We have reached the mid-year point in what has been a very eventful 2022 so far, with inflation, and in particular build cost inflation, making its presence firmly felt during the last six-month period, most notably since the onset of war in Ukraine in late February. This month marks the end of an era as the low interest environment we have become accustomed to over the last decade comes to an end with the European Central Bank (ECB) about to embark on a series of interest rate hikes, starting with a likely 25 basis point increase in the coming weeks.

Compared to other jurisdictions, Irish economic performance continues to outperform expectations, buoyed by strong tax receipts and a healthy labour market with 2.5 million people now in employment in the economy. This is the highest number of people employed on record and is 8% higher than pre-pandemic levels of employment. Moody’s were the 3rd major ratings agency in recent months to upgrade Ireland’s sovereign rating due to a fall in its debt ratio, its resilience to shocks and how it dealt with the pandemic. Meanwhile, the results of the 2022 Census of Population have shown that the population continues to grow at a rapid pace, having reached more than 5.1 million for the first time since 1841 and with every county in Ireland having experienced an increase in population in the most recent intercensal period.

Against this backdrop, the performance of the Irish commercial real estate market continues to buck the trend with more than €2.5 billion invested in the first half of 2022 when the recent Hibernia REIT sale is included. Although investor pools for certain real estate assets across Europe have been thinning and the bid ask spread has been showing signs of widening in some markets, investor appetite for prime real estate in Ireland remains healthy and there has been encouraging levels of bidding witnessed for assets brought to the market in the first half of 2022.  The gap between prime real estate yields and 10-year bonds has been narrowing in all markets as Government bonds trended upwards over recent months in anticipation of interest rate hikes in due course. Nevertheless, the yield gap in Ireland remains considerably better than in some other European markets, which is appealing to investors, particularly when combined with economic and occupational market fundamentals.

So, what will the second half of 2022 bring? One of the issues that will be of interest to investors is the outcome of the Central Bank’s review of leverage limits, which is due to be finalised in the coming months and which will necessitate portfolio restructuring for some particular funds. Depending on the extent of monetary tightening witnessed over the coming months, we could see some softening in property yields. However, as opposed to a significant outward movement in pricing, we can expect to see a widening gap between buyer and seller expectations, particularly for secondary buildings with low ESG credentials. Prime rents are meanwhile increasing and are expected to continue to rise. Until such time as inflation eases, uncertainty will prevail and this may delay some development projects commencing on site, making existing supply shortages even more acute in some sectors of the market.

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