This has been a watershed year, with multiple factors conspiring to change the mood music in 2022. It has taken time for global production to ramp back up after Covid restrictions were lifted, and the war in Ukraine has exacerbated this. The outcome has been sharp inflation, and this has made it necessary for central banks to withdraw the low interest rates that propelled property investment for the last decade.
Rising rates have caused a mismatch between current rental yields and the ability to service debt. Consequently, cap rates are inevitably moving out. This is universal across countries and sectors, but in Ireland is most pronounced in logistics and PRS, where yields had previously tightened most sharply.
A total of €4.85 billion of investment property was traded over the first three-quarters of this year. When all the chips are counted, we estimate turnover for the full year could be about €5.5 billion, putting 2022 pretty much on par with 2021, the second strongest year in history. However, the investment context has changed, and investors’ and vendors’ expectations are having to adjust and realign. This dance we expect may take several quarters to play out. While this happens we are likely to see a tapering of transactional activity and an adjustment in pricing – both of which will set a baseline for the next cycle.
In terms of occupier markets, conditions are definitely less favourable than a year ago. Higher costs of living are dragging on an already struggling retail sector, and September’s figures show that sales continued to fall sharply. The right-sizing of the tech sector has resulted in local job losses and, along with hybrid working and ESG, will present challenges for the absorption of older office stock. Nonetheless, Ireland has two distinct advantages that will continue to attract capital.
Firstly, our population growth has rebounded sharply. This will provide strong support for retail property cash flows – particularly in the more defensive segments, eg grocery- and convenience-led schemes. Secondly, although Ireland’s economy is now slowing, it is forecast to outperform most, if not all, EU peers in the foreseeable future. This should ensure continued jobs growth, driving the demand for best-in-class office space and underpinning cashflows. To this point, despite recent sector-specific dynamics in big tech, it is notable that office-based employment in Dublin continues to rise year on year.
In logistics, a significant pipeline of supply is coming through. Strong demand for warehousing due to population growth, the ongoing expansion of ecommerce and the adoption of on-shoring will ensure this is easily absorbed. Vacancy will remain tight and rents should continue to rise. Housing delivery surged in 2022 and will surpass 28,000 units as predicted by my colleague Dr John McCartney at the start of the year. But expanding yields and rising costs are making most schemes uneconomic, which will eventually drag on output. At the same time, housing demand is strongly supported by in-migration and Government initiatives such as the First Home Scheme and softer mortgage rules. Rent and house price inflation have moderated in recent months, and this trend should continue. However, an outright decline in house prices and rents still seems some way off.
Kenneth Rouse is managing director and head of capital markets at BNP Paribas Real Estate Ireland
