Institutional Investment in Ireland’s Property Market: Corrective Blip or Here to Stay?
Since the financial crisis erupted in 2008, there have been unprecedented levels of largescale international investment in Ireland’s property market, across the spectrum of retail, office, and residential markets. The Irish market has become one of the most in demand locations for commercial property investment, with sales exceeding €4 billion in 2016.[i]
The main factor that separates this recent trend from what had come before is the nature and origin of the investors. Up to the time of “the crash” eight years ago, only a handful of funds – virtually all of them from the UK – ever showed any interest in the Irish market. Even up to the late 1980s, British pension funds and insurance companies were the only entities with Irish portfolios, usually confined to office blocks and high street shops let out to long-standing traders.[ii]
The trend towards international institutional investment has been gathering momentum in recent years. Since the start of 2013, the Irish real estate market has seen a turnover spend of €13.19 billion, with more than half that spend coming from foreign buyers.[iii] In 2016, it is estimated that foreign buyers accounted for 70% of total spend, with the majority of the investment sourced from the US.[iv] With property prices continuing to bounce back strongly from their lowest point in 2012/13, Ireland is now seen as a fundamentally strong market that represents good value with a stable outlook.
Much of this foreign investment stems from the continuing reverberation of the seismic crash in Ireland’s property market that began in 2008, and bottomed out in 2012/13;
The collapse of confidence and lack of liquidity that followed the onset of the financial crisis, and the bankruptcy of Lehman Brothers, was deeply felt across Europe, but acted as a particularly devastating catalyst in bursting Ireland’s property bubble, to which the Irish banking sector was inextricably linked. With the value of most of their assets declining in line with the property market, the liabilities of the six Irish domestic banks were now considerably greater than their assets. The subsequent guarantee of their debt by the Irish government to the tune of €64bn would soon see the need for the international bailout of 2010.
Ireland's distressed markets presented a ripe environment and opportunity for large scale investors, mainly private equity firms, to buy up much of the debt, providing investment at time of high risk and uncertainty. They provided much-needed capital for Ireland’s economy, at a time when many other investors had retreated from the country following the international bailout in 2010.[v]
They purchased much of the 'bad' property debt of Ireland’s banks, many of whom had been bailed out by the Irish government. In 2014, the Republic’s “bad banks” were the largest vendors of distressed property assets in Europe. The National Asset Management Agency (NAMA) was established in 2009 as one of a number of initiatives taken by the Government to address the serious crisis in Irish banking which had become increasingly evident over the course of 2008 and early 2009.
NAMAs core objective was to reduce its €30 billion contingent liability as quickly as was commercially possible, with a high percentage of its portfolio being bought by private equity firms. These investment companies have since become some of Ireland’s largest landlords and mortgage providers, and generated huge profits after the Republic’s property market recovered. Residential property prices rose 8 per cent in 2016.[vi]
With property prices continuing to bounce back, and with the Irish market seen as a stable place to invest, with positive forecasts for forthcoming years, the trend of largescale international investment in Ireland’s property market shows no sign of deceleration. Ireland is seen as a stabilised market with a macro economic environment that is the fastest improving in Eurozone;
'Institutional investors take a long-term view and look for sustainable returns in a low volatility environment. Ireland now presents a compelling case to the international investor particularly following the Brexit vote in June 2016. The staple attractions remain that Ireland is committed to the Euro; represents a gateway for foreign companies to the European market; and has a growing population of highly educated and motivated young people.'[vii]
The ripple effects of Brexit are already beginning to be felt, particularly within the financial services industry, with Dublin’s nearshore location to London giving it a distinct advantage. JP Morgan has already bought up 1000 capacity office space in Dublin, with another investment bank strongly indicating it will soon expand its Dublin operations.
There have been warning signs, however, of another potential bubble beginning to form. The market, particularly in Dublin, is very constrained with little to no new housing supply being delivered since 2010. The rental market in Dublin has already exuded signs of runaway acceleration, with prices reaching record levels in Q2 2016 and continuing to rise. There was a warning from the OECD in June 2017 that “the sharp rise in prices and lending raises concerns that another bubble may be forming, and the authorities should stand ready to tighten prudential regulations if needed”.[viii]
It is clear the lessons of an all too recent history should continue to loom largely in the forefront of any policy strategy. The state of the overall economy cannot again be allowed to become so inextricably linked to one single class, such as a buoyant property market. Whilst it may seem like an obvious warning in light of such recent history, the positive feedback mechanisms that result from a property boom can quickly escalate and become self-reinforcing;
'Recall the period of wonderful outcomes preceding the financial crisis. The demand for housing spurred price appreciation, which enabled mortgage credit to be supplied at increasingly generous terms. The most suspect credit cannot default if the value of the collateral keeps appreciating and, as a result, the supply of credit keeps expanding. The fear of missing out is also supremely powerful. The conservative individual becomes less so when he or she sees a neighbour flipping houses with success. Similarly, the conservative lender is forced to compete with more aggressive suppliers of credit. For lenders, not being accommodative enough during the go-go years can amount to an existential business question.'[ix]
The above statement from Bloomberg is directly applicable to the US housing market crash, but its sentiment applies globally. The dangers of collective amnesia in the face of seemingly continuous growth in property prices should not be disregarded. There are numerous reasons for optimism surrounding current investment conditions in Ireland’s property market, but the risk of another property bubble forming should still be at the forefront of any long-term investment management approach.
[i] Duff and Phelps, ‘Demand in Irish Property Market Set to Continue in 2017’, Feb 2017.
[ii] Jack Fegan, Irish Times, ‘Foreign investors still dominating Irish real estate market’, Dec 2016.
[iii] Cushman and Wakefield, Irish Investment Market Q4 2016, pdf.
[iv] Knight Frank, ‘Foreign Investors still dominating Irish Real Estate Market’, Dec 2016.
[v] Attracta Mooney, Financial Times, ‘Aggressive vulture funds swoop in on Irish property’, Feb 2017.
[vi] Attracta Mooney, Financial Times, ‘Aggressive vulture funds swoop in on Irish property’, Feb 2017.
[vii] Duff and Phelps, ‘Demand in Irish Property Market Set to Continue in 2017’, Feb 2017.
[viii] DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIES, OECD ECONOMIC OUTLOOK, VOLUME 2017 ISSUE 1 © OECD 2017
[ix] Dean Curnutt, Bloomberg, ‘Low Volatility Is Market's Most Significant Danger’, May 2017.
Tom joined FinTrU in September 2015 as part of the second Financial Services Academy. He is a graduate of the University of Glasgow, where he gained a MA in English Literature/Philosophy as well as completing an MSc in Carbon Management.
Since joining FinTrU, Tom has worked as an Asset Manager on behalf of the Securitised Product Group of a Tier One Investment Bank. He is responsible for ensuring the contractual compliance of all reporting related to all EU jurisdiction loans, as well as being responsible for the production of CCAR reporting and Quarterly Management Reports.
Part of the Quarterly Management Reporting involves assessing and analysing market conditions and trends in Irish, U.K and wider EU circles.