The Journal posted an article today on IRES (Irish Residential Properties REIT Plc), noting how shareholders are currently furious due to the firm bleeding money – despite rents being at an all time high.
Full article here for anyone who wants a look; https://www.thejournal.ie/ires-reit-landlords-irish-market-6141039-Aug2023/
Their stock details are available at https://live.euronext.com/product/equities/IE00BJ34P519-XDUB – currently trading at €0.91, just above their all time low of €0.88. This represents a market capitalisation/total valuation of just under €500 million.
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So where did everything turn to shit? With almost 4,000 properties and surging rents coupled with a reported 99% occupancy rate, investors were expecting no risk with comfortable yields of around 4-5%. And instead, the company is losing money. Somehow.
The Journal does a pretty decent job at breaking it down, but avoids pointing out one major nuance – they were never liquid for the purchase of these properties. They took out loans at the extremely low interest rates that were on offer in the EU since ’08.
Hilariously, in a folder called “inside-information”, their domain links to a recent close on a credit facility worth €450m, extendable to €600m; https://www.iresreit.ie/sites/ires-ir/files/inside-information/pr-18-04-2019.pdf
Similarly under their “inside-information” folder, we can see their latest credit facility expansion was targeted towards increasing their property holdings; https://www.iresreit.ie/sites/ires-ir/files/inside-information/pr-13-06-2019.pdf
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According to The Journal, many of their purchases were made against NAMA – can’t find any source of exact figures though. But it sounds about par for course; properties fell into bad debt, and were removed from their occupants in favour of handing them to a state-approved actor to fall into bad debt with.
NAMA opinions aside, the bottom line is that without ever being actually liquid for the cash, IRES was simply taking out loans to cover mortgage repayments on properties, and enjoying extremely low interest rates to boot. So, basically what everyone in Ireland did when they lost the run of themselves during “the good times”.
And similar to the subprime collapse, the interest rates on entry did not remain at those levels forever. Once they shot back up, this company finds itself in the exact situation which allowed it to buy up such cheap property in the first place – suddenly unaffordable mortgages.
And the kicker is that (again, echo’ing 07/08) their loans are backed by the value of their properties, which have finally begun to fall. According to The Journal, their loans are only secured while they maintain at least 50% of their value in their property holdings. So if property valuations continue to fall, they’ll cross the threshold and need to begin liquidating these assets.
At risk of sounding like a broken record, that’s essentially once again what happened in 07/08. Properties flooded the market due to liquidations, and the state’s “bad bank” had to be established in order to prevent this exact type of situation happening again.
Welp, fair play. I guess it didn’t happen again. Instead of individual people owning properties and causing a speculative bubble, it’s now a tiny cohort that were allowed to do the exact same.
by lleti
9 comments
Unlike 2008 a lot of these properties are rented out to councils at very good rates guaranteeing a return.
Even if the market price falls a property leased for 25 years will hold most of its value as a return is basically guaranteed by the state.
The difference between 08 and now is who assumes the risks, the general public along with the ‘too big to failI’ banks? Or REITs? Our pensions may be eroded but the present economy won’t tank
This time the average joe won’t be left holding the bag though, in fact it might work out well for us in the long run
If Ires Reit do get to the point of selling many or all of their properties, I wonder if the Dept of Housing could look at a bulk buy deal.
In the US there is $1.5 Trillion of Corporate Real Estate (CRE) that will need to refinance at higher rates by 2025. Essentially going from near zero interest to 5%+ on current rates. Wework bonds are now trading at 10c on the Dollar. They invested heavily in CRE. The EU CRE market is in the same boat as the US. It’s only a matter of time before the market corrects. The only thing that might save it is a return to Zero Interest Rate Policies (ZIRP) but that’s not going to happen as ZIRP caused the problem by allowing almost infinite leverage. Investors on hopium are however betting on a ZIRP return and are extending and pretending until they have to capitulate their portfolios which will happen when they cannot refinance. In Ireland we have IRES and their portfolio of residential CRE. The state is essentially keeping them liquid through guaranteed rents but they can’t bailout everyone in the CRE space. It will be interesting to see how it unfolds here but I believe it’s a bubble about to pop. You just need to look at the level of vacant property everywhere in our cities. Property is priced on the margin, so when one domino drops many will follow.
Very interesting post.
Good post, ultimately who eats the soggy biscuit if it goes tits up?
The institutes that have loaned to them? And who are those? Irish banks or Canadian retirement funds?
IRES REIT operate very successfully at a high profit margin and pay a good, dependable dividend. This is what REITs are supposed to do.
Some of their investors are in it for the wrong reason. They wanted value growth. That’s what funds are for. Recent shareholder turmoil can attest to that, as can the survival of the Board.
They have good liquidity and are well able to maintain their debt ratios, both legally required and internally set. Their occupancy is virtually 100%, mostly at below market rates, which will remain there because they have to be vigilant under a watchful RTB eye. They make money and lots of it, and they distribute it to shareholders. They are incredibly stable and healthy, despite what valuers do to their balance sheet and what markets do to their share price.
REIT rules don’t allow them to be developers. They have to buy completed units or forward fund a developer to increase stock. This leads to scenarios like them sitting on planning permissions only to sell the property when they can’t find a way to develop it that will be profitable for the parties they are forced to involve.
Finally, there is just no appetite for capital investments in REITs in Ireland. They can’t raise equity, because foreign money wants value growth. That’s a shame, because they are almost a perfect REIT in a perfect residential market for the right investor base. That base just isn’t in Ireland.
The ire should be more towards the nature of investment capital than IRES REIT.
Seems like capitalism doesn’t work unless you take huge risks e.g. Uber/Bolt/etc burning away money hoping one day they will turn a profit, as acting cautions would have gotten them outperformed by other ride sharing giants.
Can’t wait for the office buildings giants to go fuck themselves.