Damien McCaffrey
Director - Investment BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233

With the economy severely impacted, but improving, Irish society is learning to live with the restrictions of Covid19, while also progressing, and reclaiming elements of former lives and freedoms. So too, the real estate market is dealing with the fall-out from restrictions on normal business activities and travel, as well as the anticipated impacts on investor sentiment, tenants livelihoods, landlords agreements and the new property infrastructure demands of living with Covid.

Investor Outlook
The September market reopened with strong overseas investor demand, although business is not without its obstacles.  Strong liquidity in the system, and investors seeking to allocate funds to the Irish real estate market, supports an expected sharp V-shaped rebound of transactional activity. 
As the market opens up, investor sentiment continues to increase and some off-market transactions are progressing.  It will take some time for the increasing number of forward agreements to complete as normal.
Core and core plus funds, with significant dry powder, are ready to deploy for fitting opportunities. Lack of supply and postponed decision making, due to various reasons including travel restrictions, has pushed out some sale processes that will consequently impact annual turnover figures.
Many investors, post pandemic, have been focussing their efforts on cash-flow and asset management to protect and enhance their portfolios, while they take a pause on transactions.  Meanwhile, opportunistic investors watch patiently on the side-lines for unfortunate pockets of distress to potentially occur.
Domestic wins are being chalked up too, in what is potentially an advantageous time for cash-rich Irish real estate investors.   Limited overseas competition in recent months has produced opportunity.  As we know, the Irish market is more reliant on foreign investment, compared to other markets such as Germany and France.
As stock values of some listed real estate entities have taken a hit, public trades have been the first evident activity by global opportunistic investors. We have learnt from previous crises, although not global pandemics it has to said, that it takes time for the impacts, successes and unfortunate failures to work through and for opportunities to present themselves over time.

Office Block
ESG, wellness and new post Covid19 safety specification requirements may leave older assets in need of significantly more capex to achieve competitive standards.  Those meeting the new office dynamic and maintaining competiveness for premium tenancies will likely see renewed sales in the near term.
Occupiers also find themselves balancing staff safety with the need for collaboration, staff wellbeing and more structured business operation.
Working from home (WFH) has presented conflicting and divisive opinions over occupational demand.  Some seasoned investors are finding comfort in the fact that the new office dynamic will likely require companies to use WFH as a means to reduce density in their existing spaces but the need for that space still prevails!  
Investment demand for core offices remains strong with transactional evidence positively completed post-pandemic.  
Offices are expected to be the quickest asset to recover when a new normal is achieved, and investors remain confident in this forecast. This optimism is coupled with continued investor confidence that Irish real estate will be a key Brexit beneficiary, as the only English speaking first language country and gateway to Europe.

Retail Therapy
The retail sector was already undergoing a structural shift to omni-channel e-commerce solutions when the sudden impact of Covid-19 forced an acceleration of the trend.
As lockdown ended, most retailers were quick to adapt operations and implement market strategies to recover lost trade.  Flexibility and omni-channel logistics solutions will be important, and many larger retailers will use the market opportunity to improve their High Street / shopping centre positions by acquiring space from those that fail.
It is positive to note that global investors overseas are offering rescue plans to help large retail developments reposition and repurpose via joint ventures.  Interestingly, the convergence from retail to logistics/industrial is also being explored by investors, at present.  This is an exciting evolution space to watch, albeit with challenges including the value difference between the two asset classes.
Yet, generalising an entire asset class can help present opportunities. Locally, repositioning of retail has been evident, with the addition of residential and leisure.

Industrial Strength
Due to the underlying strength of the logistics and industrial market there is potential for increased values and yield compression, in line with continental European markets.  The limited supply and development pipeline of modern logistic facilities here, and an increasing demand of global capital, also supports the appeal of this asset class.
The success of last mile logistics continues, with the merging of retail.  Investors support the pipeline and capital should continue to be available for development and take out, as the fundamentals of the asset class seem to be intact.

Defensive Assets
Logistics and residential have proven themselves the most defensive property classes in recent months.
The private residential rental market is experiencing increased demand, as it matures and becomes institutionalised with continuous new entrants. This sector is expected to be a dominant sale class again, with a strong pipeline of expected disposals, and competitive demand for the right product via forward purchase structures, providing a positive boost for the supply pipeline.
In the alternatives sector, healthcare and medical offices are another beneficial class, with increased operational expansions and new market entrants supporting growth in this still ‘niche’ sector. 

Hard-hit Hospitality
One of the hardest hit asset classes, the hotels and hospitality sector has suffered immediate shut down, zero occupancy, lock downs and travel restrictions, which continue to impact urban hotels, even as staycation business sees movements in more rural locations slowly increase.
Although the short term forecasts are tough, and attentively monitored, the medium/long term view is brighter.  This sees additional occupancy requirements from extended stays and a boost in tourism and demand when society reaches its new normal.
Even thinking back to 9/11, when aviation travel was so drastically affected, the urge to travel and to holiday quickly bounced back.
Low transactional activity is expected in the short term as businesses focus on getting through the pandemic. Over time, the outcome may result in some receiverships or sales, as operational challenges and post covid19 specifications may present difficult capital expenditure requirements and cash flow concerns.
Core prime assets of scale, with investor grade covenants, remain a rare commodity in the market and appeal to long term global investors.
Some hospitality pipeline has already been repositioned to residential and office use, raising the concern of future imbalances in supply and demand to support international business and tourism.

Market Forces
Without a crystal ball, we like to think the worst of the pandemic is behind us but who knows!  However, the market is facing sluggish economic growth in a low interest rate environment with stubbornly high unemployment for a long while yet.
Coming from a low leverage and healthy market, the hunt for yield continues.
Short to mid-term investors may need some further visibility on the market before investing, while mid to long term investors can find comfort in the long term commitment, when supported by good credit rated tenancies.
Demand will increase for new apartments in the suburbs, offering greater space and appealing environments to meet the new needs of working from home.  And, the market is more than ever conscious of the distance to amenities and schools.  
Secure long term income is in high demand and expected to continue as a safe haven for private and institutional capital, with an increasing demand for social housing opportunities too.
Risk/reward analysis for capital expenditure on assets is in focus, and decisions in the short term should boost supply and consequently transactional activity.
Our best hope for society is to reach whatever this ‘new-normal’ is, as soon as possible.  And, for real estate, for the different commercial sectors to adapt to new ways of doing business that drive recovery, and for travel restrictions to continue to relax, permitting the dominant overseas investors access to invest in the Irish market.

Damien McCaffrey
Director - Investment BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233