The fundamentals of the commercial real estate market remain positive

Despite the start of containment until 2021, it has been a good year for the commercial real estate market.

At the end of the third quarter, sales reached 3.5 billion euros and are expected to be around 4.5 billion euros for the year as a whole. More than half of all investment transactions through the end of the third quarter were residential, up 38% from the same period in 2020, illustrating continued demand for residential investment.

Investors

This year we have seen strong demand from two cohorts in particular: wealthy Irish private investors and European funds, particularly French and German. US money is also targeting Ireland.

An interesting statistic for 2021 is the increase in the number of Irish private investors in the market. In 2020, only 18% of acquisitions were made by Irish buyers. This rate increased steadily over the year to reach 43% in the third quarter of 2021. With negative interest rates charged by banks on deposits, and the yield on Irish 10-year bonds of 0.25% per year. compared to the latest MSCI equivalent return on all real estate of 5.4 percent, real estate is a particularly attractive investment. We have seen larger scale Irish investors focus on more opportunistic deals, while smaller scale investors are more risk averse.

European funds see Ireland as a safe real estate destination. Irish real estate, and Dublin real estate in particular, has shown resilience throughout 2021 and has been successful in attracting capital due to positive market fundamentals. Strong performance and future confidence in the economy are fundamental to the business of commercial real estate investing and how it compares to other jurisdictions.

Retail sale of bricks and mortar

Investor perception of retail took a turn in the second half of this year. Some sellers were confident enough to put assets on the market based on the existence of investor demand. Owners such as Marathon, Goldman Sachs and Davidson Kempner have successfully sold a number of assets such as Parks Portfolio (€ 70 million), Bridgewater Shopping Center (€ 18 million) and Nutgrove Retail Park (€ 66 million) euros). With the combination of values ​​at attractive levels, rising occupant inquiries and the fact that it is likely that it will be some time before a new retail outlet is built have underpinned the logic of acquisition.

Office

The office as a workplace has been called into question last year. However, with a high level of occupant inquiries and a potential shortage of new office space, investor demand remains strong. An Irish private investor has acquired Royal Hibernian Way for 74 million euros. German investor Deka Immobilien has reportedly fended off stiff competition from a number of international funds to acquire Airbnb’s European headquarters at Hanover Quay for a yield of less than 4%, while Blackstone reportedly pays € 400m for the headquarters of Meta. at Ballsbridge, again with a yield of around 4%.

Logistics

The biggest winner during Covid continues to be the logistics industry and it is now a key part of the overall retail supply chain. Yields tightened considerably, with the Primark facility at Newbridge secured by Union for around € 129 million, a yield of less than 4%. This is now a lower return than premium and online trading with offices.

Sustainability / “brown discount”

The demand for offices meeting the ESG (environmental, social, governance) requirements of occupants and investors has also changed significantly. Both are reviewing their portfolios with these requirements in mind, which has had a positive impact on new buildings, with older properties being viewed through the lens of additional expense and upgrade costs.

Overall, Ireland and housing market fundamentals remain positive, despite continued uncertainty caused by the pandemic. Inflation has appeared more recently and real estate being a traditional hedge against inflation, its fundamentals as an investment vehicle should remain attractive. That said, how central banks handle inflation will be something to watch in 2022.

Seán O’Neill is director and co-owner of TWM

Penny D. Jackson