Ireland’s commercial property market is likely to endure a “quiet” first half of 2023 amid the wider economic slowdown, Savills warned, as real estate investors seek to shore up their current properties rather than add to their holdings.
The property agent sees some investors needing to raise fresh equity in order to maintain covenants with lenders tied to loan-to-value ratios. That could lead to a need to sell assets into a weakening market overall.
“The current period is undoubtedly a challenging time for Dublin’s office market due to its exposure to the tech sector, which accounted for 50 per cent of take-up in the six years before the pandemic,” Savills said. “Given the weighting of the Dublin office market towards the tech sector vis-a-vis other sectors, it is inevitable that the office market will also see periods of pronounced weakness as is currently being experienced.”
The report is the latest indicator of the overall decline in commercial real estate in recent weeks as property investors grapple with the economic downturn and the retrenchment among big technology firms. The investment market slowed sharply in the last three months of 2022, with deals totalling about €761.5 million during the period. That was the lowest quarterly total since 2012.
While tenants cut jobs and pulled back on how much office space they require, investment funds are grappling with a decline in the price of other assets such as bonds and stocks,while interest rates rise. As those securities shrink in value, that may increase the proportion of commercial property in a single fund, Savills said, pushing it beyond the maximum ratio allowed. That in turn could force institutional investors to offload properties into a declining market, thus pushing prices down further. At the very least those firms may have to effectively rule out fresh acquisitions.
Still Savills believe the tech sector is poised for a “significant upswing” when equity markets recover, which will benefit the Dublin office market as this demand feeds through to the occupational market once again.
The commercial property market should recover in the second half of 2023, it added. “While this current market adjustment makes for an undoubtedly difficult transition, we are seeing real estate yields return to levels more in-line with historical norms.”
The report notes that the last number of years has seen an increase in the prevalence of off-market deals taking place. Rather than engage with full open market marketing campaigns agents have been typically presenting opportunities on a confidential basis to a select number of identified parties that have the ability to execute.
Due to the decline in transactional values and the rise in price uncertainty, sellers are expected to further increase their preference for off-market deals as they offer greater transactional certainty and deliverability.
[ Una Mullally: It looks like a commercial property crash is looming for DublinOpens in new window ]
While the report notes the evidence that inflation is being brought under control and the spike of the past 12 months is subsiding, it says it is remaining higher for longer than in the recent past due to the “stickiness of core inflation”, which excludes food and energy. “This means that interest rates are likely to remain significantly higher than they have been over the last 10 years,” it says.
There were 179 investment deals worth about €5.8 billion during 2022, the estate agents said, echoing figures from other brokers. The largest transaction of the year was the acquisition of Hibernia Reit by Brookfield for the sum of €1.1 billion.
Irish buyers were the most active in 2022, accounting for 25 per cent of acquisitions. It was the first time since 2018 that they had the highest share of the market.
