Current uncertainty offers opportunity for investors to secure attractive property deals

Investment Market

With interest rates increasing and high-profile lay-offs in the tech sector, some institutional investors have hit the pause button, waiting for greater levels of transparency on pricing before re-entering the market. This has resulted in lower transaction volumes in the final quarter, traditionally the busiest time of the year. Despite this, due to the strong performance in the earlier part of the year, total investment spend for 2022 will exceed €5 billion (the third highest level of investment activity on record).

Although some investors are sitting on the sidelines, others are taking the opportunity provided by reduced competition and higher returns to secure attractive deals. The most active of these have been the French retail funds, including Corum and Novaxia, with German investors, including Patrizia and AM Alpha, also active.

Although volatile borrowing costs are impacting pricing, with prime yields in both the office and private rented sector (PRS) markets increasing by 25-50 basis points (bps), there are indications that the slowdown in transactional activity may be relatively short-lived, with demand for Irish assets likely to rebound by the second quarter of next year.

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There are a number of reasons for this, including;

– In contrast to many continental European markets, which saw continued yield contraction over the last two years, Irish investment returns remained largely static. Although this yield gap has been partially eroded, with values now falling in continental Europe, Irish returns still offer investors a significant premium.

– Despite the current turbulence in the sector, Ireland’s strength as an international technology and pharma hub remains a significant draw. Although painful for those involved, redundancies in Irish-based IT companies make up only a tiny fraction of the estimated 200,000 currently employed. As the global reliance on technology continues to increase, this sector is likely to be the first to rebound. This is supported by a recent survey by the American Chamber of Commerce Ireland, which shows that two thirds of US multinationals operating in Ireland expect to hire additional staff over the next 12 months.

– In addition to the importance of the IT sector, the Irish property market benefits from US-based occupiers and investors to a greater extent than many of our European peers. As the Fed has moved faster and more aggressively than the ECB to tackle rising inflation, with evidence that costs are already beginning to moderate, it is likely that the US will emerge from recession earlier than Europe. The Irish market should benefit from a US recovery and, given the relative strength of the dollar to the euro, we will see an increase in both occupier demand and property investment.

Although we anticipate activity levels will recover next year, a longer-term casualty of the current high levels of inflation and interest rates will be older, non ESG-compliant properties. Institutional buyers are under pressure to rebalance their portfolio in favour of sustainable assets and, unless older properties offer a clear roadmap to improve their environmental credentials and are priced at a level to allow for required upgrading works, the demand for and value of these assets will continue to decline.

Although there are continued risks, the first and second quarters of 2023 may represent an attractive buying opportunity for equity investors. Historically, the best time to buy has always been when funders are most reluctant to lend.

– Adrian Trueick is Irish investment property director with Knight Frank