These are strange times in the Dublin property market. IRES REIT, the largest landlord in Ireland, and listed on the Irish Stock Exchange, has seen its shares decline some 36% from a peak of €1.83 back in December 2019 to €1.17 today. At the current price, the shares trade at a 35% discount to the actual market value of its 4,000 rented apartments portfolio of €1.68 a share.
And the shares offer a tasty dividend yield of 5.2%, almost twice the income on offer from an Irish Government 10-year bond. The income from such a bond is fixed for the 10-year period whereas the dividend on IRES REIT’s shares can grow, should rental income grow.
So, what’s up?
We can see three separate risks.
First up is the company’s debt, which represents 43% of its assets with 70% of its debt at floating rates, which means that its interest bill is already rising as the ECB raises interest rates. Next up is political risk as a Sinn Fein government would likely lead to unfavourable policies for landlords. And thirdly, rising interest rates and rising unemployment can be expected to at least soften up property prices in the capital given that they are at significantly elevated levels relative to incomes.
Against a backdrop of rising interest rates, property and share prices often fall in order to offer a higher yield (return), which then enables them to continue to attract investor interest. In other words, rising interest rates are bad news for property investors, affecting both their earnings and asset values.
From an investment perspective, the risks in IRES REIT’s property portfolio and rental income stream are also exactly the same as the risks all investors that own actual apartments in Dublin face.
People who own an apartment for investment purposes probably have a mortgage (debt) and many will mostly have a higher proportion of debt against the property compared to IRES REIT. They are also likely to have floating rate debt, so that their interest bill is already rising. And they own property at similar valuations to IRES REIT, so that they have the same valuation risk as IRES REIT and investors in IRES REIT shares.
So, does a person who wants to own Dublin property today buy an apartment at elevated levels in a single location with debt that is getting more costly, or does she buy IRES REIT which offers diversification and with (at least some of) the risks discounted in the price?
Like many investors in Ireland, we find property an interesting topic. On our website, we provide detailed coverage of IRES REIT and another investment trust focused on investing in European listed property companies, as well as commentary on and analysis of property as a whole.