Ires Reit finds itself most unloved stock on Iseq 20 as rates bite hard

An ongoing exodus of small Irish landlords from the market amid concerns about stricter rent controls, taxes and, more recently, rising interest rates accounted for two in every five property sales in the final three months of last year, according to the Society of Chartered Surveyors Ireland (SCSI).

Stock market investors have also been getting out of the State’s largest residential landlord, leaving Ires Reit, whose shares have fallen 38 per cent over the past 12 months, the most unloved stock on the Iseq 20 for the period.

On the face of it, there should be much to endear investors to Ires, owner of almost 4,000 homes, mainly apartments, and the only surviving real-estate investment trust (Reit) of the four that floated on the Dublin market in the past decade.

Occupancy across its properties rose to 99.4 per cent last year from 99.1 per cent in 2021 – hardly surprising given the dearth of homes on the rental market. A cursory glance at Daft.ie’s website on Friday shows there are fewer than 1,150 homes being advertised for rent in the Republic, with fewer than half of those in the capital, home to almost all of Ires’s portfolio.

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The company is also strategically invested in a modern portfolio where the average age of homes is 13 years with good energy ratings, putting it in a better position than many European peers.

Revenue at the group increased by 6.5 per cent last year, as chief executive Margaret Sweeney added 238 new units to the portfolio that were quickly leased, and rents grew within the confines of a 2 per cent rent increase cap imposed by the Government in late 2021 on rent pressure zones.

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However, those limits mean that the average rent across its portfolio – at €1,750 a month – was 11 per cent below that of fresh property coming on to the market, according to independent valuers, the company highlighted in its annual report published this week.

Meanwhile, its valuation growth story has also evaporated – for the time being, at least – amid rising interest rates. The company said last month that its net tangible assets, measured on a basis set out by the European Public Real Estate Association (Epra), fell 4.4 per cent to €1.59 per share.

Ires wrote down the value of investment properties on its balance sheet by €45.6 million to €1.48 billion – including an almost 12 per cent hit on its development land, which declined to €21.8 million.

The slowdown of the once-hot Irish private rental sector was underscored by the biggest deal in this segment of the market so far this year, when it emerged last week that the family firm of Zara founder Amancio Ortega had paid just over €100 million for a portfolio of 120 luxury rental apartments in Dublin’s south docklands. The price hadn’t budged from what the outgoing owners, New-York headquartered investor Angelo Gordon and its local partners, Carysfort Capital, paid for the scheme back in 2019.

Sentiment towards the sector more broadly across Europe has also been hit, according to market observers, by news last month that German police had raided the company headquarters of Vonovia, one of that country’s biggest residential landlords, amid allegations some employees had received kickbacks for awarding contracts to subcontractors.

More locally, sentiment can’t have been helped by Minister for Finance Michael McGrath this week putting the regime surrounding Reits – as well as Irish Real Estate Funds and so-called section 110 special purpose vehicles – up for review as part of a broader piece of work on the funds sector.

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Irish Reits, under legislation introduced in 2013, are generally exempt from corporation tax and levies on gains from property values or capital gains tax (CGT). The idea is to shift tax liabilities on to shareholders who must, by law, receive at least 85 per cent of a Reit’s property income by way of dividends. Withholding tax of 25 per cent applies to these distributions.

Mr McGrath’s predecessor, Paschal Donohoe, tightened up rules around Reits in 2019, including closing an anomaly in the original rules that allowed a trust to hand out gains from property sales without shareholders being subject to a withholding tax.

Meanwhile, Sinn Féin, which has been leading Irish political parties in polls in recent times, has said it would raise dividend withholding taxes and apply a 33 capital gains tax on the sale of assets by Reits.

All of these are external forces, of course. But Ires has also disappointed in the handling of matters over which it had some control.

While many other European property groups moved early last year to fix interest rates on debt as market rates started to jump in anticipation of central bank moves, Ires didn’t close a deal to effectively fix rates on €275 million of a revolving credit facility until December. As such, coming five months after the European Central Bank had started hiking official borrowing costs, it ended up paying a higher price to fix them.

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Ires also employed the highest level of debt relative to assets of the four Irish Reits that floated over the past decade. Its loan-to-value ratio stood at 43.8 per cent at the end of December – compared to a 50 per cent limit under Irish Reit legislation and the company’s own lending covenants.

Green Reit, Yew Grove Reit and Hibernia Reit had ratios of 15 per cent, 27 per cent and under 20 per cent, respectively, before they were taken private in recent years.

Analysts at Barclays said in a report last month that Ires would likely sell about €50 million of assets in 2023 to ensure it had sufficient headroom over legal and financial debt covenants if property values declined more than expected in the coming years.

The company said in the annual report that it remained focused on recycling capital. It was reported last week to have reached a deal to sell a site with planning for more than 400 apartments in Sandyford, Dublin 18, for about €20 million – having abandoned plans to build the units itself.

Would-be buyers of Ires assets know they are dealing with a motivated seller in a weakening market.