Investment in property back on the cards for this year
Published 02/01/2013 | 05:00
Noonan initiative allied to the attractive yields on offer will entice international funds
WITH most of the post- Budget attention focusing on the painful austerity measures, there has been little commentary and analysis on the Government's efforts to kick-start certain parts of the economy.
A case in point is Michael Noonan's announcement that he will provide for the establishment of Real Estate Investment Trusts (REITs) in 2013.
A REIT is effectively an investment fund that holds investment properties, with investors getting paid by the rent coming from those properties.
REITs are nothing new, they have been around for years in places like the US, Europe and Australia.
Ireland has been behind the curve on this front but their proposed introduction could hardly have come at a better time.
Investors looking to capitalise on Ireland's recovery have limited options.
The most obvious way is to buy government bonds, but much of the value in that particular investment class has now gone, given the performance over the past 18 months. Another way would be to invest in Irish companies, particularly the banks.
However, the asset class that continues to crop up on the radars of international investors is property.
It is easy to see why: after a record crash since 2006/2007, rental yields on commercial and residential building are attractive once again, vacancy rates have started to fall from very high levels and prices in urban locations in particular look like they are stabilising.
The case is becoming compelling for investors, but to date large-scale international investment has been constrained by the lack of suitable investment opportunities of any significant scale, with intense focus on a few high-profile buildings in Dublin city centre.
Given that Irish banks' ability to provide credit to the property sector will remain poor for the foreseeable future, international investment is vital to sustain any recovery in the sector.
Key to this will be how NAMA disposes of €13bn worth of loans on completed residential and commercial building in Ireland over the coming years.
A drip-drip approach to the sale of these underlying properties risks another downturn for property prices. That is in no-one's interest, particularly taxpayers who own NAMA and most of the domestic banking system.
This is where REITs can play a role and, fortunately for Ireland, this particular sector, which performed strongly in 2012, is likely to continue to attract strong interest in 2013 as investors seek alternatives to low yielding bonds and deposits.
Moreover, our own surveys of international investors suggest a strong interest in investing in Irish property through a REIT.
While most Irish investors have probably never heard of these types of investment funds, more than half a trillion euro is invested in them in just the US and Europe, while more exotic markets like Brazil is seeing a boom in this space.
Everyone remembers how the music died for the Irish property market in 2006/2007, but 2012 will go down as the year that some glimmers of light started to emerge once again.
While the resumption of mortgage lending will be key to a continued housing market recovery, international investors will have to take up the slack when it comes to the commercial market.
Tools like REITs should therefore be welcomed and embraced. A window of opportunity is now open.
It's up to Irish policymakers to expedite the path to this new source of funds for Irish property.
Dermot O'Leary is chief economist at Goodbody Stockbrokers