The legacy of 2020 will vary, and have different repercussions, for each sector and sub-sector of the property market. Some sectors that were negatively impacted by Covid-19 are likely to see a notable rebound in activity this year, particularly in the second half of the year once we are out of lockdown, a vaccine has been rolled out, most people have returned to their workplaces and the travel ban has been lifted. However, it may take several years for other sectors of the market to see a return to normalised levels of activity and trading.
Which sectors are thriving and which are facing substantial challenges?
Investment
KEY POINTS
Investment
- Considerable international capital looking to deploy into markets that offer defensive, low risk characteristics, such as Ireland.
- Encouraging volume of liquidity in the market, which bodes well for the domestic investment market in the year ahead despite the current backdrop.
- 2021 expected to be a busy year from a transactional perspective considering the volume of pent-up demand and the many investment sales campaigns that were put on hold that will now be reignited. However, investment spend is likely to be heavily skewed towards the second half of 2021.
- Security of cashflow has become important from a pricing perspective, with investors increasingly specifically targetting opportunities that offer secure long-income potential.
- More sale and leaseback transactions expected in 2021 as many companies look to release equity and reduce costs while securing continuity of their core business, following what has been a difficult year economically for many.
- While the prospects for core property remain healthy, thinner demand for secondary product is likely to continue to impact on pricing over the course of the next 12 months.
- Demand likely to be primarily focussed on beds, sheds and meds.
Offices
KEY POINTS
Offices
- Notable pickup in office leasing activity from the second half of 2021 onwards as economic activity improves and several postponed mandates are reignite
- Fewer large transactions likely to being signed during 2021. This will encourage some landlords to adopt a multi-let strategy in order to reduce vacancy in particular buildings and generate income as opposed to holding out for longer to secure a single occupier.
- One of the lasting legacies of the global pandemic will be increased demand for flexibility, both in terms of the adaptability of office buildings themselves and increased flexibility in the leases agreed between landlords and tenants.
- The occupational needs of companies will change as a result of the outbreak of Covid-19, and while companies may not necessarily need less office accommodation, the way they use that accommodation will definitely change. Occupiers will have to think seriously about the configuration of their office buildings, how efficiently accommodation is being used and how this might change in the future, with an increasing proportion of staff likely to work remotely, either from home or another ‘3rd place’, at least part of the time.
- Prime headline rental levels in Dublin have eased since the onset of Covid but not dramatically so. While there might be some further decline in headline rental levels during the first half of 2021, the main change will be in relation to lease terms.
Retail
KEY POINTS
Retail
- The severe disruption to trade since the onset of Covid-19 highlighted structural trends that were already evident in the retail sector and exposed fundamental weaknesses in the traditional retail business model.
- Typical leasing arrangements are now likely to be more aligned to tenants’ ability to pay and their turnover, which is the norm in Europe.
- We expect to see shorter lease lengths being sought and granted, with greater flexibility built into typical retail leases.
- The significant regearing and restructuring that has characterised the retail market over the last 12 months is likely to continue in 2021, meaning we are now firmly in a tenant’s market.
- A thinner pool of occupiers seeking to secure stores coupled with greater availability and flexibility means that rental values will have to rebase to new levels in order to prove attractive to retailers. The magnitude of rental decline in the Irish market is likely to be more aligned to rental falls experienced in mainland Europe as opposed to the very dramatic declines already witnessed and anticipated in the UK.
- A resurgence in activity in the retail sector will occur in 2021, but this will not be a ‘return to normal’. Rather, the retail landscape will look considerably different from this point forward.
Industrial & Logistics
KEY POINTS
Industrial & Logistics
- Structural trends supporting both occupier and investor demand for industrial & logistics real estate. A combination of lockdown and Brexit-related uncertainty stimulating an increase in Ecommerce and data centre activity fueling demand for facilities in this sector.
- Vacancy rates reaching all-time-lows of below 2% during the last year which boosted rental growth. Prime headline rents expected to increase to €116.80 per square metre (€10.85 per sq ft) over the next 12 months.
- Prime yields expected to compress further in 2021 as a result of the weight of capital targetting this sector.
- Demand for reverse logistics is expected to increase in 2021. Also demand for temperature-controlled warehouse space increasing as food exporters and importers move towards holding increased inventories in-country. The national Covid-19 vaccination rollout may also stimulate demand for additional cold-storage facilities in 2021.
- May see some opportunities emerging by way of sale and leasebacks. We also expect to see increased investor appetite for opportunities to invest in data centres and life sciences facilities, which are particularly highly sought after across Europe at present.
Multifamily
KEY POINTS
Multifamily
- Considerable domestic and European institutional and annuity capital targetting both public and private sector opportunities in this sector.
- Particularly strong demand for standing stock (specifically product that can clearly demonstrate stabilised rents) and stock that is nearing completion as opposed to stock that is in various stages of the planning process.
- More developers applying for planning permission and developing schemes in fringe locations that offer accessibility to good public transport, on the basis that affordability is better, and the renter pool is deeper in these locations.
- More ‘suburbanisation’ of the multifamily offering in Dublin, with some providers developing and acquiring schemes in locations that they would have disregarded previously.
- Potential for prime yields to compress during 2021.
Development Land
KEY POINTS
Development Land
- A rebound in the office market and other occupational sectors during 2021 will stimulate demand for commercial and mixed-use sites in due course. In the short-term, most developers will focus their attention on residential-led opportunities.
- We expect to see some sizeable landbanks in the Greater Dublin Area being offered for sale during the year.
- Those building housing aimed at purchasers will focus attention on the commuter counties and the Midlands region while those focusing on other typologies such as multifamily will focus on more urban sites, particularly those on the fringes of the city with good public transport connectivity.
Hotels
KEY POINTS
Hotels
- Hotel transaction volumes in 2020 down approximately 75% year-on-year.
- Demand for Dublin hotels remains encouraging with particularly strong appetite for hotel development projects where the properties will not be completing until 2022 or later, demonstrating confidence in the medium-term prospects for the sector.
- Improved trading conditions expected in 2021 but likely to be a number of years before the hotel and tourism industry fully recovers from the disruption of 2020.
- Hotels will therefore be predominantly reliant on domestic business initially until such time as there is a meaningful improvement in overseas business and tourist activity.
- Distress has emanated from an inability to trade and uncertainty about the length and severity of Government enforced lockdowns and travel bans. We believe that hotel values have declined by between 10% and 25% on average.
- The rollout of a vaccine should boost values in due course, but it is likely to take some time for hotel values to recover to pre-Covid levels.
Cork
KEY POINTS
Cork
- Very limited investment product of any significant scale available to trade in the Cork market and unlike previous downturns, investors are not under pressure to sell.
- Unlocking investment opportunities likely to remain challenging although we may see some off-market trades occurring in 2021.
- For the most part, international investors will need to see a recovery in the Dublin market before they will commit to deploying in regional locations.
- There is an urgent need to provide services, roads and wastewater facilities to unlock sites and facilitate development in the Cork region.
- Changes to work practices and in particular, an increase in remote working, bode well for regional cities and we expect to see an increase in occupier interest in locating some, or all, of their operations in cities other than Dublin. For this reason, we expect to see an increase in office leasing activity in Cork and other regional cities in 2021 and beyond.
Healthcare
KEY POINTS
Healthcare
- Transaction volumes in the healthcare sector were higher than had been anticipated in 2020.
- Occupancy in all nursing homes declined as a result of Covid-19 with occupancy down between 10% and 30% in general. However, there has been no evidence of any deterioration in values or diminution in multiples for future-proofed, good quality nursing home stock.
- The biggest issue facing this sector in 2021 will be the 31st December 2021 date by which all nursing homes have to be fully compliant with 2016 National standards. Achieving this by year end may be simply impossible for some older establishments. Some properties may have no option but to close as the cost of compliance with the standards will be prohibitive.
- We expect to see continued activity over the next 12 months with several groups keen to continue to build their portfolios and consolidate operations here. Investment in nursing homes is likely to continue to be dominated by French, German and Dutch groups while we expect to see Irish and UK funds being the main investors in the primary care centre sector.
Funding
KEY POINTS
Funding
- The role of the debt market remains central to the performance of the wider investment market and the impact of the current dislocation cannot be underestimated.
- Retrenchment on the part of many commercial banks, combined with a general softening in the levels of debt offered, has left an opportunity for others to exploit, with alternative lenders most focused on taking advantage of this liquidity gap.
- 2021 looks a very interesting opportunity from a funding perspective, as access to the correct cost of capital will prove crucial.
Sustainability
KEY POINTS
Sustainability
- 2020 saw increased focus on sustainability and wellness with ESG increasingly underpinning both occupier and investor decision-making.
- We expect to see continued focus on sustainability in 2021, with increased demand for the renovation of properties to meet sustainability and climate change targets in addition to demand for redesign and conversion of existing buildings to accommodate wellness and social distancing.
- We also expect increased focus on green leases, green funding, carbon neutral objective setting and socially responsible investment over the course of the next 12 months.
