2022 is expected to be another strong year for investment activity, writes Jackie Fitzpatrick, Lisney director and head of Investment.
As we fast approach 2022, hopes that we could move on from COVID-19 have stalled. The new Omicron variant is causing more concern; however Ireland is well placed for trade next year with one of the highest vaccination rates per capita in the world.
The Irish real estate investment market has been dealing with pent-up demand from investors for almost two years now. The previous travel restrictions on international investors and lockdowns slowed market activity, delaying sales and acquisitions. In spite of this, market turnover was €3bn in 2020. In the nine months to the end of September 2021, turnover reached €3.5bn, and given the deals ongoing, should comfortably reach €4.5bn by the end of December.
“There is the threat that international investors will look abroad to more welcoming markets instead of Ireland”
The question is what other off-market deals could potentially allow turnover to exceed this, or could legal negotiations delay signings prior to Christmas. We are aware the Blackstone acquisition of Facebook is almost signed at approximately €400m, Deka is acquiring 8 Hanover Quay at €41.5m and the Flutter Entertainment HQ offices at Belfield Office Park are also under offer after guiding in excess of €100m.
Earlier this month, I joined Lisney, Ireland’s largest independently owned real estate advisors. After three months on gardening leave, I’ve really noticed a strong shift in industrial yields for prime assets with investors pricing in expectations for rental growth.
The sale of Primark’s distribution centre at a reported 3.7% net initial yield shows the strength of demand for well-let, large-scale industrial investments.
The problem in the market to date has been a shortage of stock for this type of investment asset with investors willing to pay strong yields when the right stock becomes available. We expect continued strong competition for industrial and logistics assets in 2022.
The other main change I’ve noticed is a hesitation around PRS (private rented sector) investment. While prime PRS yields (net of OPEX) are currently at 3.25%, some international investors appear concerned over the level of Government intervention in this market.
Frequently changing the rules makes it impossible to forecast when carrying out investment cash flow pricing models.
The negative press these international investors are getting for investing in large-scale residential developments (some of which would never be developed otherwise) is also a concern. While some of the public will be happy to hear this and believe it should help owner-occupiers buy homes, it must be remembered that PRS developments have significantly helped supply in Dublin’s rental sector. It remains to be seen whether government intervention will hamper this market in 2022.
There is the threat that international investors will look abroad to more welcoming markets instead of Ireland.
In terms of the office sector, the government advice to work from home is generally seen as a short- term situation, with most companies now allowing hybrid working plans and more spacing required for staff. Most staff also appear to want to come into the office either on a full-time basis or hybrid model for social interaction.
As such, demand from investors for office assets has not diminished and prime yields have remained stable at 4% (but with scope for hardening on well-let modern buildings). Investors are however, becoming increasingly more conscious of BER and LEED ratings and achieving the requirements set out in the Net Zero Asset Managers Initiative (net zero greenhouse gas emissions from property portfolios by 2050 or sooner).
Before the pandemic, I found that real estate investors often asked about BERs as an after-thought in a sales process. However, over the last two years, the pace of change in this area has increased and now BER and LEED ratings are to the forefront of investors’ minds. Poor BER ratings can impact saleability and pricing of assets, a trend that is set to continue in 2022 and beyond.
The retail sector has struggled for about five years now, but we are starting to see renewed interest in the sector. When asset are priced correctly, investors are seeing value for money. Prime high street retail has finally seen some movement with the sale of McDonalds and & Other Stories on Grafton Street, both of which provided some yield evidence for valuers and fund owners.
Shopping centre sales, although generally of a smaller lot size to date, have shown much improved investor interest, with demand from both local private investors and from international investment groups. The number of bidders has generally improved in shopping centre sales, but investors are price sensitive. They are doing significant analysis on tenant business viability and rent sustainability with moves towards turnover rents being more difficult to analyse and predict future cash flows, a risk needing to be priced in.
Retail parks have generally traded well during Covid, with a move towards out-door fresh air shopping. There is good investor demand for well-located retail parks as evidenced by the sale of the Parks Collection. Marlet Property Group acquired the portfolio for €78m, which included M1 Retail Park in Drogheda, Poppyfield Retail Park in Tipperary and Belgard Retail Park in Tallaght. Underbidders included Lone Star subsidiary Hudson Advisors, French asset management company Corum, UK private equity fund Kildare Partners, and Simon Kelly’s RQTwo; showing the level of demand for good retail park assets.
A busy year ahead
Looking to 2022, we expect another busy year in the Irish real estate investment market.
Proposals by the Central Bank of Ireland to reduce the amount that ICAVs (Irish Collective Asset Management Vehicles) can hold when acquiring has caused some concern amongst investors, and may impact activity in the long-term by Irish property funds – the regulator has proposed a 50% cap on borrowing for Irish fund and if this ceiling is introduced, they will have three years to reduce debt levels.
With international investors back travelling and able to inspect buildings, along with the pent-up demand that is present and with plenty of capital to invest, we believe 2022 market turnover will emulate this year.