By Paul Stenson, Director for Real Estate Investment Management, Dublin
Expo Real, the premier annual European real estate summit, is an opportune moment to delve into the current dynamics of the Irish real estate sector. While many of the trends observed in Ireland resonate across the broader European Union and the UK, the local nuances offer a distinct perspective.
Despite the current challenges in the wider commercial real estate market, the prevailing sentiment is that recovery will be gradual rather than rapid. The market landscape in Ireland, while complex, reveals key areas of activity that hint at potential recovery. These indicators not only outline the trajectory of the market but also highlight emerging opportunities that could pave the way back to a more stable and robust normality.
Emerging interest in Ireland from Middle Eastern investors
At IQ-EQ, we’re seeing a notable increase in inbound queries about positioning for various thematic strategies, with many coming from jurisdictions and market participants previously unfamiliar with Ireland. This trend is particularly evident among Middle Eastern family offices, who view Ireland as a strategic tool for jurisdictional diversification to balance their portfolio exposures. While investment sizes vary, there is a clear preference for medium to long-term secured income. These investors are also open to local partnerships to effectively capitalise on tactical value-added opportunities.
Local high net worth individuals driving sub-€20M market
In the sub-€20 million market segment, local high net worth individuals are the predominant buyers. These investors typically purchase assets with equity and capitalise on existing banking relationships to secure additional debt, thereby freeing up capital for subsequent projects. While a smaller segment of these investors remains interested in development scenarios, their focus is primarily on the living sectors, particularly residential and hotels. Additionally, there is growing interest in how fractional ownership of larger assets could be structured that avoids the issues experienced during the Celtic Tiger era syndication.
The influence of French SCPI Funds and institutional activity in Ireland
On the institutional front, French SCPI funds have emerged as key market players in Ireland over the past 2 to 3 years, significantly influencing various sectors. These funds have consistently entered the market, acquiring assets that, as a consequence of recent price corrections, offer solid income yields. According to a report by CBRE, French investors accounted for 26% of spend in Q1 2024 following 15% of all investment in 2023. In contrast, Irish financial institutions have been notably absent, grappling with legacy portfolios, particularly in secondary office spaces, and navigating Solvency II regulations. German institutions remain active, completing several transactions, but must carefully manage their involvement due to current redemption profiles and tax changes. Meanwhile, investors from the Netherlands and Switzerland continue to play a marginal but relevant role in the intra-regional EU market into Ireland. According to Colliers, European investors accounted for 54% of Q2 investment in Irish CRE.
U.S. and UK Investors eyeing core assets amid market shifts
U.S. and UK purchasers are primarily targeting core and core-plus assets, seeking properties with a distress narrative to satisfy their in-house investment committees. This trend is largely driven by funds nearing the end of their life cycles and looking for exit opportunities. While such deals were predominantly off-market a year ago, more opportunities are now emerging quietly on market. Transactions are increasingly occurring through non-traditional methods, including recapitalisations of existing fund structures, secondary sales of funds, and even staple financing and legal underwrites for credible counterparties. Notably, a number of transfers are happening between ICAVs, a process that often flies under the radar and garners little media attention.
Government entities boosting market participation through strategic acquisitions
Government bodies have become significant players in the real estate market, particularly over the past 12 months. Local councils, health services, and the Office of Public Works have been notably active in acquiring assets within the Private Rental Sector (PRS) and office spaces. This engagement complements their involvement in the residential land market through the Land Development Authority and approved housing bodies. This quasi-owner-occupier approach fills a gap left by traditional corporate owner-occupiers, who have been less active due to the high-interest rate lending environment. The government’s strategic acquisitions provide a stabilising force in the market, offering a welcome counterbalance to the current conditions.
The future of Irish REITs: A landscape in transition
The Irish Real Estate Investment Trust (REIT) landscape has now contracted to a single player. Recent changes in government regulations have made the formation of new REITs less likely, casting doubt on the prospects for new entrants. However, the evolution of the market suggests that opportunities may still arise for those who can strategically navigate the CRE capital markets. Whether through capitalising on the narrowing premiums of unbroken PRS blocks compared to their break-up values or through innovative approaches to repositioning stranded office assets, the potential for a successful business model remains. Only time will reveal who will effectively seize these opportunities and find a way to the capital markets with an appropriate platform.
Debt vs. equity
In recent years, private equity firms have increasingly favored commercial real estate debt investing. However, as capital grows impatient with these strategies, a shift in preference could occur, potentially rebalancing the market. This evolving trend will intersect with the current challenging fundraising environment, influencing how frustrated funds manage discontent among investors.
In closing
The market currently reflects a dual challenge: a perceived lack of buyers coincides with an actual scarcity of sellers. This dynamic adds another layer of complexity to the commercial real estate landscape. However, there is hope that a potential decrease in interest rates could alleviate some pressures. These factors will undoubtedly shape our understanding of the sector and offer insights into unraveling the intricacies of today’s commercial real estate market.
About the author
Paul joined IQEQ in 2023 where he leads the Irish Real Estate Investment Management team. Paul has extensive experience in European commercial real estate, including transaction management, distressed assets, asset management and development. He holds a BSc. in Valuation Surveying and a MSc. in Financial Risk Management from University College Dublin.
