Irish CRE Bucks European Trends, But For How Long?

The Irish property market has shrugged off the economic headwinds of inflation and war to post optimistic investment, sale and leasing figures.

The Irish property investment market saw over €3.2B of activity in the first half of 2022, with investment 17% higher than in 2021 and 11% higher than a previous half-year peak in 2016, according to data from Savills.

The figures have been boosted by the sale of Hibernia REIT to Canada's Brookfield, but Savills' analysis showed that even stripping out the €1.1B purchase, the market transacted €1.24B in the second quarter, significantly above the 10-year average transaction volume of €950M.

However, investors have begun looking for alternative investments alongside the traditional office blocks, with hotels, student accommodation, healthcare and life science investments becoming more prominent.

Reports by JLL, CBRE and Savills found that the Irish CRE market had rebuffed headwinds better than many European markets, at least for the present.

“Despite the volatility and uncertainty in the post-pandemic economy, expectations for healthy transaction volumes in 2022 have not tapered in the face of the multitude of challenges that have presented themselves,” JLL Ireland Head of Research Niall Gargan said in a statement.

“This is in contrast to mainland Europe, where the onslaught of geopolitical and economic obstacles has impacted many large deals leading them to stall or fall through, with the likes of the €300m+ deal for the MIK Building in Düsseldorf and Wacker Chemie’s headquarters in Munich with a sale price of circa €160M.

“Ireland has not experienced similar investor hesitancy and some notable large-scale transactions are expected to finalise in Q3/Q4 2022.”

CBRE noted, however, that there had been a decline in the number of bids on certain assets, as well as some softening in pricing in some European markets in recent months. Ireland, CBRE said, had also bucked the European trend, according to its figures.

“Core investors are encouraged by the fact that yield spreads are considerably wider than in many other European markets and that many sectors of the Irish market are severely undersupplied, which in turn is helping to sustain rental cashflows and returns," according to CBRE.

CBRE’s head of research and consultancy has warned that property yields may be affected in the coming months. 

“Depending on the extent of monetary tightening witnessed over the coming months, we could see some softening in property yields,” CBRE Ireland Head of Research and Consultancy Marie Hunt said. 

“However, as opposed to a significant outward movement in pricing, we can expect to see a widening gap between buyer and seller expectations, particularly for secondary buildings with low ESG credentials.”

The softening in the market for lower-grade offices had been mooted by BNP Paribas earlier this year, with Head of Research John McCartney saying that occupier demand is expected to focus increasingly on modern, sustainable buildings.

Prime office rents in Dublin have reached €62.50 per SF and are likely to climb narrowly higher to €67.50 per SF by the end of the year.

CBRE said take-up in the capital during Q2 was roughly on par with the 485K SF signed in the first quarter. Office, PRS and industrial are the leading sectors for investment, with 26%, 24% and 20% of investment volumes, respectively, JLL’s report said.

Industrial looks to be crowned the star performer for the year so far, with JLL reporting that the sector had recorded its second-largest year of investment, with €360M traded across 16 deals.

Is A Lack Of Space Beginning To Impact Logistics Lets? 

Ireland and particularly Dublin have seen a severe shortage of space for SME-sized industrial units.

The latest data from Savills Ireland found that the dearth of small deals has continued, with the average size of logistics space rising to 33.7K SF, 7% higher than the five-year average.

Overall, the uptake of logistics space slumped in Q2 compared to Q1, with 438K SF transacted in the three months to the end of June compared to the quarterly average of 714K SF over the past five years.

Data from Savills found that the biggest deal signed in Q2 was the 78.4K expansion by Dunnes Stores at the Stadium Business Park. Other notable deals in the quarter included Henderson Park pre-letting a space to logistics provider GLS and the forward sale of 70K SF at Dublin Airport’s Logistics Park for €17M to Yourway. 

“We continue to see a healthy level of enquiries and demand occupiers, particularly for more efficient modern units that are now coming to the market.” Savills Ireland Director of Industrial and Logistics Jarlath Lynn said. 

“Of the 459K SF of stock that was completed in Q2, just one unit of 50K SF was vacant upon completion. As the energy crisis has intensified, modern units built to a quality significantly higher than anything was seen in the last cycle can provide occupiers with operational efficiencies and savings.”