After two years of unprecedented challenges posed by the pandemic, the country approached 2022 with a sense of optimism as the final days of social distancing emerged on the horizon. Unfortunately, this optimism was short-lived, and in the economic aftermath of the pandemic, new challenges emerged that make for a subdued outlook for 2023.
Despite the murky terrain the markets have rolled into, there is a case for positivity in 2023. Gustave Flaubert said, “There is no truth. There is only perception.” As such, it is best to view the markets over the next 12 months as either a glass half-empty or a glass half-full.
First, let us look at the half-empty glass.
Two topics are at the forefront of the industry that did not form part of the conversation 12 months ago: inflation and interest rates. The inflation rate is on the brink of double digits, with the latest data from the Central Statistics Office placing it at 9.2 per cent in Ireland, a level not experienced since the mid-1980s. Inflation is impacting upon all countries within the European Union. As a result, the European Central Bank has aggressively raised interest rates from record lows to 2.0 per cent in a matter of months, with a further rate increase imminent.
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Volatility has crept into the markets as it absorbs the increasing rates. Market participants are facing capital constraints, partly due to lagging valuation resets hampering the deployment of capital. This impacts pricing, and the prolonged period of price discovery is slowing transaction activity and triggering divergent performance across sectors and assets. This is reflected across Europe, where the region experienced a drop in third-quarter activity, with volumes contracting 25 per cent year-over-year to $64 billion (€60 billion). It is the first time since the global financial crisis that European transaction levels have fallen for three consecutive quarters.
The year ahead will be a significant “reset” period within the industry. Across all sectors, sustainability is leading the conversation and the decision-making
It is anticipated that activity in the market will subdue for Q4 2022/H1 2023 as a period of price discovery will lead to a wider bid-offer spread and a mismatch between vendor and buyer expectations. JLL research carried out in November 2021 found that 5 per cent of investors expected market conditions to worsen in the next six months. The same research in November 2022 discovered that 49 per cent of investors anticipate worsening market conditions over the next six months.
Now, let us look at the glass half-full.
Despite the multitude of economic challenges, the Irish market has outperformed expectations in 2022. By the end of Q3 2022, the total volumes invested during the year were €4.7 billion. This makes 2022 the third-largest year on record for investment volumes, behind 2019 (€7.25 billion) and 2021 (€5.5 billion). Money invested in Q3 2022 outperformed the five-year quarterly average by 46.2 per cent, with the office and living sectors exceeding their five-year quarterly averages by 70 per cent and 44 per cent respectively.
It is anticipated that the end-of-year volumes will range between €5.2 and €5.3 billion. With a few notable deals in the market expected to sign in 2023 and solid fundamentals in the living sector, the markets may again outperform expectations, albeit at reduced levels of activity, but accurately priced assets will continue to attract attention.
[ A year of two halves as Irish property displays remarkable resilienceOpens in new window ]
[ Investment in commercial real estate on course for €5.5bn spendOpens in new window ]
2023 – Creating the foundation for the future
The year ahead will be a significant “reset” period within the industry. Across all sectors, sustainability is leading the conversation and the decision-making. In the office sector alone, 90 per cent of Dublin’s top 10 office tenants have commitments to reduce or eliminate carbon emissions. Achieving this goal will require decarbonising real-estate operations. The ongoing flight-to-quality trend will intensify the bifurcation in the market, with demand for high-quality Grade A space showing greater resilience. Grade B and lower assets will come under increasing pressure and, in some cases, might be unleasable in their current form. A push toward refurbishments and retrofitting will necessitate more significant capital expenditure from landlords.
So 2023 will be a year to watch carefully and, as ever, clever investors will be rewarded but undoubtedly with elevated levels of risk around those returns.
John Moran is chief executive and head of capital markets at JLL Ireland
