According to CBRE, the onset of the Covid-19 pandemic and the resulting lockdown has impacted every sector of the Irish economy and real estate market, with sectors of the market that have a high volume of social interaction impacted significantly more than others. The Commercial property consultants in its latest bi-monthly report for May 2020 state that Ireland is in the midst of an unprecedented situation, which unfortunately is going to take some time to resolve. Against this backdrop, they say that collaboration between landlords, tenants and their financiers is critical.
Every sector of the property market has been affected differently. Some transactions are proceeding with notable deals announced in recent weeks in both the occupier and investment sectors. However, for the most part, campaigns have been curtailed for the foreseeable future, which will result in significantly lower transaction volumes being recorded in all sectors in Q2. CBRE states that a lack of transactional evidence will clearly pose challenges from a pricing perspective. Against this backdrop, they say that the quality of underlying income, the sustainability of cashflow and the availability and price of debt become increasingly pertinent.
Industrial & Logistics
- More than 86,000m2 of take-up occurred in this sector in the first quarter of 2020 – 17% higher than the 5-year average for Q1. Although transactional activity has, for the most part, been curtailed in recent weeks, with several industrial and logistics requirements as well as a few large land transactions now on hold for the foreseeable future, there has been a spike in short-term requirements from the grocery, parcel delivery, logistics/3PL and pharmaceutical sectors, which is directly attributable to the Covid-19 situation.
- With non-essential construction halted and likely to re-open on a phased basis, it is inevitable that the delivery of new industrial and logistics stock will be delayed somewhat, putting further pressure on availability of modern accommodation in the capital. For this reason, at this juncture, CBRE is not expecting any notable deterioration in headline rents in this sector of the market.
Retail
- Other than the grocery and pharmacy sectors, which have witnessed significantly increased activity during March and April, the retail sector of the property market has clearly been very negatively impacted by the Covid-19 lockdown, with all non-essential retailers forced to close their physical stores during the last two months. This has encouraged some retailers to accelerate the rollout of online facilities.
- Many trading businesses have therefore been calling for support from landlords in the form of rent adjustments and abatements or lease restructuring to help them to weather this crisis and be in a position to reopen in due course. Every situation has to be considered on a case-by-case basis. Collaboration between landlords, tenants and their financiers is critical while some form of Government support for this sector of the economy is now clearly merited.
- The expectation is that retail vacancies in some schemes will rise meaning retail rents in some locations could come under pressure in the medium term.
- The ‘new normal’ is expected to look considerably different, with footfall in retail stores is likely to remain compromised due to a combination of weaker consumer demand, restricted trading hours, restricted customer volumes and social distancing requirements that are likely to remain in place for some time.
Investment
- According to the latest MSCI Irish Index, Irish real estate achieved a total return of 0.6% during the first quarter of 2020, bringing the annual rate of return in the year to the end of March to 4.3%. With investment spend of approximately €1.3 billion having been recorded in the Irish market during Q1, it is encouraging that despite the Covid-19 lockdown, momentum has continued in April with a number of high-profile investment transactions having completed in recent weeks.
- While a number of other investment transactions are currently in legals and expected to complete in the coming weeks, most sales campaigns are unfortunately now delayed as investors, who are unable to travel to conduct meetings or building inspections in any event, adopt a ‘wait and see’ approach.
- Encouragingly, CBRE says that investor demand for Irish assets remains strong and there is still considerable liquidity, meaning that when we are through this crisis and sales campaigns recommence, market activity is expected to rebound quickly in this particular sector of the market. CBRE is expecting to witness a ‘flight to quality’ however, with particular demand for core assets once trading activity recommences. The property consultants say that pricing for core product is unlikely to alter to any great degree but ‘core plus’ and ‘opportunistic’ assets will be more susceptible to a potential outward movement in yields over the coming months.
- The focus for the foreseeable future will be on preparing assets for sale once liquidity returns with particularly strong appetite anticipated for office, industrial and residential investments.
Development Land
- Many land transactions have now been put on hold indefinitely, with the bid date on most campaigns pushed out until later this year.
- The appetite for sites is hugely dependent on the availability and cost of funding. CBRE expects to see some downward pressure exerted on land values in the short to medium term as a result of current uncertainty. With Irish banks relatively well capitalised going into this crisis and in a position to offer a certain level of forbearance, those sites that are funded by alternative lenders are therefore likely to be most vulnerable if this crisis continues for a considerable period of time. This could lead to an increase in the number of sites being offered for sale in the second half of the year.
- According to CBRE, holding a referendum to tackle land prices (as mentioned in the recently published Programme for Government document) would prove difficult, if not impossible, to implement and would likely be challenged on constitutional grounds.