As investors are pissed off at Irish property, housing construction faces new risks

Still, shares in Ires Reit, Cairn Homes and Glenveagh Properties have all underperformed this year and are among Euronext Dublin’s worst performing stocks in 2022.

Analysts say investors are clearly controlling pricing, margin and volume concerns in the sector as input cost inflation and higher interest rates push the breakeven point higher. It has not been a good year for Reits worldwide who, barring the global financial crisis, are having their worst year on record.

In fact, the overall construction market in Ireland has stalled, with activity levels falling in recent months. Housing starts are down after a strong start to the year and completions for 2023 are likely to fall.

Let’s take Ires Reit as an example. The country’s largest landlord has 4,000 units, 99.3 percent of which are leased. The net asset value of this portfolio is around 900 million euros, but the company’s market capitalization is not even 600 million euros. The stock has had a hot year, falling 37 percent since early January.

Reits tend to follow the stock markets more closely than the real estate markets. So when the markets fall, a gap opens up between the price and the value of the assets, which leads to transactions.

This happened to all of Reit’s commercial properties in the Irish market. All were taken private by savvy buyers who saw an opportunity to buy property and rental income streams cheaply.

A combination of deteriorating economic conditions and shifting earnings dynamics has altered the conditions that birthed Reits in the first place.

Reits were introduced after the financial crisis when there were many cheap Irish property buying opportunities but not much capital or liquidity. They solved both problems – with generous tax breaks.

But they also happened in a world of zero interest rates, which made leverage cheap and yields above the risk-free rate easier to achieve.

Ires’ 5.6 percent yield just may not seem all that attractive in a world where European Central Bank lending rates have risen to 2.5 percent in less than six months and have yet to rise, according to ECB President Christine Lagarde to appear.

This certainly helps explain why housing construction has fallen in half after a year and a half, where apartment buildings accounted for most of the net increase in Irish housing construction.

Higher material costs and wage inflation – as well as labor shortages – are making it difficult to build housing profitably to meet sustained high demand. Now, zoning and planning regulations favor precisely this type of development over houses.

This means that the industry is stuck in a kind of impasse: the opportunity is there, but the means to seize it are lacking.

That’s certainly the point made by Glenveagh CEO Stephen Garvey, who said in September that the government would need to relax planning rules to allow more suburban homes instead of apartment blocks.