Robert Lloyd
Director - Head of Land & Development BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233

Coming off a 5 year period of continuous increases in land prices and transactional volumes the outlook at the beginning of 2020 for the development market in Ireland was looking very positive.

Solid economic and market fundamentals underpinned strong demand across various sectors. Land prices have stabilised as rents and sales prices have matured, following a sustained market recovery since 2014. The combined effect of these factors and a reduction in the rate of construction cost inflation, produced a positive platform for real estate development.

Covid-19 has certainly paused development market activity. It has caused immediate cashflow challenges and funding reviews, restricted lending on new developments, stunted end-user and occupier take-up, and called a temporary halt to construction activity which has only started back this week.

We expect this pause in market activity to show signs of pick up as we gravitate towards a ‘new norm’ market. For now, the questions are: when will this be and what could the ‘Other Side’ of Covid-19 look like?
Where are we now?

In the last few weeks, the government’s focus has moved towards a phased and gradual re-opening up of the country (our Roadmap), a step forward from the shutdown mode we were in before this – which is positive news in itself.

It has to be said this is largely down to the actions taken by the Irish Government who are widely recognised as having acted quickly and positively, getting the R nought value (reproduction rate) to around 0.5 in a matter of weeks. It looks like the short term frustrations of working from home will soon pale into insignificance and be forgotten.
When will we get to the Other Side of Covid-19?

We all know there is a long road ahead to get the economy back up and running and restore employment levels. The longer it takes to open the country up fully, the longer it will take the economy and markets to make a sustained recovery – the acute versus chronic effect. The bigger the unemployment bill coming out of shutdown or the more cash reserves are depleted, the longer the economy will take to recover.

Current economic projections are that GDP output may progressively return to pre-pandemic levels by 2022 with signs of a pick-up before this in 2021. However, development projects can typically take 2 to 5 years to complete anyway (sometimes longer). So, real estate developers, lenders and investors are used to forward thinking, looking beyond immediate horizons in progressing development projects.

While there is still positive sentiment in the development market, real estate development is inherently occupier and end-user led. So, the economic and market stagnation that Covid-19 has caused have had an immediate impact on development projects.

Decisions to lend, transact or forward commit to development schemes take time and, like our economic recovery, market stability will also depend on our proximity to a vaccine and suppressing the risk of a Covid-19 reproduction rebound.
What could the Other Side of Covid-19 look like?

Inevitably, economic recoveries coming out of Covid-19 will be varied and nuanced across countries and markets, which could be multi-speed, and depend on the scale of the pandemic’s impact, together with each country’s individual response and subsequent progress.

Countries which manage to promptly stabilise the virus and the reproduction risk, and get ahead of the recovery curve, may attract international investment capital which otherwise would have been deployed to countries still trying to neutralise the virus.

Governments may also take to increasing infrastructure spending, for example, to stimulate economic recoveries and a return to pre-pandemic employment levels.

In an Irish context, an increase in much needed spending in Dublin’s transport infrastructure, for instance the Metro and LUAS, would provide a boost not only to the economy, but also to the viability and sustainability of real estate development projects. Such projects would also reduce carbon emissions and the ongoing need for cars, and bring Ireland closer to a net-zero carbon status.

There were a number of trends already in motion in the real estate industry before Covid-19 and it will be interesting to see if Covid-19 will accelerate them, change their course, or trigger new ones.

Covid-19 has certainly highlighted the pre-existing trend towards omni-channel and online within the retail sector, a trend that has been ongoing for a number of years – arguably exposing ‘bricks and mortar’ retailers with underdeveloped online strategies. Many retailers had already acknowledged that they must adapt their business models to evolve (and survive) – and Covid-19 has probably accelerated this.

In turn, an even greater focus on online could shape the future of ‘bricks and mortar’ retail development, particularly shopping centres. The last shopping centre to be developed in Dublin was about 15 years ago and it’s unlikely we’ll see further additional development here unless there is a substantially convenience retail and / or leisure element to the proposed scheme. However, this could place more importance on existing prime centres, and an opportunity to reposition them in a sector that could have future constraints on the supply of new physical space.

Having proven to ourselves that many of us can work from home, use cars less and videoconferencing more – Covid-19 is prompting us to ask: ‘what will office developments look like in the future?’

Since employee health and wellbeing are of paramount importance to employers, it’s unsurprising that Covid-19 has stirred the debate between higher density, open-plan office environments; and lower density (possibly cellular) office formats – potentially reversing a prevailing trend towards open-plan densification.

In determining future office requirements, developers and occupiers will weigh up the benefits of remote working and physical office environments – and examine the work / life balance benefits of remote working, versus the collaborative / innovation benefits that a physical office offers.

The outbreak of SARS in 2003 and H1N1 in 2009 also caused occupiers to look at office formats, workplace practices and environments. So, whether Covid-19 will in itself have a material effect on office developments in the future remains to be seen. However, it’s fair to say that it will certainly advance the debate.

Similarly, the negative effects of Covid-19 on business travel, a very lucrative profit centre for both the hospitality sector and the airline industry, has brought into question whether Covid-19 will trigger a new trend of reducing the need for frequent business travel, perhaps replacing short business trips with videoconferencing.

As corporations try to recover and reduce costs coming out of the Covid-19 pandemic, a significant reduction in business travel is expected to continue through 2020 and into much of 2021. Consequently, the immediate focus of hotel operators will be on restoring and stabilising profits, with their financial strength and professionalism becoming even more important in future hotel development projects.

Perspective is everything. The availability of a Covid-19 vaccine is potentially 12 – 18 months away – and this too has to be borne in mind in forward planning or making decisions about future real estate developments. Albeit an important one right now, Covid-19 is a chapter in the book, not the whole book.

While the Irish government has done a great job so far – what we do next as a country will be just, if not more, important in determining the future of our economy and real estate market.

The real estate industry has always been agile and innovative, continuously creating and adapting. Like earlier economic recessions, those who adapt and respond best to the immediate shocks usually recover better. And those who do this and look beyond usually fare better still.

Robert Lloyd
Director - Head of Land & Development BNP Paribas Real Estate Ireland
+353 (0) 1 661 1233