Is it time for Irish investors to look at commercial property again?
BlackRock, the global investment giant, last week told its clients that the outlook for property is brightening, with falling interest rates and reduced yields in other assets.
Does Ireland fit into this “brightening” picture?
Portfolio allocations to the sector have been dragged down by weak prices coupled with a lack of investment interest. Within the market itself, the first quarter of this year was especially sluggish, with an investment spend of €160 million marking a 12 year low. A pick up in the last two quarters has seen investment volumes rise to €1.3 billion for the first 9 months of the year. This is still low. By contrast average volumes over the last 10 years were in excess of €4 billion.
While the figures are dominated by a relatively small number of larger transactions, better activity leads to clearer price discovery. It is worth noting that many sales are happening at substantial discounts. Some 2024 transactions have happened at a 25% discount to already-lowered late 2023 guide prices.
Where has the money been going? In the quarter just gone, investment into retail has been to the fore, followed by office where some investors see signs of value.
The office sector still dominates most institutional property portfolios (such as pension funds) with allocations north of 60% being typical. Other sectors include logistics and to an extent residential.
We know the last few years have been tough for the office sector.
Today there are three important consequential trends to consider in this sector – two on the demand side and one on the cost side.
What is the likely direction for hybrid working? Many companies have moved to smaller spaces or restructured existing buildings for a lower attendance. This has impacted demand.
But we have seen moves from some employers who look to move back to a 5 day week. According to LinkedIn, there has been a decline in the number of both hybrid and remote job offers in the past 12 months. It appears that we may be past “peak hybrid”. Even if there is no mass return to the office, current trends may reduce the drain on the demand we have seen post pandemic.
Will foreign direct investment hold up? The technology sector, especially from the US. has been a pivotal part of office demand. We have seen some cracks in this demand profile recently. Some investment plans have been paused. Political developments in the US may also play a role here. The outlook is uncertain. FDI flows are a vital element in the future demand for Grade A office space.
Finally there’s the environmental status of already established office space. Former central banker Mark Carney has been warning of “significant stranded assets”, as many older buildings may not make economic sense to refurbish or repurpose for environmental reasons. The scale of the issue is immense. The International Energy Agency says that operating buildings accounts for 26% of global energy-related emissions. For investors, the “environmental health” and age of the property portfolio is a key metric. IPUT, for example, who have long championed their environmental credentials, highlight the fact that 67% of their office portfolio is Grade A+.
So after a multi-year decline of 25% and more for property funds – does the sector offer value?
Office property yields today are about 5%. Retail and Logistical yields are in the 5.5% to 6% range. By comparison, 10 year bond yields in Ireland are in the region of 2.6%, down from 3.2% 12 months ago. So property offers an attractive income. But with a stubborn office vacancy rate bubbling under 20%, and the very specific and substantial issues highlighted around demand and costs, it’s difficult to see capital values making much headway in the near term.
Tradewinds 