Refurbish and retrofit to trump demolish and replace in 2023 – The Business Post

Certain investors are sitting back with an expectation of better value for buyers in the future, but the ESG credentials of any property are key in the Irish investment market
Michele Jackson

With continued uncertainty in the markets, it is once again difficult to forecast how activity for 2023 in the Irish investment market will pan out.

There is plenty of focus on the threats and risks in the real estate investment market. They include the shortage and cost of competitive debt from the geared buyers, the risks of downward pricing on valuations from the institutions, the potential for distressed sellers and concern over the office occupational market.

In particular, the ESG credentials of any property are key and the data in this area continues to evolve with a growing movement now in favour of reusing and upgrading rather than demolishing and replacing. The Netherlands has adopted this approach with a presumption in favour of refurbishing and retrofitting.

Carl Elefante, the former president of the American Institute of Architects, coined the phrase ‘the greenest building is the one already built’. The theory is based on the negative climate impact related to the construction process relative to the energy efficiency of the building. Buyers will want to budget for future capital expenditure needed and current sales prices need to reflect this.

Certain investors are sitting back with an expectation of better value for buyers in the future or their risk profile means they need more certainty on the future.

The majority of the assets that are actively being sold at the moment are sales that have rolled over from Q4 2022. These vendors are therefore realistic and understand the market dynamics for their specific asset. Selling agents are only paid when deals happen so they are sense checking and making sure they are spending their time wisely.

Generally, the stock for sale has a combination of shorter lease terms and vendors want to sell the asset before the unexpired lease term erodes further or there are asset management initiatives and capital expenditure needed imminently. Whilst there is a shortage of prime long income assets for sale, even investments that tick all the boxes are being cautiously analysed with one eye on what else might come for sale.

The commercial real estate investment market turnover was €5.6 billion for 2022, which compares favourably to the ten year average of €3.6 billion in spite of the uncertainty in 2023.

Overseas investment accounted for a significant 50 per cent of this investment and nearly half of the overseas portion was from euro jurisdictions. Relative to other asset classes and jurisdictions, Ireland scores favourably in terms of the economic performance and outlook.

2023 outlook

The current gap between the ten-year government bond yield of 2.8 per cent (Feb 2023) and the latest MSCI (Morgan Stanley Capital International) all-property equivalent yield of 5.8 per cent indicates that the Irish investment market will continue to attract investors. This is supported by the relatively poor performance of equities and bonds over the past year with the MSCI reporting negative returns of 21.1 per cent and 18.7 per cent respectively.

With so many requirements waiting and watching, 2023 will offer great opportunities for long term experienced investors who understand the repetitiveness and waves of the market cycles.

Credibility and track record will give buyers more currency in their negotiations now and they are likely to be entertained. Pricing is driven by the level of demand versus supply and buyers holding off for future value need to assess the volume of investors doing the same who will be their competition.

Often the opportunity is the lack of competition and the ability and time to assess and acquire opportunities selectively. Knowing when the bottom of the market has passed is done with the benefit of hindsight.

Michele Jackson is a director and co-owner of commercial property adviser TWM