The Celtic Tiger roars again

As seen in the February edition of Master Investor Magazine.

Ireland may be small in comparison to Europe’s major economies, but its property market once packed a real punch. Between 1997 and 2007, property prices rose by a staggering 268%. Ireland’s decade-long house price boom was one of the longest and biggest in Europe, and at the time attracted investors from all over the world. Everyone knows what happened next. With seven years having passed since the bursting of the bubble, is now the time to get back into Irish property?

The higher you climb, the further you fall. Ireland’s property owners painfully experienced the truth behind this old adage. After the collapse of the mortgage industry in 2007, Ireland’s house prices fell by an average of 53%. In comparison, the rest of the OECD saw prices fall by an average of 23%. A few particularly hard-hit segments of the Irish market fell by as much as 80%. It was a bloodbath that cost many an Irish property investor a fortune, and wiped out an entire class of Irish property billionaires.

What happened next could become a case-study for a country quickly managing itself out of the mess it had gotten itself into. In November 2010, the Irish government had no choice but to seek a €67.5bn bailout from the European Union and the International Monetary Fund. To relieve banks of their non-performing loans, a “National Asset Management Agency” was established as a place to park toxic loans so that the banks could repair their balance sheets. In the meantime, the entire country stuck to a stringent austerity programme. It was a belt-tightening that was felt all across the Irish economy.

In 2010, the government started with an annual budget deficit equivalent to a mind-boggling 31.2%. This was reduced to 12.5% in 2011 and 8% in 2012. The deficit was subsequently reduced even further, to just 3.9% in 2014. For 2016, the budget deficit is projected to amount to just 0.8% of GDP. If there is a European country that could serve as a model case for turning around a debt-addicted economy, that country has to be Ireland.

The Irish economy eventually stabilised and in 2013 started growing again. After a sluggish 0.2% and 1.4% growth rate in 2012 and 2013 respectively, this nation of 4.5 million residents once again took on the old guise of the “Celtic Tiger”. Growth came in at 6.4% in 2014, a remarkable turnaround by any standard. Final figures for 2015 are likely to show 5.8% growth, and current projections for 2016 are running at just under 5%. The country has found its footing again.

Once viewed as a down-and-out, Ireland has now even seen a major property IPO. In July 2013, what used to be known as Green Property plc came back to the stock market in Dublin and London. Founded in 1965, the company had once been listed, but was taken private in 2002. When the first green shoots of recovery were visible, its management decided to take the plunge. Green Property was renamed Green REIT, and it became the first listed Real Estate Investment Trust in Ireland.

Green REIT (GRN) raised €310 million in equity during its IPO, and another €400 million during a second offering. It now owns a portfolio worth €882 million, consisting of 24 properties that are almost all in and around Dublin. Three quarters of the properties are office buildings, while a further 20% consists of retail space. The current occupancy rate of 96% is projected to rise to 98% in 2016. On average, its leases have a further five years to run.

As the largest listed property company in Ireland, and the first under the new REIT legislation, Green REIT is in the public spotlight. Its management team made a point of building a conservative portfolio, which so far includes just €94 million in debt financing. In fact, it could purchase another €400 million of property and fund it with debt, but still only have a total gearing level of 35%. To all intents and purposes, this is a conservatively funded property portfolio.

Green REIT was set up during the beginning of the recovery cycle and its shareholders have already seen a significant upswing in value. Brought to market at €1 per share, it was last trading at €1.49. (N.B. the listing on the London Stock Exchange (“GRN”) is also in Euros, not Pound Sterling.)

As of June 2015, the company’s net asset value (NAV) per share had risen to €1.35, following a 24% jump in property values in the preceding 12 months. With the further increase in property values since then, the share is currently trading at roughly the net asset value. The portfolio yields between 6% and 7% p.a., making Green REIT a seemingly attractive alternative to bonds.

The question is: where will property values go from here?

The OECD already warned of a potential “new bubble” in Irish property. The think tank pointed out that “such strong price rises may again spark a reinforcing spiral of higher property prices and credit leading to another misalignment of property prices and eventual burst that causes large losses in the banking sector”.

For now, it seems, the Irish property market is nowhere near bubble territory. House prices in Dublin remain nearly 34% lower than their boom time high, recorded in early 2007. Apartments are 41% cheaper than they were in February 2007. In the rest of Ireland, property prices are still 36% lower than their pre-crash highs.

What’s more, Ireland remains a dynamic economy. Arriving in Dublin airport during my research for this article, it was impossible to not notice the relative youth of its population, the apparent can-do attitude of the authorities, and the continued position of Dublin as a hub for finance, technology, education and other industries.

The recent rapid rise in prices cannot continue at such a pace, and the market is bound to experience periods of stagnation or even small decreases in price. However, with supply being very limited due to restrictive planning laws, and few places in Europe offering a dynamic environment for companies and enterprising individuals, it seems almost certain that Ireland’s property market recovery will continue.

For anyone wanting to invest into Ireland for the next 5-10 years, Green REIT might just be the easy, convenient and safe vehicle that investors should look to.