Saturday 20 January 2018

Ireland popular but risky bet for property investors

While Ireland is seen as a relatively risky proposition for property investors, Dublin’s retail sector is rated as an investment target
While Ireland is seen as a relatively risky proposition for property investors, Dublin’s retail sector is rated as an investment target

Donal Buckley

Ireland's commercial property market moved up from 19th to 13th in the world in terms of the amount of foreign investment it attracted in 2016 following a 24.6pc increase to €5.68bn in the amount of investment.

However, the country is ranked only 35th in terms of being a safe place to invest. These are among the findings in the latest Cushman & Wakefield Investment Atlas, which monitors global property investment trends.

When it comes to investment targets for 2017, Dublin's retail sector is mentioned as one of the European cities that are considered investment targets in 2017: "Dominant centres and flagship high streets in core German and Nordic cities plus Paris, London, Milan, Madrid, Barcelona, Lisbon, Dublin, Amsterdam and Brussels."

In terms of the rise in Ireland's cross-border investment, David Hutchings, head of investment strategy, EMEA Capital Markets at Cushman & Wakefield, said Irish reforms and strong economic recovery have revived the Irish property market "and with good liquidity and high rental growth for good space, this has encouraged renewed interest from investors regionally and globally".

Ireland's overall risk ranking of 35 puts it in the bottom half of the table of 50 countries, which is topped by Norway, Denmark, The Netherlands and Switzerland. Greece is ranked 11 and Bulgaria 13.

Nevertheless, Ireland's risk ranking is still better than the UK, which is ranked an even greater risk at 42.

Referring to the risk related to Ireland's over-dependence on US trade and projections for economic growth for the next five years, Mr Hutchings said these are a reflection of shorter term risks.

"Nevertheless, Ireland's ranking in the table should remind investors that there are certain vulnerabilities in the economy and hence they do need a risk premium in pricing relative to the most secure markets or they must be sure the market will continue to deliver rental and income growth to compensate for the added risks."

"Of the risk factors examined in the table, those holding Ireland back are its exposure to US trade, reliance on energy imports and a relative slowdown in growth compared to the very robust rates seen in the recent recovery. It's worth noting though that the former two have eased as key risk concerns, with the new US administration not yet acting on much of its pre-election global trade rhetoric, while oil prices have been volatile but have not maintained the growth rates seen late last year.

"At the same time, whilst economic growth in Ireland may be slower than in the last five years, it is still forecast to easily outperform EU averages. Hence the relative prognosis on the market is still good, albeit there are potential risk factors to which investors must be alert - such as increased political uncertainty and, of course, Brexit," he added.

In terms of political stability, Ireland is ranked a respectable 15 and that is ahead of the UK at 26 and Germany at 23.

Such rankings could well be reversed if British prime minister Theresa May secures a landslide election victory in the UK and Ireland's minority Government becomes paralysed by the political opposition.

In terms of risk, Norway is considered the safest place in which to invest, mainly because of its low levels of energy imports, its low dependence on US trade and stable political situation.

But one of the key differences between Ireland and Norway is energy imports, with Ireland ranked 47 based on 2013 imports while Norway, due to its high oil resources, was ranked the safest bet at 1.

Ireland's dependence on US trade is also given a risky 44 out of 50 and while in the past this might have been considered unfair as strong US trade would have been considered healthy, in more recent times with President Trump threatening to bring jobs home, it looks like US trade is considered more risky.

The Atlas report says that short-term risk is lowest in core European markets, in particular those in the Nordics, the Netherlands and Switzerland.

Some less core markets also feature strongly, such as Portugal, Spain, Poland and Greece due to their more limited exposure to US trade but also a relative improvement in growth.

Central European markets led by Poland and the Czech Republic are well placed but on a broader reading, Thailand, India and Indonesia are perhaps best placed among emerging markets generally due to their balance of risk, deficits and growth.

Russia and to some extent Brazil are among the most improved, meanwhile, with stronger confidence thanks to a change in policy and lower inflation in Brazil and stronger oil prices and the ending of recession in Russia.

Another interesting feature of the global market has been the upsurge in development land sales, which accounted for the largest investment sector in 2016, well ahead of offices.

Mr Hutchings attributed this to the Asian market, which represents 94pc of global development land sales, with China alone accounting for 87pc of transactions in the sector.

"Clearly this reflects a very different dynamic in terms of a developing market with a rapid rate or urbanisation and expansion, but also in terms of a market with large land resources and a high level of greenfield development versus the situation in much of Western Europe where a lot of development will be on brownfield urban land where older buildings are purchased and repositioned or cleared and redeveloped. Hence development land sales per se are much less in developed markets."

In a separate report, Cushman & Wakefield Ireland estimate that Ireland's development land market recorded €792m worth of direct and indirect transactions in the Greater Dublin Area, Cork, Galway and Limerick. These included 180 direct development land sales totalling €687m.

In terms of value, direct sales were moderately lower compared to 2015, when approximately €721m worth of sales were completed. However, the volume of transactions in 2016 recorded an increase of 15pc.

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