Residential Volumes Prop Up First Quarter As Office Volumes Flatline

Worried investors largely deserted the Dublin commercial real estate market in the first quarter of 2023, as harsh economic headwinds and a transatlantic banking crisis spooked deal-makers.

Office investment hardly registered, with the lowest quarterly volumes since Q3 2016, as just €90M was invested across seven transactions, according to the latest figures from adviser JLL.

However, the commercial, residential and industrial sectors all saw new international players make their investment debuts in Ireland, suggesting that a number of pan-European funds see potential and value in the Dublin area.

And while the potential contagion of Silicon Valley Bank and Credit Suisse appears to have been contained for now, Dublin’s commercial real estate sector is sitting on a knife edge, wondering which way the market may turn.

“We are in a period of market uncertainty," JLL Ireland CEO and Head of Capital Markets John Moran said. "While, encouragingly, there is still a lot of available capital, it is struggling to transact as pricing remains volatile. I expect we will need to see further downward price adjustments, reflecting the higher interest rate environment, before we see activity levels return to five-year averages.” 

The largest office deal by far was the Waterside buildings in Citywest, Dublin 24, which achieved a price of €65M. That acquisition saw Grosvenor Diversified Property Investments make its debut in Ireland after investing €40M alongside Fine Grain Property in FGPO Ireland Fund III, a fund focused on workplaces in business parks across Ireland.

The remaining six deals were far smaller and transacted at an average price of just €4.1M, JLL said.

Across all real estate sectors, €620M worth of transactions took place in Q1 2023, accounted for by 25 deals, according to JLL. It said those investment volumes outperformed the “initial bleak market expectations” caused by economic challenges and banking issues.

Bleak Outlook Among Investors

Internal JLL research in February 2023 revealed a downcast view of the remainder of the year and had shown that 58% of investors felt that market conditions would worsen or stay the same over the next six months.

The recorded transactional volumes for the year’s first quarter reflected this negative sentiment, with volumes down 49% on the 12-quarter average. Additionally, volumes were down 41% from the previous quarter and dipped 19% from the same period in 2022.

The residential sector represented the majority of deals completed in the quarter, with €334M of transactions completed. The sector accounted for three of the top five transactions, with notable investments including two debutants to the Irish market.

At the end of March Amancio Ortega, the billionaire founder of Zara, agreed his first deal in Ireland at 6 Hanover Quay, Dublin 2, worth €101M. The building, called Opus, houses 120 apartments, and was acquired by Ortega’s family office, Pontegadea Inversiones, from Angelo Gordon and Carysfort Capital.

Similarly, Eglington Place in Dublin 4 was sold by Richmond Homes to M&G’s European Living Property Fund, which is looking to make more rented residential acquisitions in Ireland after agreeing the €99.5M deal.

Becoming the latest pan-European investor to target the Irish private rented sector, M&G launched the fund in early January with €578M of equity — including €400M from MN, one of the largest pension administrators and asset managers of Dutch pension funds.

Abrdn’s Pan European Residential Property Fund, or aPER, also recently completed the purchase of Roselawn, a multifamily/build-to-rent scheme in Dublin for €70M. The development was the first BTR asset purchased by the fund in Dublin after being acquired on a forward commitment basis in July 2021 from Richmond Homes.

That said, despite being the busiest sector, quarterly volumes were still down 28% compared with average volumes in 2022 and down 40% on the five-year quarterly average. 

JLL said that it believes investor interest in the sector will remain throughout 2023 because of a fundamental undersupply of housing, both in quality and quantity, which continues to underpin the asset class.

However, economic headwinds mean deal-making has become increasingly difficult, which is likely to impact transaction volumes and means that total transactional volumes are set to fall compared with previous years, the adviser said.

Ingka Completes First Logistics Deal

The other significant trade during the period was in Dublin 2 for a €101M logistics investment by Ingka Investments, the investment arm of Ikea owner Ingka Group, which acquired Greenogue Logistics Park in Dublin in its first-ever logistics investment.

Ikea Retail UK and Ireland has also announced that it is to open its first Irish Customer Distribution Centre at the site.

The acquisition by Ingka Investments is part of the company’s ongoing strategy to invest in distribution and logistics real estate in major cities where Ingka Group operates. It forms part of a wider strategy to buy key real estate locations after earlier acquisitions in Paris and London's Oxford Circus, which are to become city-centre Ikea stores.

For commercial real estate, the rest of the year seems increasingly likely to see polarisation between older stock and new, sustainable developments coming online increase.

That has already been evidenced in suburban Dublin markets that have slowed amid ongoing uncertainty according to HWBC’s Dublin Office Review for 2022, which showed that total take-up for the year stood at 2.41M SF, almost 50% ahead of 2021.

The question remains whether the current short, sharp shock will be painful but swift, or will draw out into next year and beyond, the real estate adviser said.

From an occupational standpoint, financial services firm Citi and SMBC Aviation were the standout deals in the final quarter of the year, signing for 300K SF in the north docks and 135K SF in the city centre, respectively.

HWBC reported that average prime headline rents largely remained stable at a range of €57.50-€65 per SF in 2022, while new developments on Dawson Street and Kildare Street achieved headline rents of €65-€67 per SF during the year.

For real estate investors, there will also be concern that the value of general mergers and acquisitions in Ireland beyond the property sector collapsed to the lowest level since the Global Financial Crisis in the first three months of 2023.

M&A Activity Plummets

M&A with any Irish involvement reached €1.4B during Q1 2023, an 87% decline compared with the first quarter of 2022 and the lowest start to the year since 2009 — the depths of the financial crash in Ireland — according to figures prepared for the Irish Independent by data specialist Refinitiv (part of the London Stock Exchange Group). 

The number of Irish deals was down more than a quarter compared with a year ago and Ian McFarlane, Ireland country manager for LSEG, warned that while deal flow was still relatively high, values were down.

“In a positive note the number of deals continues to remain high with 115 deals, which is the third-highest first quarter of all time, but average transaction values have declined significantly,” he said.

Although global economic news appears to be slightly better than first feared and interventions put the brakes on a feared banking crisis, the high cost of debt and inflationary pressures mean there are only a few glimmers of hope in the immediate future, said JLL Ireland Head of Research Niall Gargan, who said that 2023 is set to be a "challenging" year.

“Rising interest rates signal that the era of cheap money is over," he said. "However, the slowdown in the pace and magnitude of increases means we can plan and price debt once more and look ahead to the other side of the tightening cycle. The market dip will present opportunities for cash buyers, as some funds seek to swiftly offload assets to meet investor redemptions."