s purchase of Griffith Wood, and Hines’s purchase of Rostrevor Place, for €177 million and €63.5 million respectively, demonstrating net yields in the mid-late 3 per cents for prime stock.

Retailers and logistics operators have been driving occupier demand for warehousing space, and the undersupply of existing and future stock has been driving vacancy rates down and rents up. The ongoing forward-funding disposal of Primark’s new distribution facility in Newbridge, which attracted very strong investor interest, is expected to trade at a net yield of below 4 per cent and will set a new benchmark for prime logistics in the Irish market.

Although the €127 million worth of offices transacted in the third quarter is down on the second and first quarter figures, sentiment in the sector is improving, which should see deal flow pick up over the next six months.

Core European and North American investors are dominating the office market at present, including players such as Deka Immobilien, which acquired Riverside IV for €164 million, Commerz Real, which acquired One & Two Docklands for €152.3 million, and Blackstone, which is understood to be in exclusive discussions for Meta's (formerly known as Facebook) EMEA campus in Ballsbridge for about €400 million.

Looking ahead, we believe that investor interest in Irish real estate will remain solid into 2022, due to the strong levels of global liquidity. As prime real estate yields throughout Europe have reached unprecedented low levels during this market cycle, Irish real estate still appears good value compared to other countries.

These low property yields have become more acceptable by investors in recent years, as higher market liquidity and positive market fundamentals have supported investor confidence in property, coupled with the attractive spread over bond yields. This is expected to translate into further downward pressure on yields within the most sought-after sectors.

Consumer habits

Due to the limited product available that meets investors specific environmental, social and governance (ESG) requirements in core European markets, pricing for core assets will remain keen, with capital values set to rise further for the best-in-class buildings in key sectors including offices, PRS and logistics.

Although retail is the sector that many investors are avoiding, due to changing consumer habits and risks around occupier covenant strength, food-anchored assets and strong performing retail warehousing are in high demand. Forward purchase and funding deal structures will continue to be prevalent in the period ahead due to the limited availability of standing stock opportunities in certain sectors.

Finally, ESG and net zero will remain at the top of the business agenda, as interest in sustainable real estate drives demand from all stakeholders for buildings that can demonstrate a high green performance. As a result, we envisage the pricing discount to non-core, less attractive older buildings with poor ESG credentials, to widen.

Kevin McMahon is a director within the investment division at Savills Ireland