The Irish economy is estimated to have grown by 13.5% during 2021 despite the pandemic and its associated restrictions. Similarly, GNP, which excludes multi-national profits, is estimated to have grown by 11.5%. Ireland has continued to show its resilience as an economy in the face of such challenges and the Government supports retained throughout the year have no-doubt helped to bolster the recovery.
As 2022 strode in, the waves of economic uncertainty of the previous 21 months began to recede and there was renewed optimism across the majority of business sectors, albeit cautious-optimism, as stronger than expected inflation growth emerged. While the world debated whether we were in supply-constrained transitory inflation or more structural inflation change, the war in Ukraine has thrown yet further uncertainty in the mix. As we approach the end of Q1, interest rates are forecast to rise this year and consumer spending continues to increase, albeit at a slower pace than 3 months ago. It remains to be seen exactly how the Fed and ECB will approach the coming months given the ongoing war as they endeavour to keep the economic recovery on a steady footing.
Having recently joined the firm, I’m delighted to be part of the Cantor Fitzgerald Ireland team and the global Cantor Fitzgerald Group as we expand our offering to clients and investors in the Real Estate sector. Real Estate assets are often a hedge against an inflationary market due to the lack of direct correlation to equity and bond markets and the typically longer-term, less volatile profile of income. While that is generally true, the specific nature of each property asset, its individual income profile and its physical characteristics must be assessed to ensure that the cashflows do offset inflation risk more than alternative investments. We are working to leverage our real estate and finance expertise, combined with our global reach through our colleagues in Newmark, to grow the Cantor Fitzgerald real estate offering and source best in class investment opportunities for our clients.
Commercial Real Estate
It is important to first highlight the announcement in March of the sale of Hibernia REIT to Brookfield Asset Management for a 36% premium on its latest share price and 3% premium on its December 2021 NAV. This transaction is testament to the maturity of the Irish real estate sector, the institutional grade quality of commercial assets being developed here and the confidence of international capital in Ireland despite uncertainties globally.
Looking at commercial real estate, we believe there will be value-add investment opportunities in a number of sectors in the coming 12 to 24 months. Some examples include, repositioning of older city centre assets, certain suburban office locations and big box retail parks on the edge of cities, to name a few. The strong performance of the Park Collection in Carrickmines has demonstrated the potential in realising strong returns from clear lease up, regearing and asset management strategies. On yields, as we are in an interchangeable interest rate environment, it is more likely that capital growth will be fundamentally driven by asset management and income improvement, while yield compression will be harder to come by.
In the lower risk-return space, senior debt, loan note financing remains in demand across the market. With an increasing number of providers in the alternative lender space however, this market is now more competitive. That said, we have recently issued loan notes on a number of real estate projects with clients seeking bespoke debt structures. These include a development and investment loan note for a new build industrial facility in Ringaskiddy, Co. Cork and a senior loan note to finance the development of 95 apartment units in Carrigtwohill for a leading Irish developer.
Where investors are willing to move up the risk curve into the opportunistic space, we are seeing demand for equity and preference equity investment in the residential and commercial real estate sectors. Taking residential development as an example, the fundamental lack of housing supply is being further constrained by insufficient equity in the market. By identifying best in class co-promoters and development equity partners, there will be key opportunities in this portion of the capital stack providing higher risk-adjusted returns.
It seems like ESG is now mentioned as often as KPIs in any investment prospectus – and it is just as prevalent in Real Estate. Furthermore, as the EU Taxonomy legislation has come into play, the flight to quality is becoming even more of a core priority for investors and tenants alike, as they seek out newer, more sustainable buildings. Fortunately from an ESG perspective, Irish residential and commercial real estate is indeed attractive for investors as its credentials shine bright. Owing to Ireland’s stringent planning, construction and building material regulations introduced in the last decade, the environmental and sustainability credentials of our new buildings are amongst the highest globally. Combined with our strong governance and legal systems and a stable and growing economy, assets with strong social attributes are at the forefront of investors wish lists. Recent analysis by Knight Frank Active Capital has shown an 8 to 18% ‘green premium’ for more sustainable buildings – indicating that income growth and yield compression may be achievable through ESG improvement strategies.
We continue to work with companies and development firms which demonstrate strong ESG targets for their projects and have it built into their DNA. For example, we are raising capital for Wisetek Solutions, a sustainable manufacturing, data sanitisation and IT asset recycling firm, to develop their new headquarters and processing facility.
The word ‘crisis’ is often used in Ireland to describe the housing situation, which seems hyperbolic when we consider the current situation in Ukraine. That said, the demand for homes of all types and tenures in Ireland will continue to far outstrip supply for the foreseeable future. The Government has endeavoured to tackle supply and affordability issues through the introduction of numerous measures. Some of these in isolation (Help To Buy, Shared Equity) have had and should have a positive impact on supply in time, however, other policies (Site Value Tax, Land Value Sharing and Increased Part V) in seeking to address affordability may instead have the opposite effect in driving up land and house prices, further impacting viability and limiting supply.
While we have seen increased commencements of new homes since restrictions lifted – 15,986 in Q2 2021 alone – and are likely to see higher numbers of build-to-sell, social and PRS homes delivered in the coming two years, significant challenges remain. Two of the most significant long-term challenges are the availability of zoned, serviced land going forward and the complex and unpredictable nature of the Irish planning system. We foresee the structural supply / demand imbalance persisting until such a time that these core issues are tackled by the Government. With this, there will be continued strong demand for funding across equity and debt, in residential real estate in the medium term, with property prices supported by the delta in new homes supply.
From an investment market perspective, residential made up approximately 40% of all Irish investment volume in real estate in 2021. Even though policy change in 2021 has restricted investment in low-rise housing and has restricted rental growth to 2%, multi-unit residential assets remain a strong investment case with high tenant demand and lack of general supply for social, affordable and open-market rental alike.
Following the successful launch of the New Haven fund in H2 2021, the fund is finalising the acquisition of residential assets, including a new build apartment development in South Dublin. While government policy has pivoted away from social housing leases as a priority, private sector development and funding of social housing delivery will remain a keystone for the Government to achieve the set target of 10,000 new social homes per annum. We believe further opportunities to support delivery of new homes across all tenures are emerging and private funding and capital will be well positioned to serve this sector.
In conclusion, we are continuing to grow our real estate offering and would be happy to discuss any challenges that recent policy changes or market movements have caused to direct real estate assets you may hold. Going forward, the fundamental strengths of real estate in Ireland are holding through despite uncertainties globally and these are further supported by the supply-demand imbalance in key sub-sectors including residential and the increasingly sustainable credentials of the assets.
David Lawlor is Director of Corporate Finance at Cantor Fitzgerald Ireland.
Contact details for each individual team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.