Investment Market Comes to Near Standstill as Slow Price Adjustment Drags on Activity

  • Q2 was weakest investment property quarter for 6 years
  • Irish commercial market suffers 3rd sharpest slowdown in Europe
  • German investors inactive
  • Sluggish price adjustment and weaker office market feed into slowdown
  • Trade to pick-up in 2024 as vendor and investor expectations align

Ireland’s investment market came to a near-standstill in Q2 2023 with just €333.4m of income-producing property changing hands. This was 47% down on Q1, and 73% down on Q2 2022 – even when one exceptionally large deal from that quarter is excluded. In an international context, Ireland’s market suffered the 3rd sharpest slowdown in commercial property investment across 27 countries over the first half of 2023.

Commenting on the latest BNP Paribas Real Estate Ireland Investment Market report, Kenneth Rouse, Managing Director and Head of Capital Markets said;

“It is a sobering reality that market turnover between April and June was less than that recorded in any quarterly period during the pandemic. Unfortunately the market is responding quite slowly to the new reality of higher interest rates.”

Rouse says this is 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.”

John McCartney, Director of Research at BNPPRE, also attributes the slow adjustment of asking prices to the small 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. But with scarce transactional evidence to work with, vendors’ and buyers’ assessments of the appropriate discount can take more time to align.”

German investors were the biggest foreign buyers of Irish investment property between 2016-2021, accounting for 19% 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% 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. Kenneth Rouse says;

“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.”

However, Domestic and French buyers targeting smaller lot sizes and less prime assets are responsible for an increasing share of market activity, accounting for 24% and 11% respectively of spending in the first half of 2023.

BNPPRE says that the remainder of this year will be dominated by two factors; monetary policy and price discovery. While it believes that the price adjustment process has further to go, and that this will see continued sluggish activity in H2 2023, it expects trading volumes to recover next year as greater clarity on terminal interest rates and more transactional evidence emerges.