THE NEW BEST PLACES TO LIVE Firies, Co Kerry

Post-Covid demands in property market will emerge as old certainties evaporate, writes Conor Skehan

WITHIN 18 months the global property market will be transformed. New post-Covid demands will rapidly emerge, while old certainties evaporate. Most of the changes will be existing trends that have been amplified and accelerated by this crisis, while a few will result from altered behaviour. These changes will have major implications for property markets, public finances, and the investment sector as well as housing.

The two biggest changes will be in the retail and commercial sectors, which are the most valued parts of the market as well as the main sources of commercial rates for local authorities. These have also been the staple of investment funds seeking high-return properties as part of their portfolios.

The online share of retail in Ireland increases at a rate of 8pc per annum. Over the past two years, this has already resulted in the loss of major high-street stores like Debenhams and Mothercare. Lockdown has significantly accelerated this trend, resulting in further falls in demand for, and returns from, large-floor plate retail units — usually the ‘anchor tenants’ in shopping centres and inner-city development projects.

This is happening all over the world. A report in 2017, predicted that up to a quarter of malls in the US would close by 2022 and all indications are that this is happening. Expect to see a significant contraction in demand for large retail units, which will cause a fundamental reappraisal of the financial models that underpin many developments. This will have knock-on effects on the value of property returns to investment portfolios — as well as the land-use planning and rates generation models for town centres.

The office market faces two contradictory forces — on one hand there is an increased demand for space to achieve social distancing, while at the same time the increase in home-working means that each business needs to accommodate fewer people. This problem is compounded by capacity restrictions for lifts, canteens and other shared facilities which will affect larger buildings more severely. Falling business profitability over the next two years will mean that there will be a declining willingness to pay more to buy or rent property that can hold fewer people, who can work elsewhere anyway. On balance, demand and price are both likely to fall. City-centre locations that rely on high-capacity public transport are likely to be worst hit.

Experience from other countries suggests that these vacancies from the closure of large retail spaces will be partially filled by apartments, hotels, co-working spaces, fitness companies and grocery stores. The combination of significant declines in city-centre retail and offices is likely to increase the viability of higher-end centre-city residential, which will balance out much of the resultant market gaps.

These forces will drive changes in the demand for expensive urban amenities and public transport which will eventually attract some form of increased residential property taxes in emerging inner-urban enclaves of wealth.

The residential market is more difficult to predict. The types of accommodation will change, the issue of affordability and social housing will increase with declining incomes, while the most sought-after locations will change, often dramatically.

The residential sector will continue its trend towards build-to-let — to meet the growing demands for rental accommodation as well as changing patterns of household formation, especially increases in single-person occupancy. Falling or static income levels will also drive the demand for more affordable models of housing — away from the seller’s market of ridiculously over-specified new homes, towards much more basic, improve-as-yougo affordable starter homes.

There will be no return to the ‘business-as-usual’ model of traditional house building.

The big surprise in the residential sector will not be the types or price of housing but the location. Increasing home-working and shorter working weeks will significantly increase the attractiveness of smaller towns and villages that have available and affordable housing as well as great amenities.

New market opportunities will open in places that were previously dismissed because of the long commuting distances involved. Future working arrangements are much more likely to involve a trip ‘to the office’ only once or twice a week. These opportunities may not only require new housing, but the ‘living-over-the-shop’ model for home-working also has the potential to finally provide the ignition spark to re-use the thousands of small-town streets in those places that lie within 40 minutes of major cities. This will also have the advantage of providing a walk-everywhere lifestyle that so many people have learned to value during lockdown.

There will also be a significant surge of expenditure on home renovation as well as new housing. Home improvement is an under-appreciated market of scale because Ireland has nearly 2m existing homes — compared to the mere tens of thousands of new buildings that are required annually.

In all this it is important to differentiate between the property market and the wider construction sector. Ireland is lucky to have a large service and manufacturing sector that will be less affected than other more traditional ‘metal-bashing’ industries elsewhere. Employment in these sectors is likely to remain relatively unscathed and some manufacturing will even expand.

The demand for continuing improvement in infrastructure will need to continue to require significant investment. Similarly, there will be a need for additional capital expenditure on high-occupancy institutions especially schools, as well as colleges, health facilities and public transport.

Treat claims of a ‘Covid crisis’ by the construction sector with a large dose of salt.

These changes will be viewed as disasters by many investors in the property market — expect to hear a growing clamour of calls for tax relief, grants and supports for this ‘industry’, despite the irony of ignoring the need to change market demand — the true mantra of business. Less noticed will be the challenge that it will pose for traditional rates-based local authority finances.

It is true that the traditional outlines of the property market are not going to come back, but it is equally true that a new market is emerging for those brave and nimble enough to capitalise on it.

This will be required by more than just traditional entrepreneurs. Bankers, investors, local authorities, land-use planners and policymakers will all need to adapt to these new realities.

Seen in a bigger context, these changes were happening anyway, initially in retail and increasingly in office accommodation and housing. Ireland’s population is young and growing and extra household formation will continue for the foreseeable future. Our economy will emerge strong and there will be continued, if altered, demand.

It will be important for the Government to understand and accept that these are inevitable and international changes — any discomfort will not be the ‘fault’ of any one national government.

It will be critical to avoid being panicked into providing policy, fiscal or financial supports to prop up property models that are no longer viable.

Indeed, there is every likelihood that the construction sector is likely to be busier than ever, even as the property market is likely to be changed forever.

There are a lot of changes coming Ireland’s way. It’s up to us, and our Government, to decide whether these changes are problems... or opportunities.

As the sport coaches like to say: “It’s ours to lose.”

‘Changes are coming. It’s up to us to decide whether these changes are problems or opportunities’