In the 1970s, my wife and I spent a lot of time criss-crossing our way across Africa. I remember in particular that as we drove through the bombed-out and bullet-ridden towns and villages of Biafra in eastern Nigeria, an incongruous billboard kept appearing everywhere.
The billboard lauded the health virtues of a dark alcoholic liquid called Guinness. I knew well that Guinness was the national drink of Ireland, but had never experienced its pleasures (or benefits).
Last week, however, I did make time for a few pints of the black stuff (which the Irish will tell you simply doesn’t taste the same once it leaves Ireland), while kicking some tyres in the Irish property market.
Ireland was hit hard by the global economic crisis in 2008-2009. Its banks crashed and burned, as did its over-leveraged real estate markets. Irish banks had built up huge loan books in the early 2000s, and much of their excess lending was to real estate.
I have seen in many markets over the decades how a leveraged real estate sector is often a precursor of debt crises.
For Ireland, a day of reckoning was inevitable. While property prices in many western countries fell by 20 to 30 percent, in Ireland they collapsed by 60 percent. Property development companies disintegrated. Development projects around Dublin and many other parts of the country ground to a halt as the money dried up. Real estate related bankruptcies reverberated through the entire economy. The National Asset Management Agency (NAMA) was set up to take on huge portfolios of non-performing real estate assets.
To its credit, Ireland swallowed a great deal of bitter medicine prescribed by the IMF (and others) in return for bailout help.
The result has been a remarkably quick recovery of the economy – to the point where Ireland’s GDP growth of 4.3 percent in 2016 was the fastest in the Eurozone. This will slow in 2017, to around 3.4 percent, but will still rank top for the region. Unemployment is almost back to pre-crisis levels.
I have been monitoring the developments in the Irish property market, from a distance, as the recovery has taken shape. Last week I had the opportunity to visit some leading real estate companies in Ireland.
I am upbeat on Irish real estate. My on-the-ground research has confirmed, with some subtle nuances, what I had seen from afar in my research.
Prices in the Dublin residential market, according to research from real estate consultants Knight Frank, fell by more than 60 percent from the peak in 2008 to the trough in 2013.
Prices have recovered substantially but are still about 35 percent below their peak. They look set to continue to move higher.
It’s all about basic supply and demand, with a smattering of policy positives as well. After the global economic crisis, construction of new housing collapsed. Supply has now picked up in Dublin in 2016 to see new completions of about 4,000 units. But this compares demand of more like 10,000 units per year. Supply is not going to come anywhere close to that figure in the coming few years in Dublin.
Supply will remain very constrained in the city. As a result, Dublin’s residential prices will continue to rise.
This demand is being driven by an economy that is attracting foreign direct investment at a rate that is exceeded only by the US, China and Hong Kong. And this is for a country with a population of less than that of New York.
Multinationals expanding their Irish presence
Ireland has long been a popular destination for technology companies like Google, Microsoft and Facebook, for many years as well as numerous pharmaceutical companies. Recently Twitter signed a contract for 177,000 square feet of new office space, which I estimate will accommodate about 1,300 new employees. And they are just one of many offshore companies setting up shop in Dublin. These new employees all need to be housed, in a hugely undersupplied market.
This is all reflected in population growth over the past 25 years that is five times the total population growth in the Eurozone. That growth does not look like stopping anytime soon.
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Dublin’s office market is also booming. Following the economic crisis, office construction virtually stopped. There has been no new office building completed for five years up to 2016. But companies took up about 2.9 million square feet in 2016. This was a record for the city. Prime office rents which fell almost 60 percent during the recession have rebounded to reach pre-crisis levels. Vacancy rates for grade A commercial space (i.e. the best quality offices) in the city centre have tumbled to around 3.5 percent. There are few cities anywhere with such low vacancy rates. About a third of the recent take up of space is by the technology, media and telecommunications sector, with the finance sector accounting for the next biggest share.
Also, construction activity is picking up. The crane count in central areas of Dublin is higher than I see in similarly sized developed cities. Most of that activity is for office space, which Knight Frank estimates will accelerate to around 2.8 million square feet this year, in line with recent take up. As at Q1, about 40 percent of the space scheduled for completion in 2017 was already committed.
As for the housing market, rentals and prices look set to continue their upward trend in the medium term.
Like many countries, Ireland’s real estate investment trust (REIT) industry was born out of crisis. REIT industries tend to grow when there are piles of distressed assets in the real estate space as they are a great way to finance distressed property portfolios. You simply bundle a bunch of properties together, and sell them to the public through a REIT listing, which by law has to pay out 90 percent or so of its net income to shareholders via dividends. And in most countries, those dividends are given tax breaks that make them very attractive to retail investors, pension funds and insurance companies.
Ireland’s REIT industry is new and was established in the wake of the economic crisis. The REITs I visited are less than five years old. Like REITs in most countries, individually they focus mainly on one kind of real estate, and limit the amount of greenfield development (i.e., building) that they will undertake.
REITs in Ireland have benefited from asset sales by NAMA, which has sold down its portfolio of non-performing real estate assets that were taken out of bankruptcies and receivership companies. These REITs in Ireland did not start the way REITs in most other countries did.
In most countries REITs spun off a portfolio of rental properties from a parent company. That’s how the industry took shape in markets like Japan, Singapore and Hong Kong.
In Ireland, though, a small company would first be first listed as a REIT, it would raise some capital through the IPO (initial public offering) process, and then it would acquire assets for its portfolio with the cash raised.
Then, quite quickly, having invested the first tranche of capital, the REIT would raise more cash to acquire more distressed assets.
The key distinction with Irish REITs is that these companies are not the slow-growing rental animals that we see in most REIT markets. In most markets, REITs grow assets and earnings very slowly. In Ireland, the REITs are very actively growing their portfolios from a standing start three or four years ago. Growth is coming from renovations of older buildings, acquisitions of building from NAMA (or others) and new development on sites acquired, often from distressed sellers.
In this way, the REITs in Ireland exhibit some of the characteristics of real estate growth stocks. Because growth is baked into the cake of these new real estate plays, these companies have not yet settled down to become those very predictable, long-term yield-producing investments that this industry is most noted for.
For example, Irish Residential Properties REIT Plc (Dublin, ticker IRES), a residential REIT, is on track to double its portfolio of residential rental properties over the coming three years. In this growth phase dividend yield will be modest as the portfolio is built out and occupied. But total dividends being paid out are growing rapidly.
Similarly, Hibernia REIT (Dublin, ticker HBRN) is growing its office portfolio rapidly. Its pipeline of new floor space will increase its total portfolio by almost 50 percent in the coming four to five years. Its net asset value has risen by 52 percent in the past three years and the company looks set to see a similar increase over the coming five years.
Both of these REITs should see share price growth track the growth of their portfolios over the medium term. Both companies will see dividend yields rise also as the portfolios mature and fill up.
These REITs offer the dual advantage of growth as well as dividends, and as such are something of an unusual phenomenon in the global REIT space.
And, after all these years, that Irish health drink is still a wonderful drop!