The right moves: Balancing risk versus reward
Published 09/06/2016 | 02:30
A sure sign of a strong economy and property investment market is the development of "alternative investment" sectors.
As competition for mainstream properties drives down yields, "alternatives" open up, often promising returns of 10pc or more. Some of these will be a revival of old ideas and others will emerge from technological or social change.
Some will become part of the conventional market, others will establish a niche and many will disappear without trace. So what are the opportunities and pitfalls for investors and financiers?
We can learn a lot by looking at trends worldwide and many innovations can be judged by their performance in the US and UK markets. The big difference between Ireland and those markets is population and we don't have the critical mass to support some of the business opportunities that work abroad.
However, we have seen a dramatic growth in our population over 30 years and that is seeing student housing becoming a "mainstream" investment business here. Irish and international investors and developers are vying to get into the market and this is a sector which is here to stay.
A very welcome development here is the advent of an institutional market for residential investment, where professional landlords, like Reit's, manage and hold, (usually apartment blocks) for the long term. This boosts the supply of good quality accommodation and provides security of tenure for tenants. This sector will undoubtedly strengthen further. Serviced apartments and "aparthotels" are also long established internationally and, given the shortage of residential accommodation and hotel rooms, offer a real opportunity here.
Investment in social housing is well established abroad and there is no reason why it cannot work here on a large scale, with developers/investors providing housing for local authorities or housing associations. The main impediment to that market blossoming here is the state's tax take, which is making new housing unaffordable.
Retirement housing has had a chequered history in Ireland but is a conventional property investment sector abroad. Properties can be sold or leased and can be combined with providing healthcare and other services, as required. I think this is one of the biggest opportunities in Ireland. It will be supported by a "graying demographic" and is also a part solution to the lack of housing supply, as many family homes are occupied by pensioners who would prefer to move to smaller houses in their area, but have no options.
At the other end of the spectrum, crèches and nursery schools are well established markets abroad. There has been widespread development of crèches here, initially fuelled by tax breaks. This sector will continue to do well here in the long term, underpinned by our high birth rate and tax/social policy, which encourages both parents to work.
Hotels have moved closer to the centre of the investment spectrum and the big change is the arrival of professional management companies who either invest in hotels directly, or operate the hotels for investors. The sector is doing very well again, particularly in the cities and the medium term outlook is very positive, driven by strong tourism and the local economy.
The leisure sector never ceases to offer a selection of fresh opportunities, but therein lies its weakness, in that it is susceptible to changing tastes.
Sports and fitness clubs have a potted history here. Squash, tennis, bowling, indoor football and other activities ebb and flow in popularity. Golf courses became over supplied during the boom and many needed to rely on house sales and/or a hotel for profitability. The sector is recovering again now but many of the members lost in the recession are now caught up in the latest craze-cycling.
Pubs and restaurants are also subject to the vagaries of "trendiness."
In London the latest trend is for pubs to incorporate an activity, such as model car racing or table tennis. Investors in these businesses should be wary as the underlying "leasehold interest" and fit-out are often worthless.
Power generation has become an opportunity for investors and land owners. Technology has opened up new horizons and the risk seems to be in a changing legislative context as different governments favour solar, wind or other technologies.
Whilst we may not follow London into developing a market for urban farms on the roofs of our city centre buildings, crematoriums, car parks, data centres, self- storage, development financing and land, all offer options to investors seeking higher returns.
It's all about balancing risk and reward.