Irish commercial real estate market update

Market background

After five years of value decline, we believe the tide turned for international commercial real estate (CRE) markets during 2024. This is largely due to the turn in the interest rate cycle during the year as well as the value adjustment which leaves CRE offering attractive relative risk-adjusted returns to investors.

The recovery in market sentiment in Ireland is evidenced by the fact that the MSCI Irish Property Index recorded positive total returns in the third and fourth quarters of 2024, the first quarterly positive returns since June 2022. The turn has led to the pace of investment activity recovering strongly with JLL reporting a total of €2.4bn invested across a range of sectors during 2024. This is an increase of 30% on 2023 and is the second highest level of investment activity in the market in the last five years.

Several high-profile properties were placed on to the market at the behest of lenders during 2024 including Blanchardstown Shopping Centre, The Square Tallaght, The Ronan Portfolio, 1/2 North Wall Quay, The Beckett Building and 2 Dublin Landings. These sales attracted opportunistic buyers, both domestically and internationally, and most have transacted such that the market now has a range of benchmark deals to guide future pricing.

Retail was once again the busiest sector of the investment market making up 53% of the spend. As has been the case for some time, international investors accounted for over 75% of investment activity with the public sector and Irish domestic private investors taking up most of the balance. It is noteworthy that international investors continue to be attracted to the Irish property market drawn by the strong underlying fundamentals such as a robust domestic real economy, growth rates well above the EU average and positive demographics.

Office sector

Occupier demand in this sector has recovered strongly albeit from a low base and is driven by companies seeking to expand and/or upgrade the quality of their office accommodation, and is coming from various sectors including professional services, ICT, the public sector and healthcare

After a weak first quarter, take up in the Dublin office market rebounded in Q2 with 800,000 sq. ft. of space transacted. This momentum carried into the second half of the year with Savills reporting a total take up for the year of 2.1 million sq. ft. This is an increase of 60% over 2023 and well above the five-year average for the market. To add to the recovery story, Workday announced that it has agreed terms to lease 425,000 sq. ft. in central Dublin in what is likely to be one of the largest office lettings in Europe in recent years.

This deal was not finalised before the year end and therefore was not included in the 2024 take up stats. As might be expected, occupiers and investors are showing a strong preference for energy-efficient, future-proofed buildings.

While take up is increasing so too is supply as development projects that commenced pre-Covid come to completion. Therefore, the overall vacancy rate for office space in Dublin has increased to 16%, the highest it’s been since 2014.

Retail sector

There is very little oversupply of retail space in quality locations and most retailers have by now adjusted to the reality of online as well as in store selling.

Meanwhile, personal consumption and retail sales have grown off the back of the generally positive consumer environment and rents have stabilised, albeit at levels well below those which prevailed prior to Covid. There is expected to be rental growth as retailers compete for a reducing supply of available space in the better locations.

The gradual recovery in occupier demand, coupled with the high yields on offer has made retail investments especially appealing and it is no surprise that the retail sector continues to attract investors.

Industrial sector

There remains a shortage of modern distribution and warehousing facilities in Dublin and this is resulting in a reduction of space being taken up by occupiers.

CBRE report that c.1.6 million sq. ft. was signed during 2024, the lowest level of take up since 2011. The vacancy rate is just 2% with c.1.8 million sq. ft. under construction and due for delivery in 2025, c.25% of which is pre-let. Scarcity of suitable space, coupled with rising construction costs has driven strong rental growth with headline rents for prime space now up to €13.5 per sq. ft.

Market outlook

The ECB has cut interest rates four times since June 2024 and with inflation moderating it is likely that further cuts will be made over the next 12 months. In addition, growth in the Irish domestic real economy remains robust and the recent pre-election budget will likely ensure that metrics such as jobs numbers, real earnings and retail sales will underpin occupational demand for commercial property into 2025. A significant potential risk to this positive backdrop is the uncertainty associated with the new Trump regime in the US and its consequences for Ireland. While it remains to be seen what tangible impact any changes ultimately have for the Irish market, this uncertainty is likely to remain for some time.

Against this background we remain of the view that after the decline of 25% since 2019, commercial property values have bottomed out in Ireland, and a range of fundamental investment valuation metrics have reached a level where investors are once again being attracted.

These include:

• Relative income yield – the average equivalent yield as per the MSCI Irish Property Index is now 6.7% while 10-year Irish government bonds are yielding 2.8%, thus the yield premium offered by property over bonds is 3.9%. This level of premium is well above the 25-year average of 2.7%
• Relative capital value – the proposition that current capital values are relatively modest is supported by the fact that the MCSI Irish Property Index of capital values is 50% below the level it was at immediately prior to the crash in 2008. By way of contrast, the same indices for the UK and Spanish markets are down 13% and 4% respectively
• Replacement cost – the decline in values coupled with the increase in construction costs has resulted in many cases where values are at or below replacement cost

On the supply side, new retail development has been limited for several years, and office construction activity has declined with very few new projects commenced since COVID. This inevitably means that little new space will be delivered into the market once the existing batch of development projects currently underway is completed by end 2025.

This reduction in new supply coupled with higher construction costs will underpin values once surplus stock is absorbed. Given that there are reported to be live office requirements in the market for up to 2 million sq. ft. and this demand will focus on grade A space, it is likely that there will emerge a scarcity of such space within the next 12 to 18 months.

Conclusion

As always, there is a range of risks which can overturn the positive outlook but subject to no major upsets it is reasonable to conclude that as the macro-economic environment becomes more settled investors will increasingly be drawn to the relative value and growth potential which well-let commercial property offers.

Any views and opinions are those of the Fund Managers, this is not a personal recommendation and does not take into account whether any financial instrument referenced is suitable for any particular investor.

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