Brian Gaffney, Director at Murphy Mulhall gives his views on the likely pricing adjustment coming in the Irish commercial property market.
The Irish commercial property investment market continues to perform impressively to the end of H1 2022, with a spend of €3.1 billion for the year to date. This record opening half was largely driven by the sale of Hibernia REIT portfolio (sale price approx. €1.1bn). Excluding this, transaction volumes for the quarter were a more muted €1.2bn, with a H1 spend of €2.0bn. This is still ahead of the historical average for the Irish market which is €1.72bn (half-yearly). Notwithstanding this there is a firm view amongst both institutional and smaller investors that they will adopt a more cautious approach for the coming months as the impact of likely interest rates hikes by the ECB and continual inflationary pressure will impact on returns. With the potential for an economic global recession also looming, these factors will have an undoubted impact on yields in the market. While the factors driving these may abate in the medium term, the resultant wage pressures and production cost increases will keep inflation elevated above the 2% target well into 2023.
The likely softening of investment pricing will be lead by the increased cost of debt and there are reports of likely ‘hold patterns’ by some vendors and investors in the market. Across all sectors of the Irish investment market, with the exception of high street retail, investors still have confidence in the underlying occupier market especially in the offices and industrial/logistics sector but the investor pool is likely to thin out. Market reports across Europe are forecasting capital growth slowing from 2022 to 2026 in the three biggest sectors, logistics, offices, and retail.
A potential for a drop in competitiveness within the market will also drive softening yields. The increasing cost of debt will also further reduce the margin between property yields and financing rates, impacting negatively on returns. It is likely that yields will soften by around 25 to 50 bps in this predicted outward yield movement. There is ample anecdotal evidence across the UK and European markets of transactions being slower to progress (with ultimate price adjustments) or being placed on hold due to changed pricing or cost expectations on either side.
Q3 2022 could see a sluggish investment market whilst vendors and investors review pricing and monitor other markets such as the UK and Europe for similar trends. Whilst some investors will adopt a ‘wait and see approach’ there will be some who see the price shift as an opportunity.
The Irish commercial investment market is now viewed globally as a secure and stable market, so notwithstanding the above, we do believe there will be continued activity for the remainder of the year. Dublin remains a very attractive destination for international investors compared to other established European centres such as Frankfurt, London and Paris as prime yields are higher and better returns on offer across all sectors including Offices, Industrial, PRS and Retail.
– Brian Gaffney MSCSI MRICS, Director, Murphy Mulhall