Last year was a stinker for Ires Reit shareholders. The country’s biggest institutional landlord should be the riding the wave of misery washing over the housing market. At the half-year point, it reported record occupancy of 99.3 per cent and a 7 per cent rise in gross rental income. It owns 4,000 apartments in a market with an unprecedented scarcity of stock.
Yet the share price fell 33 per cent in 2022. Worse still, Ires trades at a 35 per cent or so discount to its net asset value. That scale of discount tends to signal blood in the water for a Reit.
Rising interest rates is a big factor. About 70 per cent of Ires’s debt is floating and therefore the cost of servicing its borrowing will rise.
There is also a bit of market wariness that Ires’s exposure to the higher end of the market is increasing, though modestly, at precisely the wrong time.
Yet can these factors really justify such a undermining of fundamental value?
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There is another possible factor: Ires is probably the stock on the Irish market that is firmly within the crosshairs of the nation’s ruling party-in-waiting, Sinn Fein.
The general election might be a full 25 months away, and Sinn Fein may not even win power. Yet institutions allocate capital based on risk and there are concerns about what taoiseach Mary Lou McDonald might mean for the property investment market here.
The republican party has virulently opposed tax incentives for institutional property investors. In its recent make-believe budget, it proposed a 33 per cent withholding tax on dividends paid by real estate funds including Reits.
Stiffing the Reits and investment funds runs a close second to unification as a core belief. The party hopes to be propelled to power by the disaffected and marginalised. Top of the list: those shut out of the housing market.
It has vividly drawn Reits as villains of the piece.
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The current government has instigated a review of the property tax incentives. Supports are not needed to build or acquire hotels or offices. Yet if Ireland is to achieve its house-building target of 35,000 units per annum over the coming years, Goodbody estimates the annual capital requirements at about €12.5 billion.
Can that be done without international capital? Can international capital be attracted without tax incentives?
Higher interest rates and concerns over valuations have already dampened the ardour of international investment funds. This is likely to lead to fewer housing starts in the year ahead.
It may quickly become apparent just how reliant the market has become on these international funds to finance residential development here.
Sinn Fein can argue that the vast majority of those units are being built for the private rental sector: priced out of the reach of voters. It’s a fair point. The counter is that supply is needed across all segments of the market.
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In the UK, there are a number of social housing Reits. Perhaps their time has come here. With Sinn Fein looming over the political landscape, it would take a brave soul to promote such an idea.
Time to follow tech’s lead?
The country’s two largest stockbrokers managed to find a safe haven in the bosom of the banking fraternity at just the right time.
Bank of Ireland and AIB respectively purchased Davy and Goodbody primarily to feed off the fees generated from their wealth management units. Both brokers also brought very sizeable capital markets divisions, whose well-paid workforce will have spent much of last year twiddling their thumbs.
There wasn’t a single flotation on the Euronext Dublin last year, and only one transaction of note — Brookfield Asset Management’s taking private of Hibernia Reit. Not perhaps the best time for the director-general of the Irish Takeover Panel to enjoy a 37 per cent rise in earnings to €256,086.
Deal-starved and bonus-deprived brokers are unlikely to enjoy similar bumps in their income.
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There was far more equity taken off the Dublin market through buy backs than was raised through rights issues.
While the banks will be able to take the sizeable capital market losses on the chin, it is perhaps time to start a debate over the role of equity markets in providing finance to Irish business.
There were 83 listings on other Euronext exchanges last year, raising€3.2 billion. Roughly half were technology companies.
Are we missing a trick here?
