COMMENT: As is well documented, global property markets experienced a credit-fuelled property bubble which ultimately unwound during the global financial crisis (GFC). During this period, Ireland suffered more than most due to the outsized nature of its construction sector compared with the overall economy. By 2007, 12% of the entire workforce was in the construction sector, doubling the share compared to just a few years previously.
As the European Central Bank looks set to raise interest rates for the first time in a decade, the resilience of the Irish economy and the real estate industry now looks very different. First, Ireland’s macro-economy is very strong. After growing 13.5% in 2021, it is forecast to be the fastest-growing country in the EU out to 2023, despite obvious headwinds (European Commission).
Plus, total employment in Ireland has now surpassed 2.5 million, the highest level on record. Ireland is experiencing a population boom, with the population now 19% higher than it was in 2006. Prudent government policy since the GFC has also kept Ireland’s debt burden under control, with the debt-to-GDP ratio more than halving since peaking at 120% in 2013. This has allowed the perceived risk associated with the Irish market to change over time. The more stable environment is captured in 10-year bond yields; Ireland’s current yield of 2.2% places it closer to the pricing of core European countries such as France (2.1%) and Belgium (2.2%), and 30bps tighter than the median EU rate.
Increased stability
The domestic real estate market is benefiting from this robust macro-economic footing. Additionally, the macro-prudential residential lending rules which the Central Bank of Ireland introduced following the GFC have brought greater stability to the domestic banking system. Through strict loan-to-income and loan-to-value limits, the financial sector has much greater capacity to withstand adverse movements in credit and property prices. Despite introducing these stricter lending rules to improve the quality and risk associated with domestic lenders’ loans, Irish domestic banks hold three times more capital for these loan books than the European average. While this negatively impacts the cost of lending in Ireland, the financial and real estate sectors should benefit in the future from greater stability in periods of adverse market conditions.
Dublin has also transitioned into a tech hub of global importance, creating positive exposure to the fastest-growing segment of the global economy and driving demand for residential and office property in Dublin. Furthermore, by developing large campus-style headquarters, Google, Meta and Microsoft/LinkedIn have all demonstrated their commitment to the city. These large occupiers have also created significant benefits of agglomeration, with many smaller tech firms choosing Dublin as their European base.
There are also spill over effects into the financial and legal sectors that service this growing tech market, significantly improving the overall covenant of the Irish real estate sector and thus greater stability for investors.
Irish real estate proved this stability during the pandemic as Dublin’s office vacancy rate remained broadly stable at around 10%, comparing favourably with the GFC period, when it rose to in excess of 20%. Ireland’s residential market also looks stable going forward as a consequence of the macro-prudential rules and the significant lack of new supply built since the GFC. Between 2002-2006, 376,000 new homes were built compared with 94,000 in the past five years.
Transitioning market
The combination of a young and growing workforce, stable macroeconomic environment, strong occupier covenant, burgeoning tech sector and greater macro-prudential rules has seen market dynamics change in Ireland. The market has transitioned from one dominated by small players reliant on domestic demand to one of noteworthy international standing. Large international institutional and private equity capital has also entered the country, significantly increasing its share of investment volumes.
This has seen the number of €100m+ projects increase dramatically. Until recently, purchasers of these mega-sized assets built illiquidity discounts into pricing as the number of buyers at this level were few and far between, thus, the ability to exit was uncertain. The greater number of players in the Irish market has brought further market transparency and liquidity, resulting in a positive feedback loop.
Clearly, the global financing environment is changing rapidly, which will put stress on those markets internationally that are over-leveraged and with prevailing weak fundamentals. However, Ireland’s transition since the last cycle to a more open and mature marketplace puts it on a strong footing to weather this volatility. Opportunities will remain for investors and occupiers alike as strong demand persists for new residential units, ESG-compliant offices and modern logistics facilities as the Irish market continues to evolve.
Alex Norwood is a senior research analyst at Savills
