The Irish commercial property market suffered the third sharpest slowdown in investment across 27 countries in Europe over the first half of 2023, according to BNP Paribas Real Estate Ireland, with the market described as being at a ‘near standstill’.
The second three months of the year was the weakest quarter for investment property in six years, the analysis showed.
€333.4m of income-producing property changed hands in the three month period, which was down 47% down on the prior three months.
It was down 73% down on the same quarter of last year.
“It is a sobering reality that market turnover between April and June was less than that recorded in any quarterly period during the pandemic,” Kenneth Rouse, Managing Director and Head of Capital Markets, BNPPRE Ireland pointed out.
“Unfortunately the market is responding quite slowly to the new reality of higher interest rates,” he added.
John McCartney, Director of Research at BNPPRE, attributed the slow adjustment of asking prices to the small size of the Dublin market.
“Dublin is a small market with far fewer transactions than in places like London and Paris. Everybody understands that property prices have to adjust when interest rates rise,” he explained.
But with scarce transactional evidence to work with, vendors’ and buyers’ assessments of the appropriate discount can take more time to align,” he added.
German investors were the biggest foreign buyers of Irish investment property between 2016 and 2021, accounting for around a fifth of market turnover.
However, they have retracted since interest rates started rising a year ago, and their share of market spending plunged to less than 2% in the first half of 2023.
German buyers are typically institutions such as pension funds which target properties that will generate stable and reliable flows of rental income.
“From our conversations with them, German funds remain fully on-board with Ireland’s merits as an investment location. But, given current bond yields, they are not prepared to deploy capital until pricing readjusts,” Mr Rouse said.
Domestic and French buyers of smaller lot sizes accounted for an increasing share of the market activity in the quarter, the analysis shows.
The report concludes that there is further price adjustment to go, likely contributing to continued sluggish activity.
However, BNPPRE expects trading volumes to recover next year as greater clarity on interest rates and more transactional evidence emerges.