Housing supply will drop off midway through 2023 as the effects of rising construction costs on the residential property market become apparent, Lisney has forecast.

In a new report, the property advisors said that commencement notices for residential builds declined last summer as inflation in the cost of construction materials and labour surged.

As a result, housing supply will begin to slow in mid-2023 and ensure that frustrated demand for new homes will continue to go unmet, with 26,000 units completed last year -- far short of the required level despite exceeding totals for the past three years by 25%.

Additionally, close to €6bn was invested in commercial property assets in Ireland last year as "accurately priced" properties continued to attract attention.

A total of €5.7bn was invested in commercial property in 2022, but Lisney expects that activity is likely to be limited to the start of the year as the market is still in the process of price discovery, with a disconnect between vendors on purchasers.

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Lisney said the dynamics of the market changed last summer as interest rates began to rise, although the industrial occupation sector remained strong in 2022, and "numerous high-profile occupiers" are currently seeking space or negotiating deals.

The company expressed optimism that, after a slow start to 2023, the market will recover around September and will return to normal levels quickly once it does so.

"2022 was a strange year, at a societal and economic level, as well as in the Irish property market.  We began the year optimistic for a post-COVID recovery with demand strong," said Aoife Brennan, research director at Lisney.

"However, as the fallout from the war in Ukraine took hold with rising interest rates and changing macroeconomic indicators, the market slowed mid-year.  We believe 2023 will also be a year of two halves, but with demand and activity starting slow and building over the year, especially into the latter half as hopefully there is more certainty on interest rate stability and improvement in global economies. 

"A trend that will carry across the entire year will be the increased awareness and acknowledgment of the importance of ESG”

Entering the new year, combined requirements of would-be occupiers seeking space across Dublin exceeded 460,000 sq m, or the equivalent of 15-18 months take-up, suggesting another good year.

However, supply constraints are likely to affect activity levels. Dublin’s vacancy rate is now sub -2% with less than six months stock available. Headline rents grew last year, with prime rates up almost 20% and exceeding levels seen in the mid to late-2000s due to higher construction costs and intense competition for space.

Lisney said the pace of growth this year will be slower. Landlords will remain bullish on lease terms with any new buildings achieving 25-year leases with break options pushed out to year 12 or 15.

Following adjustments by companies in the global tech sector and a continued trend towards remote and hybrid working, there is now some 180,000 sq m of 'grey space', ie space vacated by tenants before the end of their lease, available.

Grey space accounts for 32% of all supply and 5.1 percentage points of Dublin city centre's 13% vacancy rate, with Lisney forecasting that more will become available in 2023.

The company predicts that potential tenants for available office space in 2023 will be highly profitable professional services firms, smaller scale indigenous tech operations, and the state.

At present, there is around 130,000 sq m of space reserved, and it is likely that activity and demand will be weaker in the first half of the year before strengthening in the second half.

Works will continue on office buildings under construction covering a planned 280,000 sq m, but there will be little or no new commencements in the near term, due to the higher cost of both finance and building materials, Lisney added.

Retail wise, Grafton Street had a very successful 2022 as the vacancy rate on Dublin's primary thoroughfare fell to 7.6%, with seven new operators predominantly from overseas taking stores.

The vacancy rate on Henry Street was higher at close to 13%, and Lisney has predicted further interest in the area during 2023, but retailers will continue to assess the ongoing viability of their business, which may result in renegotiated property deals.

The mixed-use scheme at Clerys Quarter on O’Connell Street, along with the sale of the former Debenhams store, if concluded in early 2023, will bring new life and vitality to the northern shopping core.

On the residential front, the number of properties for sale in Dublin rose almost 60% year-on-year, which will likely reduce the amount of overbidding in the coming months.

Part of the increase was fuelled by landlords selling their buy-to-let properties after becoming frustrated with rent caps and eviction bans, and Lisney predicts that more investors will exit the market in the coming year.

The annual growth rate of 10-13% in Dublin's residential property prices seen since mid-2021 eased in the summer months due to the war in Ukraine, rapid rises in the cost of living, interest rate hikes and less disposable income.

Lisney predicts that buyer price sensitivity will remain in place for at least six months of the year, meaning there will be no price increases, but market stability in the second half of 2023 will depend on supply and wider political and economic issues at home and abroad.

At the upper end of the market (€1m+) though, there is still a large number of sales in progress on and off market, while cash purchases continue to dominate country home sales.

International buyers, constituting a mix of Irish abroad and foreign nationals seeking a full-time or part-time holiday homes in Ireland, will be the most active in the Irish country homes market this year.

The majority will be from the US but European countries will also feature strongly, Lisney said. UK demand, with the exception of expats, will continue to feature less than was the case pre-Brexit.

In terms of development land, significant construction cost inflation last year and the higher cost of finance have affected the viability of schemes, and it is expected that it will be at least mid-2023 before demand for sites improves and longer before activity levels increase.

Many primary and secondary funders will remain largely absent from the market during the beginning of 2023, meaning that cash purchasers will be the dominant buyer short-term.

New planning laws due this year will likely provide greater certainty to developers and landowners and should also address delays in planning decisions.

"Despite the various challenges which might be faced by the property sector in any given year, the most enduring will be the subject of sustainability and the role the real estate sector must play in this space," said David Byrne, managing director of Lisney.

"This will remain a central tenet of our strategy in 2023 as we work with colleagues and the communities in which we operate for a more sustainable future for all.”

(Pic: Getty Images)