Irish real estate returns drop amid higher interest rates

THE returns on Irish real estate assets slumped 4 per cent in the final three months of 2022, the latest sign of a sharp downturn in the sector, an MSCI index showed.

The market value of property assets tracked by the investment research firm stood at 6.72 billion euro (S$9.6 billion) at the end of 2022, down from 7.01 billion euro at the end of September, according to MSCI’s quarterly index, published on Wednesday (Jan 25).

The decline adds to recent signs of stress in Ireland’s property market, which has been hit by staff reductions from large technology companies that have their regional headquarters in the country.

Real estate markets across Europe are braced for significant declines in valuations as rising interest rates coupled with persistent inflationary pressures and broader economic uncertainty hit investment volumes and asset valuations.

Central Bank of Ireland deputy governor Vasileios Madouros on Wednesday told a parliamentary hearing that “significant changes in valuations of financial assets” were being recorded across the world, with commercial property among the asset classes affected.

Returns in the sector in Ireland decreased by 3.1 per cent in the last three months of 2022, the first time they have been in negative territory for two consecutive quarters since 2011, according to a separate report published by Jones Lang LaSalle (JLL) on Wednesday.

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JLL’s property index rose 0.5 per cent over 2022, below the 10-year average return of 17.9 per cent, while the value of office properties — which make up over half the portfolio — fell 6.7 per cent in their first annual decline for a decade.

Developers may be going cold on the sector, with commercial real estate firm CBRE last week suggesting they may look to repurpose commercial buildings into homes.

Domestic Irish lenders have reduced their exposure to the sector over the last decade or so, thereby reducing the “transmission risk” to the broader economy, Madouros said.

However, Irish banks are “significantly exposed” to commercial real estate markets in other EU countries, according to a report by the European Systemic Risk Board this week.

Across the bloc, banking sector exposures are largely domestic, the report found, marking Ireland out as somewhat of an outlier with more than 20 per cent exposure, alongside Luxembourg, Germany and Malta.

The research also highlighted how the investment fund sector in Ireland played “an important role” in the country’s commercial real estate market, accounting for 50 per cent of the total exposures to the market by investor type. In other countries such as Estonia and Slovenia, the banking sector accounted for more than 90 per cent. BLOOMBERG