The real estate market is slowly coming to terms with the dual burden of inflationary pressures and increasing interest rates while simultaneously having to address the ever-growing demands imposed by environmental, social and governance (ESG) issues. All of the above dictated the narrative of the Irish property market in 2023.
When one looks across the main sectors it is clear that the office sector endured a particularly difficult year. Capital values fell sharply as the market struggled to adapt to subdued take-up and a higher vacancy rate in the face of big tech’s 2023 “rightsizing”. Longer-term questions also overshadowed the market such as the impact of hybrid working on office demand and, indeed, whether increasing ESG-related demands could in fact render some office stock obsolete. What is clear is there is a flight to quality in the sector with over 80 per cent of take up for the year accounted for by buildings with an A3 or better Ber rating. What isn’t clear at this point is the full extent of the repricing given the limited level of transactions that took place in 2023.
Other sectors proved to be more resilient, namely retail, living, hotels, industrial and logistics. These sectors performed well thanks to either strong trading environment and/or a tight supply-demand picture. However, even these factors failed to hold up pricing fully, with the higher interest rate environment compressing valuations in these sectors also.
Unsurprisingly investor activity withered against this backdrop – on a rolling 12-month basis investment transactions stood at only €2.5 billion at the end of the third quarter, down almost 60 per cent compared to a year earlier. But while transaction levels were down across all the main sectors of the market, some notable deals still took place.
The development land market witnessed a sharp slowdown in transaction activity through 2023, with planning permission proving to be a key factor. Those with planning in place were focused on building out their projects mainly for approved housing body (AHB) sales or retail sales as the decline in site value proved to be unfavourable to meeting the required targeted returns. Those without planning permission, meanwhile, held their nerve, and chose not to put their assets on the market given the very limited pool of capital willing to take on planning risk in Ireland.
On a more positive note, and one which is not widely spoken about, we are 13 months into this cycle. When we look at the history of property cycles in Europe the peak to trough for the Covid-19 pandemic took 12 months while the global financial crisis (GFC) peak to trough cycle lasted 18 months. Our research at European level shows we are currently tracking a similar curve to that of the GFC, which would suggest that the markets will stabilise as we move into the second half of 2024. This would seem to be supported by the recent news of inflation and interest rates improving in the course of 2023. Euro area headline and core inflation rates have been trending back towards European Central Bank (ECB) targets late in the year. This gives rise to hopes that the ECB’s October “pause” may yet become its “peak”.
The outlook for real estate investment is expected to remain diverse and is likely to evolve in line with the industry’s emerging trends, particularly in the area of ESG. Increasing demand for technology, data centres and energy infrastructure will be key areas for investors to consider in 2024. And as the average age of our population continues to trend higher, investors will be keeping an eye also on the growing demand for retirement and healthcare infrastructure.
Aidan Gavin is managing director of Cushman & Wakefield Ireland