Ireland beckons for Asian property investors

The speed of the turnaround has caught many by surprise as the market moves back into investors' sights

PUBLISHED : Wednesday, 09 July, 2014, 5:02am
UPDATED : Wednesday, 09 July, 2014, 5:02am

What a difference 12 months can make. A statement of the obvious for anybody in the business of real estate, but in Ireland this saying is particularly apt.

Many investors have been surprised at the speed of the turnaround in the Irish market, from a country synonymous with the "euro-zone crisis" to an area of interest for investors from both home and abroad. We have seen a revival in appetite for all things Irish - bonds, equities, loan portfolios, government paper and commercial real estate - with this demand escalating when Ireland formally exited a bailout programme towards the end of last year.

In the first half of this year, €1.37 billion (HK$14.5 billion) was invested in Irish commercial real estate, compared with €1.78 billion for all of 2013. But where does Asian capital fit into this equation? Well, on the surface it doesn't.

Less than 1 per cent of investment in income-producing real estate in the Irish market in 2013 emanated from Asian investors.

However, this is in contrast to hotel investment, where 13.5 per cent of the total in this sector last year came from Asia, the most notable being the sale of the Fota Island hotel in Cork in southern Ireland to the Chinese Kang family, who have since bought a second hotel in the area.

Much has been written about the increasing cross-regional flow of institutional capital from Asia, as finite prime assets and aggressive pricing pose challenges for investors seeking to expand portfolios within Asia. This has prompted some to seek opportunities overseas, with core assets in gateway cities the most sought after asset class.

Last year more than US$22.5 billion was invested outside Asia, mostly targeting prime international cities such as London, New York and Sydney. Asian investment into Europe last year was US$13.2 billion, up from US$6.3 billion in 2012.

A recent CBRE research report said that as Asian institutional investors seek to diversify into low-risk alternative asset classes, more are expected to increase their allocation to real estate, with Europe a key target. A conservative estimate of a 2.5 to 3.5 per cent increase in allocation over the next five years - allowing for a steady increase of asset size at 4 to 6 per cent per year - would translate into a potential inflow in excess of US$150 billion into global property.

Although the Irish market is small, its occupier markets are considerably stronger than many other euro-zone locations due in part to its 12.5 per cent corporate tax rate. Further, the Irish economy is set to be one of the strongest performing European economies over the next few years. There is significant deleveraging to take place in the real estate market over the next few years and some Asian investors could well see opportunities to invest either directly or indirectly, particularly considering its proximity to, and similarities, with the British market, with which many investors are already familiar.

The most significant investment was the US$100 million deal between sovereign wealth fund China Investment Corp and Ireland's National Pension Reserve Fund to create the China Ireland Technology Growth Fund.

In addition to the underlying economic indicators, investors are drawn by the fact that property assets are attractively priced - they are for the most part being sold for less than their replacement cost. They also offer rental and capital appreciation potential considering that no new stock has been built in Ireland for more than five years, which is resulting in supply-demand imbalances in some sectors.

Prime office rents in Dublin rose 25 per cent last year, and have risen by a further 15 per cent in the first six months of 2014. They look set to continue growing at a fast pace until new supply comes on stream in two to three years. Occupier markets continue to perform well on the back of improving economic circumstances, with the office and industrial sectors being beneficiaries of continued foreign direct investment.

According to the Investment Property Databank, total returns in the commercial property market rose to 12.7 per cent last year - compared with a 30-year annual average return of some 10.2 per cent - with a 5.7 per cent total return achieved in the last three months of 2013 alone.

Also, there is an expectation that the number and value of loan and asset disposals will increase significantly over the coming months as the National Asset Management Agency and other financial institutions accelerate their deleveraging activities to match current demand levels.

Asian investors can also tap the country's recovery through real estate investment trusts.

In addition to the plethora of international funds, loan buyers, Irish reit vehicles and domestic funds vying for investment opportunities in the Irish commercial real estate market, new investors from other regions continue to emerge and in time this will also include Asian investors.

Marie Hunt is an executive director, head of research, CBRE Ireland