In 2023 the Irish property market felt the full effects of high inflation and higher interest rates. Whilst in recent years the market has come to terms with dealing with uncertainty and has withstood many issues, the problems in the capital markets have had a direct impact on values. Some investors have taken advantage of the lower pricing on offer while others have adopted a wait-and-see approach. At Expo Real this year in Munich there was definitely a sense that the fundamentals of the European property markets were strong and the issue was really down to the unsettling in the capital markets
As we approach year end, there is a sense that inflation is coming back to the levels required by the ECB and that interest rates may have peaked. It is unlikely, however, that we will see reductions in rates in the short term and, therefore, values will remain under pressure until the bulk of investors feel that the bottom has been reached. We feel that this will happen during 2024 and there will be value to be had in the year ahead.
2023 saw a significant reduction in commercial investment activity volumes. The 10-year average investment volume in Ireland was €4.13 billion euros and up to Q3 2023, the spend was €1.7 billion, which reflects a decrease of 56 per cent from the same period last year. The final quarter is usually the busiest and although the final year volume is unknown, it will undoubtedly be significantly below the 10-year average.
In particular, there will be a big reduction in transactions completed, which will be worth €100m+ with many planned 2023 sales being pushed out until 2024. Owners of Prime Grade A office investment deals are not willing sellers at current pricing expectations, particularly as prime rents have held up. A key issue is the deferral of decisions and requirement for flexibility from many occupiers, which makes funding challenging in a debt market with limited competitors. Demand is discerning and assets need to be priced to reflect rising interest rates.
There will be opportunities in the market in the year ahead. There is likely to be pressure on owners to refinance. There are many sub-markets within the property market and some will perform better than others. Retail yields, for example, remain at attractive levels and end-user occupancy levels are high. PRS investments have seen values fall to below their break-up values. The supply of logistics properties remains very low, with rents still increasing. The office sector is in flux, but there are opportunities in this sector to repurpose and reposition.
Opportunistic investors and owner occupiers are attracted to deals where assets can be bought below build cost. Owners also are looking to reposition assets to ensure they are not stranded and an assessment of their suitability for alternative uses needs to be undertaken. In particular, many dated office buildings are being looked at by the healthcare, hotel and education sectors, where demand remains strong and occupier demand is a key driver for growth.
Sean O Neill is a director and co-owner of TWM
