Which sectors of the market will be most active next year?
We expect all sectors of the investment market to remain active in 2019 based on the strength of investor demand for income-producing assets in H2 2018. Specifically, we believe that current high levels of activity in offices and the private rental sector (PRS) will be maintained, as both are showing continued rental growth due to strong occupational demand.
Institutional investors’ appetite for core offices remains as strong as ever, while we expect the PRS sector to become a significant part of the transactional investment market for the foreseeable future.
Have rents and yields peaked across the various asset classes?
Demand for stock has continued to push yields lower, notwithstanding the fact that global interest rates and bond yields have been moving up.
However, history shows that an outward movement of bond yields will, in time, generally lead to an upward drift in property yields, which then needs to be offset by rental growth. We are clearly now getting closer to the top of the cycle, but rental growth prospects in certain sectors – specifically PRS and offices – continues to look strong.
Where are the best investment opportunities at this stage?
This really depends on the risk profile or the investor. Core investors are very happy with a 4 per cent net initial yield for PRS and offices. These returns can be further enhanced by the availability of low-cost finance, and yields in Ireland still look attractive when compared with competing European cites. Other opportunities will arise in the shopping centre sector.
Issues in the US and the UK retail sectors have led to negative investor sentiment around out-of-town and regional retail.
But the trading figures for tenants in Irish retail are very strong, and occupancy levels in all centres are high. If a positive resolution to Brexit is achieved, leading in turn to positive consumer sentiment in the UK, there will be a knock-on benefit for the wider retail sector.
Investors who can tap into this over the next six to 12 months at yields that look attractive relative to offices and PRS are likely to do well in the long term. As always, location and quality of the asset are key.
One thing to watch out for in 2019?
We are in a period of increased volatility worldwide. There are many factors that one would consider, but in an Irish macro context, the continued inflow of foreign direct investment from large American corporates – both from expansions of existing businesses and from new entrants – will have an important bearing on continued economic performance and the performance of the office and residential sectors.
Fergus O’Farrell is director of investments at Savills Ireland
