Professional property investment has been transformed in the past five years and may never revert to a settled, steady-state business model.
Recent investment figures reveal a dramatic intensification of trends that have been in play for half a decade, trends that have fundamentally altered the types of property that investors are buying and the locations they are investing in.
For many years, institutional investors pursued a simple two-pronged strategy. First, they targeted properties that were leased to Government bodies and established business brands that could be relied upon to pay the rent. Second, they prioritised locations where strong occupier demand would minimise rental voids. In Ireland, these criteria typically meant institutions buying offices in prime locations around Dublin’s St Stephen’s Green, and retail premises on prime high street pitches such as Grafton Street.
Reflecting these preferences, offices and retail accounted for 85 per cent of professional property investment in Ireland between 2005-2016. However, this has changed dramatically in recent years. While overall investment has increased, the combined share of offices and shops has steadily declined from 85 per cent of market turnover in 2016 to just 9 per cent in the first quarter of 2022. In contrast, the share of apartment blocks and logistics facilities has surged from 8 per cent to 73 per cent.
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This sectoral shift has fundamentally altered the geographical pattern of investment. Dublin 2, the commercial heart of the city, was traditionally the epicentre of property investment in Ireland. This 3.7sq km patch of land once accounted for one fifth of all the capital that was deployed. However, in the first three months of 2022, one solitary asset traded in Dublin 2, a €1.8 million mixed-use property on Camden Street.
The changing composition of property investment has been driven by several factors. On one hand, heightened economic uncertainty arising from Brexit, the pandemic, war in Ukraine and rising interest rates has attracted investors to apartments and logistics facilities. The rents for these defensive assets are underpinned by demographic trends more than business cycles. After all, no matter how the economy is performing, people still need places to live and goods still have to be warehoused. With the third-fastest population growth in the EU, Ireland happens to have a particularly favourable demographic profile, and this has helped attract €10.5 billion of capital into residential blocks and logistics properties since 2016.
Waning appetite
In contrast, investors’ appetite for shops has waned. The traditional model of face-to-face retail has been losing market share to e-commerce for more than a decade. Investors are concerned that this will continue, deducting from the demand for certain types of shopping space, including high-street stores. This requires them to build higher vacancy and weaker rental-growth expectations into their financial models.
Investors’ concerns about offices are more recent and hinge on two factors – remote working and environmental sustainability. Covid-19 saw nearly 56 per cent of desk-based employees in Ireland adopt remote working. The long-term impacts of remote and hybrid working on employee welfare, skills development, and productivity are unknown. However, Covid has proved the functionality of remote technologies and, with many offices still not back to full occupancy, investors are anxious that employers will now permanently rationalise their business-space requirements. A further complication is that office occupiers are increasingly focused on energy-efficient, sustainable buildings. Because these assets are scarce and hard to buy, many of the arising investment opportunities are requiring investors to weigh up the uncertain costs and benefits of refurbishing older offices, against the alternative of holding un-repositioned stock which carries significant obsolescence risk.
Property practitioners tend to view e-commerce and hybrid working as discrete, unrelated challenges that will eventually resolve themselves, establishing a stable new normal. In a narrow sense, this is entirely reasonable. Any one of the alternatives to traditional retail – experiential shopping, destination retail, click-and-collect, showrooming etc – could emerge as a dominant new model. Similarly, hybrid working could disappear altogether, or might become firmly established, supported by a structured system of rules to regulate it.
But this perspective misses the bigger point. Online shopping and remote working are two sides of the same coin. Both are examples of technology facilitating humans to live their lives differently. As this happens the human relationship with property naturally changes, and this has potentially far-reaching implications for the way we organise our cities, and for our approaches to generating wealth from property. Time will tell whether these particular examples are transitory or permanent. But they are only today’s examples. The conveyor belt of technological change is accelerating and will inevitably bring new, unforeseen, challenges to the property market. The era of steady-state investment strategies is over.
John McCartney is director of research at BNP Paribas Real Estate.
