Why positivity continues towards real estate investment and funding in Ireland

Funding Environment

The common narrative surrounding capital markets currently (and understandably) revolves around macroeconomic uncertainty and inflationary pressures. For the first time since 2011, the European Central Bank (ECB) increased interest rates across the eurozone by 50 basis points in July 2022. On 08, the ECB raised rates by a further 75 basis points which represents the largest rate hike in the ECB’s history. It is therefore expected that we will be facing a combination of further interest rate increases and slower growth, both supporting a change in regime.

Despite these hurdles, the outlook of the Irish Real Estate sector remains positive. Ireland continues to rank highly as a key strategic location for lenders and investors looking to deploy capital for several reasons, including the following factors:

1. Growing population in excess of 5.0m people based preliminary results of Census 2022¹
2. Attractive employment demographics and strong tenant profile;
3. High levels of Foreign Direct Investment;
4. Favourable supply/demand dynamics and availability of assets/opportunities for new development;
5. Robust legal system from a capital provider perspective;
6. Robust performance of certain real estate asset classes, notably multi-family, student accommodation, offices and industrial; and
7. An improving infrastructure system.

Funding Landscape

Throughout the last decade, the return available on Ireland’s Commercial Real Estate has remained attractive to institutional investors as funding conditions for all asset classes have benefitted from low/negative rates and Quantitative Easing (QE) measures.

While returns still look attractive, the uncertain interest rate outlook has resulted in borrowers and potential borrowers facing increased analysis regarding:

1. Reappraisal of investment decisions;
2. Reassessment of funding options; and
3. Reassessment of hedging policy.

The shakeout in Ireland’s banking sector has left a lot more room for domestic and international non-bank lenders to meet the funding needs of players in the Irish real estate market. The exit of KBC Bank Ireland and Ulster Bank means that competition is now just among three domestic banks and some international lenders. This in turn has led to an increase in competition for a foothold in the already densely populated non-banking sector, which is contested by incumbent non-bank lenders as well as new entrants to the market (both domestic and international). The funding landscape is therefore more diverse and complex which positively keeps lending terms competitive and enables a range of blended financing solutions.

Sectoral Focus

One of the most competitive sectors for non-bank lenders in the Irish market revolves around commercial property investment opportunities for prime and core asset classes, where the capital stack predominately comprises senior debt. Total investment turnover reached over €1.2bn in Q2 2022. A sample of active participants in this space includes Timbercreek Ireland, Origin Capital, Cardinal Capital Group, Finance Ireland, Capitalflow, BentallGreenOak, Pimco, Alpha Real and Fairfield.

The Real Estate Development Finance market also has several active participants with an appetite for a range of debt sizes. Prominent participants include Castlehaven Finance, Activate Capital, Home Building Finance Ireland (“HBFI”), Initiative Ireland, Property Bridges and Ardcairn Capital. This is a non-exhaustive list of non-bank lenders who have been playing a key role in fulfilling the debt requirements along with the two pillar Banks, AIB and Bank of Ireland.

Positivity towards real estate investment and funding in Ireland is evident through significant market transactions such as the sale of Hibernia REIT to Brookfield Asset Management for €1.1bn in Q2 2022 together with Blackstone's recent acquisition of Salesforce's new European Headquarters in Dublin Docklands for more than €500m. Colliers have noted the total spend on commercial property-related deals was over €3.2bn in H1 2022, exceeding the €2.7bn invested during the same period in 2021. For the avoidance of doubt, these figures include REIT sales as well as standard property transactions. Furthermore, the hospitality sector has also experienced high level of transaction volume, with sales in the amount of €137m for H1 2022 comprising 8 trades.

Importance of Institutional Investors

The role of the Institutional Investors in Ireland continues to be of prime importance. High-profile domestic and international investors such as Urbeo, DWS, Real IS, Patrizia, Sonbrook, Eagle Street, Union Investment, KanAm and Irish Life have been active in Ireland over the past 12 months. European funds from France and Germany, including Sodify and Iroko Zen invested €210m in Ireland during Q2 2022, across 8 transactions.

There is a considerable amount of domestic and international institutional capital targeting both public and private sector opportunities in Ireland, with a huge diversity of capital sources focussing on the real estate sector in particular. Forward sale commitments from institutional investors are now considered to be driving apartment development, particularly in the Dublin area. This demonstrates confidence in the long-term trajectory of the Irish economy and real estate market. Capital continues to be deployed in asset classes such as multi-family, student accommodation, offices, industrial and hotels as they have proven ability to withstand economic pressures by providing stable, contracted yields. The below figures taken from CBRE’s Ireland Investment and Funding Report Q1 2022 show Ireland’s prime yields in each of these sectors: