It is hard to imagine that the real estate investment market has faced such complex dynamics of competing influences.
On the one hand a very strong economy, full employment, strong tenant demand and what is likely to be a record year for the total value of investment deals, but confidence is being shaken by the war in Ukraine and the resulting energy crisis, inflation and rapidly rising interest rates.
To get a feel for what’s happening on the ground, I spoke to Brian Shields, JLL Senior Director of Capital Markets, and he told me that the markets are in a “price discovery” phase and there is still time before we sellers and buyers see Expectations are starting to converge again.
The reason for this is the rapid increase in the cost of borrowing: earlier this year, buyers with a reasonable loan-to-value ratio took out loans at interest rates of 2.5 to 3 percent. Today these costs are around 4.5 to 5 percent.
With prime office and logistics yields in the 4 percent range and even below for the year, the only conclusion is that yields need to rise. The question is when and at what level will this level off?
While Mr Shields told me that prime logistics yields in EU cities have risen by 100 to 150 basis points in recent months, office yields have not moved as much despite a lack of transactions and evidence. Although investors in Ireland have still allotted capital to property and we outperform EU markets on ‘investor sentiment’, many across all market sectors have ‘pressed the pause button’ awaiting that ‘price discovery’. .
Another sign of this shift is the increasing divergence in the bids placed by investors for the same properties, with the highest and lowest bids being 20 percent apart in some recent cases.
Uncertainty in the markets creates opportunities and real estate funds that do not require leverage are in a stronger position with fewer competing bidders. There will be some opportunistic buyers in the market looking for value, Mr. Shields told me, although it will be difficult to come by in the near term. There is no sign of distressed sellers in the market, although there may be pressure on the land development side where investors/developers face higher financing costs but no revenue.
The bad news for the housing crisis, bargain hunters and real estate agents is that the uncertainty in the market is causing new development projects to be postponed. Alternatively, developers, for example in the Private Rental Sector (PRS) space, choose to build out and lease systems but do not enter into pre-financing deals.
German funds like Union, Deka and Patrizia were the most active players in Ireland this year, followed by UK funds like Aviva and M&G. Blackstone was one of the most prominent US buyers, with an influx of French funds led by CORUM, which also bought.
Irish funds have not been as active this year and of course both Green REITs and Hibernian REITs have been sold to overseas buyers. Irish Life and IPUT have both developed and ‘repurposed’ their own shares.
“We are in a much healthier market than we were 14 years ago,” concluded Mr. Shields. Banks have been much more cautious and property owners are not as heavily indebted. “The market will stabilize and investors will come back.”
https://www.independent.ie/business/commercial-property/the-right-moves-investing-is-tough-as-property-market-edges-its-way-towards-price-discovery-42115050.html The Right Steps: Investing is difficult as the real estate market approaches price discovery