The Irish commercial investment property market came to a “near standstill” in the second quarter, which was the weakest for six years, according to a new report by BNP Paribas.
The market suffered the third sharpest slowdown in Europe in the first half of 2023 as a result, it said, with sluggish price adjustments and a weaker office market feeding into the slowdown, while German investors were described as “inactive”.
Just €333.4 million of income-producing property changed hands between April and June, a total that was down 47 per cent on the first quarter of 2023. It was also 73 per cent lower than the activity seen in the second quarter of 2022, even when one exceptionally large deal from that quarter is excluded.
“It is a sobering reality that market turnover between April and June was less than that recorded in any quarterly period during the pandemic,” said Kenneth Rouse, managing director and head of capital markets at BNP Paribas Real Estate Ireland.
“Unfortunately, the market is responding quite slowly to the new reality of higher interest rates.”
Mr Rouse said this was partly because there is currently little distress in the market that would force property owners to sell up.
“Compared with previous cycles, the Irish investment property market is not highly geared. Therefore there is currently not a significant flow of distressed assets coming to the market to provide liquidity opportunities,” he said.
John McCartney, director of research at BNP Paribas Real Estate Ireland, also said the slow adjustment of asking prices could be attributed to the size of the Dublin market.
“Dublin is a small market with far fewer transactions than in places like London and Paris. Everybody understands that property prices have to adjust when interest rates rise,” he said.
“But with scarce transactional evidence to work with, vendors’ and buyers’ assessments of the appropriate discount can take more time to align.”
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German investors were the biggest foreign buyers of Irish investment property between 2016 and 2021, accounting for 19 per cent of market turnover. However, they have taken a back seat since interest rates started rising a year ago, and their share of market spending has plunged to less than 2 per cent in the first half of 2023.
German buyers are typically institutions such as pension funds which target blue-chip properties that will generate stable and reliable flows of rental income.
“From our conversations with them, German funds remain fully on board with Ireland’s merits as an investment location. But, given current bond yields, they are not prepared to deploy capital until pricing readjusts,” Mr Rouse said.
Domestic and French buyers targeting smaller lot sizes and less prime assets are responsible for an increasing share of market activity, accounting for 24 per cent and 11 per cent, respectively, of spending in the first half of 2023.
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BNP Paribas said it believed that the price adjustment process had further to go, and that this will see continued sluggishness in activity in the second half of 2023. But it expects trading volumes to recover next year as greater clarity on interest rates and more transactional evidence emerges.
Its report covers the investment market in which owners sell tenanted, rent-generating properties to new investors who purchase them for the associated stream of future income.
It does not cover the occupier end of the commercial property market, in which landlords lease space to tenants. A separate BNP Paribas report published earlier this month identified a pickup in office leasing in Dublin between April and June but noted that activity remained “subdued by historical standards”.
