International Investors Tell Sellers In Dublin It's Time To Get Real

International investors in Dublin’s commercial real estate market remain enthusiastic about the city’s fundamentals but are being put off by the unwillingness of sellers to drop prices to realistic levels.

That is the view put forward by Miles Skinner, Union Investment Real Estate head of investment management in the UK and Ireland, at Bisnow’s the Future of Office in Ireland: Weathering the Storm event at the Alex Hotel in Dublin on 27 September. 

“It’s incredibly tough to get deals over the line,” Skinner said, citing pricing as the major block to transactions.

Union has been one of the largest international investors in Dublin over the past five years. 

“We have come from a period where interest rates were negative in Germany, so 1%-2% returns [in real estate] have looked attractive. That is no longer acceptable,” he said. “There is pressure on returns, and the alternatives to real estate are quite compelling. It’s pretty remarkable that you can put your money instead into [high-return] risk-free investments.”

Skinner said that he expected more yield movement in the office sector, and because of that, few investors are looking to get into the market without a compelling price or value-add option.

“If we have downward movement, that impacts our ability to get capital,” he said.

Skinner added that in the case of core assets, Union was risk-averse, while he pointed to sustainability as another important factor in any potential asset acquisition.

“International investors have money for new and refurbishment from brown to green building acquisitions,” Ireland Strategic Investment Fund Senior Investment Director Sarah Hickey said. “However, the challenge is the bid-to-ask spread. The investment issues are not unique to Ireland. We still feel there are some pricing adjustments to come, and once there's a bit more liquidity, we believe Dublin will bounce back.”

Figures shared with Bisnow by MSCI outline the dramatic downturn in transactions over the first six months of 2023, as first-half transaction volumes fell 72%. That is greater than the average fall of 58% across Europe. 

Another important factor for Dublin is the amount of grey space available on the market. Leasing volumes have suffered as tech firms have retrenched, often looking to sublet space they had earmarked during periods of expansion.

Knight Frank Director of Offices Jim O’Reilly estimated that the vacancy rate for commercial real estate in the city sits at just under 14%, and he predicted that this will grow to about 17% by the end of the year. That figure puts pressure on rents in the short term but could be absorbed fairly quickly.

“In isolation, that statistic is reasonably alarming, but agents will tell you that they are a lot busier in terms of viewings and the size requirements are increasing,” O'Reilly told attendees.

In all, about 350K SF of deals have been done this quarter, but 700K SF are in discussions, while “named demand” is approaching 1.5M SF, he said.

“That’s about 2.5M SF, so the situation is not anywhere near as stark as the figures suggest,” O'Reilly said.

He also pointed to the low levels of development and predicted that by 2025 Dublin would be facing a lack of suitable stock. He also noted a clear difference between Grade A, centrally located buildings and the wider picture across all grades in Greater Dublin.

“That’s a whole different story,” he said.

O’Reilly also said some occupiers may try and make use of softer terms in the current situation, especially if the available stock declines toward the end of 2024.

“At the end of 2022, we were looking at up to €70 per SF for Grade A, whereas today that is more like €65 per SF, and by year-end we are probably looking at €62.50 per SF,” he said. “I feel that’s pretty short-term. Towards the middle of next year, we may well be moving up towards €65 per SF again, and that could appreciate again in 2025-26 because of the lack of stock. So the opportunity is to move now with softer terms and better incentives.”

On top of that, despite concerns over the Dublin workforce’s reticence to return to the office, a more challenging economic environment has seen an uptick in terms of people working in offices, Corum L'Epargne Global Asset Management Director Peter Hester said.

The company had recorded higher occupancy rates at its assets, measured via building entry badge swipes, he said, adding that employers continued to search out quality office space.

“The headlines are very alarmist, but that’s not what we're really seeing on the ground,” he said.

Hester said that in Europe, lease lengths were typically heading toward 8 to 10 years and he anticipated similar movement in Dublin, as well as leases tied more closely to energy performance for both the building and the tenant's occupational behaviour.

“Larger international tenants are committing to longer leases, but smaller companies are typically looking for more flexibility,” he said. “We'll have a look at a break with penalties or extra incentives for them to commit longer. But rent-free is becoming less of an incentive. Often, it’s about the energy performance of the building.”