“Foreign investor capital has hardly featured in the last ten years in the Irish commercial property market and in 2010 only about €75m was invested by foreign investors – a welcome development but hardly significant. The peak in terms of commercial investment transactions was €3 billion in 2006 – all involving domestic investors and a lifetime ago in terms of where the property market and the banking system are now” NAMA chairman and CEO speaking in May 2011
Take a look at the attached press release from a company many of you won’t have heard about before, Europa Capital LLP. It has just bought a shopping centre in the capital of Bulgaria, Sofia. By-the-by the seller was a venture between GE Real Estate and Derek Quinlan’s old company, Avestus; Avestus has been retained to manage the asset, but Europa paid over €100m for the 254,000 sq ft shopping centre which also incorporates an additional 112,000 sq ft of offices. Europa is a real estate investment fund; in other words, it raises money from investors and invests that money in real estate which it manages itself or through others, generates a return from rents, managing tenants and perhaps some development which enhances the value of the asset; it may sell the asset at a later date and in addition to the income earned throughout its ownership, the company hopefully generates a profit on the disposal. It is UK-based and no doubt its capital has many national sources especially as it is a company within the Rockefeller Group, which is US-based.
Nothing exceptional about the above transaction at all; Europa has invested an overall total of €7bn in property in emerging markets and so-called Eastern Europe. Bulgariais familiar to many of us as a holiday destination and a place where some of us bought apartments during the mania of the past decade. It’s a former communist country of just over 7m people but a GDP which is just one fifth of ours; we’d call it a “poor” country. There’s a perception that it is still a bit of a gangster state which might be unfair but it is a fact that Transparency International ranks it as the 73rd least corrupt country in the world, compared with our own ranking of 14. It still has its own currency, the lev.
Again, nothing exceptional about the above transaction at all, it’s just €100m in a EU investment market likely to be worth €100bn in 2011; what is exceptional is the fact that Ireland, a country we would like to think is “advanced” and in the euro area with a highly stable political environment for almost a century. We are a small open economy, and despite the blips with our universities tending to slip and our OECD/Pisa rating showing some disappointing results, we are regarded as reasonably well-educated, with a decent infrastructure, an attractive corporate tax environment and home to some of the world’s most-respected brands. Last year, we captured 40% of non-EU foreign direct investment in the entire 27-country EU; by comparisonBulgaria gets less than 0.5%.
Okay we have had a shock in the past three years with our GDP declining more than 10% after the partial-collapse of the property and banking sectors. But we have a stabilising economy, a balance of trade (exports less imports) surplus, unemployment although elevated hasn’t really changed in the past year, inflation below 3%. We are one of three EU recipients of a bailout, but are generally regarded as the most likely to exit the aid programme sooner rather than later.
So why are international property funds not prepared to invest in Irish property? Indeed why have international property funds largely avoided the country during most of the past decade, as claimed by NAMA above? You might think our current woes are a deterrent but for most of the 2000s, we were held out as a model economy with high growth, budget surpluses (taxation less government expenditure); yet international property investment was not forthcoming.
As a country we don’t seem to actively market property investment opportunities, by which I mean neither the IDA or the NTMA make presentations to overseas potential investors. But although a national agency might promote and facilitate investment, shouldn’t potential investors be able to find this country on their own? We do have many of the world’s biggest property service companies and agents with established presences in Ireland – CB Richard Ellis, Cushman and Wakefield (Lisney), Jones Lang LaSalle, Colliers International, DTZ (Sherry Fitzgerald), Knight Frank, Savills – they’re all here but none of them are brokering significant foreign investment. Why is that?
Given the decimation of the usual domestic sources of investment, the general depression in lending to the property sector and the fact that with NAMA and the banks we have elevated levels of supply, now more than ever we need international investment.
Part 2 of this entry will aim to provide a response to this mystery (and by the way, this is not a general invitation to focus a debate on imminent Upward Only Rent Review changes which will be awarded a feature blogpost when the heads of the bill are published)
NAMA Wine Lake 
I would think that the main reason that international investors don’t buy Irish property is much the same reason that international banks no longer lend significant amounts of money for property purchases in Ireland. Irish property prices are simply too high, making property investment in Ireland speculative and risky.
Residential prices are above conservative estimates of value, and most commentators agree that they have further to fall. The yield on commercial property is not bad, but may be artificially inflated by bubble-era rents that are unlikely to continue indefinitely.
In addition, a major source of uncertainty is what NAMA and the banks will do with the large overhang of empty property. At the moment NAMA and the banks are keeping property off the market, in what appears to be an attempt to restrict supply and prevent the market from working. What NAMA and the state-controlled banks do is largely a political decision, and this is a huge source of uncertainty for anyone considering making a property investment.
@Roger, thanks and for the here and now, those sound like reasonable suggestions, but there has not been any appreciable international investment in the past decade, when there was credit, rising capital values, limited supply and general hubris.
@nwl when you say international investors not active in Ireland would you include for example ulster bank and consider them international or domestic.
@John, there is commonly a distinction between sources of financing and those whose business is investment. Ulster Bank is the former.
Roger’s comments are in ways correct, but he uses the wrong tense. International investors did not invest in the boom times because our prices WERE too high.
Our cap rates were tighter than London’s. Indeed, they were on a par with the West End and our indigenous investors, bolstered by cheap money from our banks and lumbered with a genetic greed and our cultural penchant for never selling anything no matter what is offered for it, meant that any offer from whatever source was greeted with derision.
The international investors were not particularly impressed with our hubris and bought off more commercial vendors in locations where they didn’t have such an inflated opinion of “the field”.
International banks don’t lend money in Ireland because we are fourth in the list of countries most likely to default. When you have options and want to keep your job, why would you invest in Irish property? Even the Irish banks won’t.
http://www.businessinsider.com/countries-most-likely-to-default-2011-5#4-ireland-18
@WSTT, so investors are willing to buy our 10-year bonds paying 8.7% but are unwilling to invest in prime industrial paying 9.5%. UORR might come into it but CBRE say that market rents have stabilised at €65 psm.
And indeed we are living in turbulents days today, and perhaps we were overpriced at peak, but it seems that at no point in the last decade were international fund managers particularly active in Ireland, at least that is what NAMA appears to be saying.
We had profound interference in the market from the tax windows and civil servants being moved. Also, of course, we had those clauses in the rental reviews. These prevented a market from operating where a return on investment was reasoned.
We had a situation where the incentives were grafted onto a legal structure that could be changed and should now be changed.
Protectionism is a very dangerous game to play. We should have released all the stuff onto the market at one swipe. All we need do is make certain none starve or freeze.
@nwl thanks for that perhaps their x economist should have explained the difference before they embarked on a very extensive loan to own programme he was widely quoted in earlier post-looks like they are in the ownership/investment business in Ireland these days…….
http://group.ulsterbank.com/media/press-releases/republic-of-ireland/2009/5-12.ashx
Ireland unfortunately for a long number of years only got mentioned internationally regarding the “troubles” this was replaced with great fanfare by the “tiger” years each in it’s own way were deterrents to property investment .
Also transaction size is major factor 100 million is minimum to have decent conservation with international investors but is Liffey Valley not partially or wholly owned by international investors.
Below 100 mil not enough fees or upside to bother with.
@ NWL,
If you have assets in excess of 5 million in Ireland then one faces a domicile levy of 200,000 euro per year, every year. Even if one spends ZERO days in Ireland for that year or for every year.
That could hardly be described as an incentive to invest in Ireland now could it?
If the successful Irish Diaspora are to be invited back to invest money here then this domicile levy could be described as a disincentive.
Considering wealthy people all over the world are facing higher taxes and possibly nursing heavy investment losses then I don’t think we will be seeing them invest in Ireland in any large numbers.
@Sporthog, I’ll stand to be corrected on this but if Europa (the fund in the Sofia transaction above) were to have invested in a shopping centre in Ireland then it would not have faced a domicile levy which is aimed at individuals, is it not? But even if that is an incorrect interpretation, it wouldn’t explain the absence of foreign funds before the domicile levy was introduced (2010).
@ NWL,
You are correct, and indeed it does not explain the absence of foreign funds invested over the last decade etc.
However my comment is directed in a future tense scenario. One cannot change the past, but the incentives for the future can be set with each budget, hence my comment “if they are to be invited back”.
If investment funds are unwilling to look at Ireland, for what ever reason, we still require money to flow into the country, not out. Hence my comment about the Irish who have left Ireland over the last 30 to 40 years.
@John Gallaher:
A very good insight into the thinking of the international investors. You are right, all those factors, the troubles, the inflated prices of the tiger years and the lot sizes are all relevant factors.
@WSTT, I wonder would the Troubles have been a factor for any fund and if you are right then surely Ireland wouldn’t consistently have the highest share of Foreign Direct Investment into the EU?
LandSec and ING, to name but two, invested in Belfast during the Troubles. They largely divested when it became clear they could off-load a bunch of mediocre (in their terms) assets to the local lads who were pumped up on cheap money. Going even further back John Laing built CastleCourt which effectively created an investment market for Belfast. The deal was massively (and necessarily) sweetened by the government. The development was bombed more than once by the IRA in the construction phase.
The Victoria Square centre in Belfast is owned by a Commerzbank fund, Castlecourt is owned by Westfield and Hermes though they are (unsuccesfully) trying to flog it. Westfield also want to develop a John Lewis-anchored scheme near Lisburn. ING have a JV with Willam Ewart and Snoddons to build a scheme in Belfast called Royal Exchange. It’s in planning.
ING got themselves a good deal in 2006 when they sold the Scottish Provident building to a local bookie for £21m, representing a ridiiculous 4.5pc yield.
@NWL, A good point, and greed does take precedent over fear. Our corporate tax rate, English speaking population and a gateway with relatively easily access to the EU did indeed bring in the manufacturers.
I think that our tax laws in relation to property investment do not make us such an attractive destination for funds. We tax rental income under Case V at source and the Capital Allowances that were available to Irish investors are not available for set-off purposes against tax in the USA. Other destinations such as the UK have more benign property taxes from an international viewpoint.
@NWL; In relation to our bonds, when they were paying 10% plus, I was asked by US funds “Why would anyone invest in property in Ireland at sub 10% when you can buy sovereign bonds at a better return?” The answer of course is obvious (because if the tenant went “belly up” the investor is still left with the building, if the sovereign defaults you are likely to be left with nothing), but hey, nobody said Wall Street fund managers are that bright. They find it hard to beat the S&P index.
The funds view Ireland as a huge currency risk. They foresee a double whammy if things go really wrong with the euro (the volatility today won’t have helped). First the euro could collapse and second, we could opt out and devalue.
As one manager of one of the USA’s largest funds said to me “For every 100 people we get in here looking to invest in the US we get 3 who will invest in London and none are interested in Ireland.
He had no axe to grind. They had just made a lot of money advising Ireland, so he was well disposed towards us. He was just stating the facts.
@WSTT, that sounds about right unfortunately. But whilst we mightn’t stand up so well with London (though good luck to investors with their exposure to inflation and currency risk), we should compare favourably with Bulgaria, should we not? The Chinese are certainly kicking around in Portugal which according to the bond markets is more at risk of default than Ireland.
In terms of Wall Street funds, I just don’t get how HP, Apple, Dell, IBM, Microsoft, Facebook, LinkedIn, Ebay, Amazon, Google and almost countless niche US software/games companies, not to mention medical/pharma companies choose Ireland for multi €bn long-term investments, but when it comes to property investment, which, when you think about it carries less risk than a greenfield investment, there is very little.
Tax may indeed be an issue but given the stark orphan status we seem to have with foreign property investment, perhaps some targeted tax changes might be in order.
@NWL Almost all of the US companies which locate their “European headquarters” in Ireland that are here don’t have as much invested here in fixed assets as is imagined. There will be a lot of money tied up in IP (inter company transactions), but most property is just leased.
Taxation is the key for almost all of these companies coming to Ireland. However, there are many other reasons why they stay. One reason mentioned to me in the very recent past was the ability to rent high spec accommodation at very reasonable prices.
The last thing we need is further property tax structures being created. Sweeping away all of the residual tax based schemes plus the removal of interest as a deduction against passive rental income should be an immediate priority.
I personally can’t imagine anyone investing in Bulgaria for the long-term. Though didn’t Seán Quinn?? It is a country with a rapidly declining population and an age structure which will make it very hard to recover from that.
@Niall, apparently €21bn was invested here last year in non-EU FDI. Now some of that might be short term money, but Google has spent the best part of €250m so far this year just buying two buildings. Production lines and equipment, even in leased premises, are not cheap.
There is a massive Irish property investment presence in Bulgaria, Romania, Poland, Ukraine and Russia (in terms of what might be called Eastern Europe). There are many other international investors also. The blogpost above is drawing attention to the fact that Ireland doesn’t attract international investment.
Why would you say the last thing we need is new property tax structures being created? If there’s something wrong with our tax regime at present, then why not reform it?
@NWL: Maybe it has something to do with the herd instinct. I know whenever I brought the subject up over the past 15 years, Ireland was just considered overpriced.
As well as that nobody promoted property investment in Ireland to the Americans in any serious way. We were considered unsphisticated and unfriendly towards inward property investors.
A good start would be to promote legislation allowing REITs.
US is considering a “tax amnesty/holiday” on foreign profits that are repatriated but credit to the IDA and Irish American Fund and many other organizations for promoting Ireland to manufacturers.
http://www.bloomberg.com/news/2011-03-17/tax-holiday-for-1-trillion-may-lure-profits-without-spurring-u-s-growth.html
@ Niall,
When you recommend
“Sweeping away all of the residual tax based schemes plus the removal of interest as a deduction against passive rental income should be an immediate priority.”
Are you referring to commercial property or Private residential property or both?
For a landlord the biggest cost is mortgage repayments, if these cannot be offset against profit then landlords will be wiped out. Unless of course they are lucky enough to have paid down the original mortgage in full.
@Niall: You wrote “The last thing we need is further property tax structures being created. Sweeping away all of the residual tax based schemes plus the removal of interest as a deduction against passive rental income should be an immediate priority.”
If you want to kill off any inward property investment into Ireland and ensure that those that are here leave immediately, this is the way to do it. Every country in the world allows a deduction for interest against rental income. Right at this moment, we desperately need inward investment to generate a market and take the properties out of NAMA. We need to make Ireland an attractive investment option.
The problem with our DoF is that it sets up these schemes to attract investment, then it becomes sorry and changes its mind when people use them as the tax shelters they were designed to be…. a bit like the boy who takes his ball off the pitch halfway through the match because he’s losing. It’s our natural begrudgery surfacing. But international investors don’t have an understanding of our national traits and detest the uncertainty that goes with our “flip flopping”. It’s this lack of commercial “nous” that unnerves the international money.
…..”I’m not an apologist for property developers, but, they AAAARRRE the risk takers”
They were risk takers, er, who demonstrated that they had very little idea about risk.
Risk-taking is about estimating risk against reward. These people have proved beyond doubt that they are incompetent in this regard. People who are competent at “risk” refused to get involved in property in Ireland after about 2004. They are the people who should be paid large salaries and potential bonuses to manage Nama assets.
Is Ireland beyond redemption in regard to asset management?
@grumpy all investment decisions involve a element of “risk” they simply priced it wrong and it appears the hedging strategy was to diversify into MORE property investment overseas or hmmm bank shares.Did it never occur to anyone that their is a direct correlation between banks shares that also have just as large property exposure… it was in effect doubling down.
Irish developers had massive appetite for RISK but absolutely no feel or sense of timing sadly they were a source of amusement to many seasoned professionals.
Unfortunately their has been understandably a back lash and salary caps had to be imposed which makes Ireland not overly attractive unless one is struck with some vocation to “save” or help.Some who attempted to advise the Irish developers were accused of lacking “balls” and completely ignored or derided and they sought the advise of “yes” men who with large fees in mind encouraged and enabled reckless risk taking.
No Ireland is not at all beyond redemption some very smart but expensive money is active in Ireland but future generations should not be burdened by the hubris of a small group of “players”