Why Ireland’s property market is a safe haven

The Republic of Ireland’s property market faces a number of headwinds, but the good news is that there are none that could lead to a “spectacular crash” as the market continues to remain a safe haven for investors. That is not to say there aren’t challenges. Recent news that Ireland’s largest REIT is up for sale has led to speculation over whether the firm is calling the top of the market. Green REIT, whose €1.5bn portfolio consists mainly of Dublin offices, is on the block at a time of rocketing demand for workspace in the Irish capital. And given the fact that both America and the UK are two of Ireland’s major trading partners, the combination of a US-Europe trade war and a disorderly Brexit is not ideal. Against this backdrop, economic growth in the republic is expected to decline this year and next, according to a forecast in April from the International Monetary Fund. The report goes on to predict that Ireland’s GDP growth will likely moderate from 6.8% in 2018 to 4.1% in 2019 and 3.7% in 2020. But this does not spell disaster by any stretch of the imagination. With rocketing investment in commercial property and a huge influx of tech firms, the Irish market looks set to remain buoyant. The trick is knowing when and where to look. Big tech magnet Almost €1.48bn was invested in the office sector in the Republic of Ireland during 2018, according to research by Savills. This represents a 73% increase on 2017 and Savills expects the strong demand for office space there to continue amid a healthy economy and a controlled supply pipeline. The city’s docklands district has become a magnet for big tech firms and the resulting  activity of this sector led to the lettings market reaching 3.7m sq ft last year, the highest level on record, according to Savills. Technology firms accounted for more than half of this figure, with Facebook quadrupling its floor space in Dublin to 870,000 sq ft during the year. At the same time, Ireland’s success in attracting major international business is closely tied to its low corporate tax rate, which stands at 12.5% – almost half the rate of other small European countries’ rates. This could potentially change due to pressure from the European Union to introduce a 3% revenue tax on the tech giants. The tax — nicknamed “GAFA,” for Google, Apple, Facebook and Amazon – all of which have offices in Dublin – has the backing of European competition commissioner Margrethe Vestager. Naturally, Ireland is not in favour of the move amid concerns it would damage its economy and impair its ability to attract US tech firms. Its famed “Double Irish” will be dropped from the menu. This current system allows firms to move revenue from an Ireland-based subsidiary through a Dutch company with no employees (the “Dutch Sandwich”) to a Bermuda mailbox owned by a different, but affiliated country also registered in Ireland. News of the change has resulted in companies like Google shifting billions of dollars out of the country before the loophole is officially closed in 2020. PRS boom The first sign of a property bubble normally appears in the residential sector. But unlike what happened back in 2008, Ireland does not have a credit-fuelled housing bubble. This is because the market to buy property is controlled by Ireland’s central bank which imposes strict caps on mortgage lending. Introduced in the aftermath of the crash, the caps restrict borrowing using loan-to-value and loan-to-income limits. Back in the early 2000s, spiralling lending led to an economic crash. Today, the problem is more of a societal one as there are simply not enough homes to house Ireland’s rapidly growing population. Savills estimates that residential output in 2018 was only three-fifths of what was required. As a result, the market continued to tighten in 2018, and residential property prices have continued to rise. Data from Ireland’s Central Statistics Office illustrates residential property prices rose by 7.1% nationally in the year to November 2018 and house prices are forecast to continue to rise strongly over the next three years until supply catches up with demand, which will occur around 2021, according to the ratings agency Standard & Poor’s. S&P expects Irish house prices to rise by 8% this year, by 7% in 2020 and by 6% in 2021, amid a strong labour market and housing supply shortages in key areas, particularly Dublin. Arguably, big investors could offer a solution to the housing crisis, at least providing shelter for the well-heeled Google office workers. Demand for housing Eoin Condren, director at regeneration specialist U+I, says: “The biggest deterrence for large tech occupiers moving into Ireland is not being able to house their staff. We want to help them expand. Ireland’s efforts to attract big tech will all come crumbling down if it doesn’t have enough housing.” U+I, known for its mixed-use schemes in the UK, is currently looking to enter the Dublin build-to-rent market. Condren says: “We are now in a position where we can bring that expertise into the Irish market.” Existing names in Dublin BTR include US property giant Greystar, which earlier this year snapped up 268 luxury apartments at Dublin Landings for around €175m. The 1m sq ft mixed-use development is being delivered by Ballymore in partnership with Oxley. Others are AXA Investment Managers, which struck up a joint venture with Kennedy Wilson last year to target the Irish PRS market; Quintain, which is building homes for rent in Dublin’s suburbs; and Avestus Capital Partners, which has launched a €290m PRS fund backed by Nordic and German institutional investors. More than 11% of residential accommodation sold in Dublin last year was acquired by corporate investors, which spent more than €1.1bn on such property, according to Savills. Corporate investors block-purchased 2,923 residential units in the capital in 2018, representing a fivefold increase on 2017 levels. Quintain is developing a 238-acre site, owned by its parent company Lone Star, known as Adamstown in west Dublin. Adamstown is the first new town-style development planned in Ireland since Shannon Town in 1982. Before the property crash, a small portion of the 6,000 homes planned for Adamstown were built, along with the railway station and two schools, but development ground to a halt. Then in 2016, Lone Star bought the majority of land. Quintain’s executive director of development Jason Margrave says: “Everyone knows there is pent-up demand for housing in Ireland. “Dublin can’t accommodate all of the growth in housing stock so it is inevitable that this will move into suburban commuter corridors.” He adds: “We are continuing to build homes on the site. We have a planning application lodged for a further phase. We are in talks with South Dublin Council over how best to bring forward a mix of retail and BTR apartments.” US private equity giant Lone Star has emerged as the leading bidder for 73 acres of development land that investment firms Hines and King Street Capital Management are selling in Cherrywood, south Dublin, that has potential to deliver 2,600 homes. Lessons from 2008 Ireland is still haunted by the 2008 property crash, which left the state carrying the can for €440bn that the banks owed. It has become a more cautious place as a result. The government has acknowledged and is responding to some of the threats on the radar. For instance, the agency tasked with attracting foreign investment is increasing its activities in growth and emerging markets to alleviate its reliance on the US. America has been a lucrative source for foreign direct investment in Ireland for several years. In 2016, the US accounted for just over 70% of investment, while in 2018, it was 65%, according to Ireland’s Investment and Development Agency. As IDA’s head of property Damien Kilgannon says: “We win a significant portion of our business from the US. We are looking at targeting new territories and we have recently opened new offices in Australia, Brazil, Turkey and Russia. From there we will look to drive that business into the regions outside Dublin.” These efforts have not gone unnoticed by investors. George Walsh-Waring, a managing director at Meyer Bergman responsible for UK and Ireland acquisitions, says: “Ireland seems committed to attracting international business and the list of companies that have located to Ireland over the past decade is testament to this.” Meyer Bergman, alongside asset manager BCP, acquired a €110m office and retail scheme close to Dublin’s major shopping district Grafton Street in 2017. It was its first investment in Ireland. Walsh-Waring says: “I think Dublin is a very positive story in terms of GDP growth. The question is will that continue? I don’t see any signs that the manufacturing, financial services, and so on, are overheating. Nor do I see evidence that lending is running ahead of what you might normally expect for a healthy economy. “Generally, it is difficult to see anything that suggests marked cause for concern.” “From a retail perspective, we realised Dublin City Centre is totally undersupplied as there has been no new retail projects delivered in the past 15 years,” says Walsh-Waring. The scheme, known as Grafton Place, will offer 99,000 sq ft in grade A offices and 72,000 sq ft in retail space. Others also consider the country to be a safe bet for property investment in the long term. Investors draw a distinction between the current boom and the boom that precipitated the crash last time. Quintain’s Margrave, says: “Ireland’s boom is different to how it was last time round. It has been driven a lot by migration of people, workforces and companies, which is driving demand for offices and residential. “Back in 2005 onwards, the boom was fuelled by high levels of bank debt, commercial lending which is not currently around. “We might see the growth tail off but I don’t think we will see a spectacular crash.” U+I’s Condren says that the rise in international investment into Ireland has also made the sector more robust. “The new folks bringing in capital allow pricing to be analysed more thoroughly. Local developers may not have brought the true rigour that was required. “I think people see that real estate development is changing in Dublin and, since the previous recession, it has become a very international city.”