Mark Twain famously advised people to buy land because they’re not making any more of it. Versions of that logic have underpinned real estate markets for many years, yet a feature of the Irish residential property market which is characterised by supply shortages has been the relatively large number of individual investors exiting the market.
From a pure investment point of view this is quite difficult to explain. House prices have been increasing at double digit rates while market rents have also been rising quite dramatically despite Government-imposed caps on increases.
According to Central Statistics Office data, Irish house prices rose by an average of 14.1 per cent nationally in the year to the end of June 2022. For an investor with a residential property valued at €500,000 in June 2021, that would translate into a capital gain of about €70,000, depending on location.
Meanwhile, the investor is also getting rental income from the property. And while they do have to pay income tax on that income, that cash flow hit is more than offset by the capital appreciation.
In these circumstances, why are investors leaving the investment rental property market? “There is no one answer it seems but the key factors according to research are as follows: the intention to sell the property dominates but the reason for deciding to sell the property varies from wishing to capture the gain on the property, to avoiding the significant annual tax cost on the rental income, to a view that the rule changes seem to keep coming at the sector with little to no certainty being given to landlords,” says Grant Thornton tax partner Oliver O’Connor.
“For small investors, the level of administration and obligations is going up,” says Bank of Ireland chief investment strategist Kevin Quinn.
Brewin Dolphin head of investment strategy and financial planning Ian Quigley agrees. “If people are looking at buying one apartment, there can be hassle with that. They are looking at the net return after costs and taxes.”
While Budget 2023 did make provision for an increase from €5,000 to €10,000 in the pre-letting costs which can be offset against income tax, this will only have an impact on the tax paid in the first year of letting in the great majority of cases.
Lack of diversity is also an issue for many investors who may be taking their gains from a single property in order to invest more widely.
“The investors we advise typically have quite an exposure to Irish property through their family home, the buildings from which their business operates and indeed some additional investment properties,” O’Connor notes. “Irish property assets will often be quite a large slice of someone’s wheel of assets. From a financial planning perspective, adding more to that which already exists rarely makes sense.”
The underlying fundamentals of property investment remain positive, however. “Every asset class has its own characteristics and attractions,” says Quinn. “Over time real estate has tended to deliver good yields. The reality is that there is an undersupply of property in Ireland. That underpins the market, even in challenging times. But it’s hard to diversify. Having 32 residential properties in 32 counties is not diversification. Larger investors can think about it as part of a portfolio where it might be just 5-10 per cent of it.”
The alternative is to invest in property funds, he points out. “The downside of that is that you have to put equity into it. You can’t borrow to buy.”
The upside is that they tend to be quite diverse and include everything from residential properties to offices to logistics warehouses. That gives private investors exposure to commercial and industrial properties that would normally be beyond their reach as individuals.
Quigley explains that Brewin Dolphin doesn’t invest in direct property assets. “We invest in funds or collective investment vehicles,” he says. “They are professionally managed and well diversified.”
That professional management issue is another reason for many private landlords, accidental or otherwise, choosing to sell up. Horror stories abound of extreme problems collecting rents and damage to properties requiring quite extensive and costly refurbishments when tenants move on. Indirect investment through a property fund shifts that hassle on to someone else.
The conditions remain good for real estate investment generally, however. “If you look at history, property is a good investment when inflation is high,” says Quigley. “When inflation is north of 5 per cent, it tends to do better than equities. There is a global phenomenon of constrained supply. Not enough was built over the last decade. We don’t have enough residential properties here in Ireland and that creates upward momentum.”
In theory, at least, that upward momentum combined with the number of investors leaving the market should create opportunities for others to enter. “However, with reference to the Sherry FitzGerald report of late 2021, it does not appear that this is occurring in the numbers that are expected, or indeed needed,” says O’Connor.
One reason for that may be a lack of clarity in relation to the Government’s intentions for the housing market in the coming years. But asking for long-term assurances may be futile. The housing crisis persists and there is no guarantee there will not be further policy changes on the part of the current Government or successors in years to come.
There is also the small matter of the economy and the prospects of a recession and the impact it might have on the property market. “It’s hard to know where in the economic cycle we are,” says Quinn. “Prudence is the watchword.”
Quigley advises people not to saddle themselves with debt when it comes to property investment. “Stay away from leverage. Leverage is a way to turn a good asset into a bad one.”