Institutional investors will play key role in kickstarting economy

The Government has outlined how it will carefully and on a staged basis reopen Ireland. With clarity, comes purpose. The economic predictions outlined by both the Economic and Social Research Institute and the Fiscal Advisory Council last week highlight the need to work together to get the economy – and our people – working again.

The new government, when it takes office, will be faced with the urgent task of sustainable recovery. While the full focus of the State rightly remains on managing the immediate threat of the pandemic, we are now considering how we can create employment for the hundreds of thousands who have lost their jobs.

Nobody doubts that kickstarting Ireland’s economy for the second time in a decade will again require substantial capital investment.

The engine of our last economic recovery was foreign direct investment – and institutional property investment was a crucial part of that. It is important to highlight that institutional investors are basically funded by large pension funds around the world whose objective is to make relatively modest returns to ensure the ongoing payment of pensions to everyday retirees. It was recognised that there was a need to attract institutional and international investment capital here to fund real estate development at a scale and volume which was well beyond the capacity of the local market; to build the workplaces, retail, industrial buildings and homes needed to support the recovery.

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This will remain the case despite the forecasts that remote working is here to stay following the pandemic experience. To meet our ongoing need for critical real estate development, Ireland needs to import almost 80 per cent of the capital required. As a small country, we can never generate this level of capital from internal sources. This is why institutional capital is so important.

Misinformed commentary

There has been much misinformed commentary focused on our sector, particularly relating to the claim that institutional investors are making outsized profits. This claim is not borne out by the facts.

In reality, returns generated on long-term institutional equity are about 5 per cent. As most of these institutions are in the main publicly quoted companies, these facts can easily be verified through their published accounts.

Pension funds and insurance companies, which are the main source of institutional investment, need to earn, on average, a minimum of 4 per cent to meet the liabilities they have to their customers who are mainly all of us who have pensions. Were returns to fall below that, they would quickly exit the market and invest their capital in other countries.

One of the other charges incorrectly levelled at institutional investors is that we are so-called “cuckoo funds” that prevent first-time buyers from getting on to the property ladder by buying up blocks of apartments and houses.

This again is not the case. Recent research commissioned by Irish Institutional Property (IIP) from independent consultants Linesight, which demonstrates the true cost of building a two-bedroom urban apartment in Dublin at over €460,000 further highlights the fact that, given the current macro prudential rules for mortgage borrowers, first-time buyers cannot currently access the finance to purchase these homes.

Rather than outbidding families trying to get on to the property ladder, our members provide the finance without which these homes simply would not get built.

While for most observers the pace of change in addressing the housing challenge appears to be painfully slow, and notwithstanding the challenges presented by the current crisis, real progress is being made. Home completion numbers are up and look set to continue to rise. In a few short years, IIP members, such as Cairn Homes and Glenveagh, have delivered more than 5,000 new houses and apartments, for sale and for rent. Our members have projects under way that are projected to deliver more than 14,000 new homes over the next three years.

Affordability challenge

That being said, a new policy approach is needed, building on the embryonic work of the Land Development Agency, to provide affordable urban apartments both for sale and rent – something that has become an important issue in the context of discussions on government formation. We have also put forward innovative proposals on shared State equity financing or deferred purchaser tax arrangements which we believe can close the gap on the current affordability challenge facing many aspiring homeowners on low to moderate incomes.

Even if land prices were set to zero, the construction cost of apartments, including taxes, still represent an affordability challenge for many in our society, in particular the young urban workforce. We want to work with the new government to put these proposals into action.

Of course, it is not just housing that institutional investors deliver. The availability of a steady supply of commercial real estate is an important enabler of our economy and our ability to meet the needs of foreign direct investment into Ireland. As we enter the post Covid-19 phase and begin to rebuild our economy, this will become an even more urgent and critical requirement.

Mindful of all these factors, it is vital that the next government provides stability and certainty in public policy so we can continue delivering the infrastructure – housing and non-housing – that Ireland needs. Following this crisis, all countries will be engaged in a similar endeavour and competing strongly to attract institutional capital to rebuild their economies. Therefore, it will be doubly important that Ireland retains its competitiveness as a preferred location for investment.

Institutional investors are here for the long haul, backed by long-term capital and seeking sustainable returns. In fact, institutional property investors are putting sustainability at the heart of their strategies in everything from urban planning and design to energy and environmental management. This requires investors to be able to take a long-term view, underpinned by the assurance that they are allocating scarce capital resources in an environment characterised by stability and predictability.

In such an environment, investors are committed to providing the capital to enable delivery of the new and refurbished workplaces; residential developments; and retail, cultural and leisure facilities that support both foreign direct and indigenous investment which will in turn generate demand for new homes and build communities as we get beyond this crisis and set new ambitions for our country.

As we prepare to emerge from the lockdown, we are ready to work with the new government on the task of recovery and renewal.

Pat Farrell is chief executive of Irish Institutional Property