In Ireland, we want it both ways. On the one hand, we want the country to be affordable. We want low rents, and the abundant property investment that gives rise to them.
On the other hand, we’re very fussy about where property investment must come from.
We don’t like foreign investors taking the lead. Foreign investors are said to be vultures and cuckoos, and not to be trusted.
We don’t want our banks to take the lead — or rather, they’re not permitted to. After the Global Financial Crisis, Irish banks have been strongly discouraged by the ECB from funding property development.
And finally, we don’t want to do the funding ourselves. Irish investors aren’t big on property. Only 2.1 per cent of Irish pension assets are invested in property according to data from the Central Bank, compared to a global average of 8.9 per cent.
Since Irish banks, Irish investors and the Irish state are unwilling to fund property development at the required scale, it’s left to foreign investors. Particularly in commercial real estate.
For the sin of funding property development in Ireland, foreign investors get relentless bad press. The gripe is that we’re giving our country away to foreigners on the cheap.
Now the market is starting to turn, particularly in commercial real estate. The turn is being driven by rising rates and a big drop in demand for office space after the pandemic. Goodbody’s Colm Lauder is forecasting a 20 per cent drop in the value of prime office blocks in Dublin City this year.
Now the market is turning, the gripe is that foreign investors aren’t developing enough. They are being criticised for pausing work on projects and scaling back their investment plans.
It’s worth thinking through the alternative, at this point. The alternative to foreign-led investment in Irish property is either for Irish investors to fund it, for the banks to fund it, or for the state to fund it.
For banks, it’s a moot point because ECB rules strongly discourage investment in risky pursuits like property development. Were they allowed to do it, it’s debatable whether they should. It would have to be done in moderation. We know what happened last time.
For the state, it’s a question of priorities. About €6 billion was invested in property by investors, approved housing bodies and councils last year, according to CBRE. Investment need is likely to rise further in the coming years if we’re to reach our housing targets.
The state could build everything itself, which would have the benefit of smoothing some of the volatility in investment over the business cycle. But building hundreds of thousands of homes, offices, warehouses and shopping centres is incredibly expensive. If investment hit €13 billion per year — not unrealistic — that would reach 14 per cent of the budget, or about as much as the state spends on education every year.
Given private investors are willing to fund these projects, you’d have to ask whether it’s a good use of taxpayer money. And that’s with a very big assumption that the state can develop property as efficiently as dedicated property developers.
For Irish investors, investing heavily in Irish property doesn’t make a lot of sense. It doesn’t make sense for the same reason it doesn’t make sense to invest in Irish shares. Irish investors are already heavily exposed to the Irish economy through their jobs and their home. They can invest anywhere in the eurozone without currency risk. Irish investors need less, not more, exposure to Ireland.
Another problem with investing in Irish property is that the main way this happens is through open-ended funds. These open-ended property funds are inherently dicey. Only last week, Bank of Ireland prevented further withdrawals on one of its property funds.
Open-ended funds allow investors to invest in property. And they also allow investors to redeem their money whenever they need it. These two goals are in conflict. The fund owns lots of buildings, those are its assets. But buildings can’t be easily sold, like stocks and bonds. So if there’s an increase in the number of people seeking to withdraw their money, the fund has no way to raise cash quickly. This is why they occasionally shut the gate, and stop savers from withdrawing.
It’s not long since the last time this happened. At the beginning of 2020, just before the onset of the pandemic, two Irish property funds — Aviva Irish Property and Friends First Irish Commercial Property — blocked withdrawals from investors. Irish Life’s fund remained gated until April the following year, and Aviva’s until December the following year.
Big complex capital projects are a natural match for big investors. Ireland is a small country so those investors, necessarily, are not from Ireland. Big foreign investors have deep pockets, an appetite for risk, a long-term outlook, and experience with big projects. We’re mad to turn them away.