The Irish property market has been through a whirlwind few years, swinging from the best- performing global investment market to the worst and back again.
This has not helped Ireland’s risk profile, but structural improvements, such as the introduction of Reits, have attempted to introduce a new longer-term investment objective.
However, the recent popularity of the market here, fuelled by the dramatic price recovery and influx of new investors, does not mean the market is in any way immune, or indeed likely to benefit, from the Brexit fallout.
Brexit is forcing investors in UK property to grapple with uncertainty. While British equities tumbled only 3.1 per cent on the day after the UK voted to leave the European Union, shares in listed real estate firms fell 15.4 per cent.
Losses for investors
A significant number of key investment funds have closed for redemptions or increased redemption penalties, others have discounted yields while a number of prime London assets have, like in 2008, reappeared on the market.
What’s more, sterling’s fall, which sank to its lowest level against the dollar in more than 30 years, caused more losses for investors in UK real estate stocks who failed to hedge their exposures to foreign-exchange risk.
In light of this, there are a number of ways to view the uncertainty that prevails in the UK property market.
First, geography may not spare investors who looked beyond London. Although London, Scotland and Northern Ireland all voted against Brexit – with the latter two possibly pushing to remain in the EU – London is the epicentre of the UK property market (37 per cent of investment real estate that MSCI tracks is in central London).
Investors can also view exposure by property sector and occupier type. London, the focus for international investors, holds one quarter of Britain’s industrial and retail real estate but 69 per cent of its office buildings.
The potential for post-Brexit London to lose jobs if companies move their operations elsewhere in the EU may translate into increased risk for investors in offices, particularly those with financial or professional services occupiers.
Risk of relocation
These two industries make up more than a third of all rent collected in the UK property market, making them the critical income source for London investors. A breakdown of rent collected by investors in the UK market is illustrated here.
In this environment, risks to office leases are not spread evenly. Certain tenants, such as governmental entities, which leased about 10 per cent of office space as of March 2016, are by definition domestic.
The greatest risk of relocation comes from the financial and services sectors, which together represent about 60 per cent of the rents in the UK office sector (although roughly 70 per cent in London).
Even then, many businesses are legally bound to lease agreements for years. Within the financial and services sectors, the average remaining term for leases to multinational businesses is 4.7 years, compared with 6.3 years for leases signed by domestic firms.
If companies do move, owners of office buildings in cities throughout the rest of the UK and continental Europe may see an increase in demand for space.
Ireland, to cite one destination, may benefit if murmurs from multinationals about moving their operations to Dublin translate to leases there.
Dublin offers many advantages: rents are comparably cheaper than London, it is an established financial centre and is a short flight to London. Equally though, the Irish capital has its constraints.
Dublin continues to be held back when it comes to attracting leading financial houses and high-level staff for a multitude of reasons.
Sustainable gains
Poor infrastructure, the postponement of crucial transport projects such as Dart Underground, endemic lack of suitable rental accommodation for financial employees and uncompetitive high personal taxation, particularly for higher- earners, have eroded the attractiveness of businesses relocating to Dublin from London in a post-Brexit world.
Addressing these issues will be crucial if Dublin is to be positioned as a viable option alongside Frankfurt, Paris and Amsterdam. Only then will real estate make meaningful and sustainable gains for the Irish market.
Colm Lauder is vice president of real estate at MSCI, which provides research-based indexes and analytics to support the world’s leading investors to build and manage better portfolios
