Ireland’s commercial real estate market may have been through the mill in the last five years but we expect a recovery to get underway this year. We believe it is an opportune time to invest as both cyclical and structural factors currently support the market.
The Cyclical Case…
• Near-term risks to the economic outlook have eased:
A more sustained recovery is expected from 2014 onwards as Ireland starts to benefit from its economic adjustment.
• We expect to see capital growth from this year:
The rate of decline in capital values eased in 2012 and we believe they have now bottomed out.
• Irish real estate yields appear attractive compared to most other European markets:
Dublin yields remain close to peak levels, with prime office yields at 7.0% as at the end of March 2013.
• We expect transactional activity in the Irish market to pick up during 2013:
Signs of a recovery in the real estate investment market are evident with a very sharp rise in transaction levels in the last two quarters.
• We expect the rental market to improve over the next five years:
While some Irish markets are still characterised by oversupply, rents have now largely adjusted to reflect this.
• We are forecasting attractive total returns:
We expect returns to be driven by a combination of yield compression and rental growth over the 2013- 17 period.
However, exploitation of this market opportunity will demand careful asset selection. In particular, an assessment of the sustainability of rental levels and a careful evaluation of lease terms will be required before any potential transaction.
The Structural Case…
Studies show Irish real estate to have a fairly low correlation with returns from equities and government bonds.
• Robust performance:
The Irish property market has delivered robust returns over the long term.
• Liquidity and transparency:
We believe Ireland is one of most transparent and best-established property investment markets in the world.
• Tangibility and ability to add value:
Real estate is a tangible asset with intrinsic value. It is also an asset that can be improved by active management.
• Stable income and low volatility:
Returns from the real estate market have generally exhibited lower volatility than returns from the equity market.
• Inflation hedge:
Some commercial real estate leases benefit from indexation against the retail price or other inflation indices, providing a highly effective inflation hedge.
We believe this is the year to re-evaluate the benefits of investing in Irish commercial real estate. The strategic case is attractive, while the amount of downward adjustment seen in recent years in both occupier and investment markets has created significant cyclical opportunities for investors. In addition, the introduction of REITs in Ireland will bring benefits to the real estate market over the medium term.
Although risks remain – including economic uncertainty in the euro zone, ongoing weakness in the banking sector and a lack of clarity from NAMA – we believe that now is an opportune time to reappraise the merits of Irish commercial real estate as part of a diversified investment portfolio.