Compelling reasons to invest in Irish Real Estate; to learn more please contact Simon Stokes of Stokes Property, our network partner in Ireland.
- Internationally competitive corporate tax regime
- Selected for investment by dynamic companies such Google, Linkedin, Meta (Facebook)
- Activity surpassed expectations during 2021
- The availability of finance in the Irish market is good
- There are no restrictions on ownership of real estate assets by foreign investors
The Republic of Ireland (Ireland) is a unitary, parliamentary republic comprising 26 of the 32 counties of the island of Ireland- the other six are in Northern Ireland which is part of the UK.
Ireland is now the only English-speaking European Union member state and has an enviable record of attracting significant Foreign Direct Investment (FDI). A young, highly educated workforce and the competitive corporation tax regime make Ireland appealing to a range of multinationals. Ireland is home to the Europe, Middle East and Africa (EMEA) headquarters of several large companies including Google, LinkedIn and Meta (Facebook). Significant industries include information & technology, pharmaceuticals, medical devices, food and beverage production, aircraft leasing and financial services.
The population of Ireland is around 5 million- the highest level since the 1840’s. Net inward migration, particularly of youg technology workers has added to the natural population growth. Dublin is the capital and largest city. Approximately 40% of the population lives in the greater Dublin Area.
There are many similarities between laws in the UK and Ireland governing land, property, landlord and tenant etc.
Ownership of real estate in Ireland may be held as either freehold or leasehold title. Freehold title confers absolute title on an owner whereas leasehold title confers ownership for a term of years as granted by the lease. Leasehold title is based on the contractual relationship between the freehold owner (the lessor) and the leasehold owner (the lessee). During the term of a lease, the freehold owner holds what is known as the ‘freehold reversion’ and, on the expiry of a leasehold term, the title reverts to the freehold owner unless the leasehold owner has a right to acquire the freehold interest in the property and it chooses to exercise this right. Stokes Property specialises in valuing and advising on the acquisition of freehold and intermediate interests commonly known as ‘buying out the ground rent’.
The Property Registration Authority governs the registration of land in Ireland and manages and controls both the Registry of Deeds and the Land Registry.
The Registry of Deeds was established in 1707 and provides a system of voluntary registration for deeds affecting real estate. The effect of registration is to govern priorities between documents that relate to the same property, and accordingly failure to register a deed in the Registry of Deeds may result in a loss of priority. The registration of a deed in the Registry of Deeds is not proof of ownership and, in contrast to registered property, the underlying title must be fully investigated to determine ownership and to ascertain whether a property has a ‘good and marketable’ title. The Registry of Deeds does not investigate title; it merely records the existence of deeds.
When a title is registered in the Land Registry, the deeds are lodged with the Land Registry and particulars in relation to the property and its ownership are entered on a folio in the register maintained by the Land Registry. The Land Registry also maintains maps (referred to as filed plans) in relation to each property registered with it. Both folios and maps are maintained in electronic form. A title registered in the Land Registry is guaranteed by the state. Property registered in the Land Registry is referred to as ‘registered property’.
Commercial landlord and tenant law has evolved through the common law system and various statutes- most notably the Landlord and Tenant (Amendment) Act, 1980 (the “1980 Act”), as amended by the Landlord and Tenant (Amendment) Act, 1994 (the “1994 Act”). The 1980 Act governs the relationship between landlords and tenants of business premises and, in particular, provides for a number of statutory reliefs for tenants, notably the right of a tenant to renew his or her lease.
The right to a new tenancy, and in particular the right to a new business tenancy, has been amended by Section 47 of The Civil Law (Miscellaneous Provisions) Act, 2008 (the “2008 Act”) which enables landlords and tenants of business premises to agree that the tenant shall have the option to opt out of the tenant’s statutory entitlement to a renewal of the lease.
Overview of Real Estate Activity
Activity throughout 2021 in the Irish real estate sector surpassed all expectations. The widely anticipated Covid-19 induced slowdown did not materialise. A recent report found that Dublin was the fifth busiest real estate market in Europe in 2021 with €5.5 billion invested. There has been significant activity in the private rented sector (PRS) throughout 2021.
There were slightly over 200 recoded investment transactions in Ireland in 2021. 115 of those were in the €1m to €20m bracket.
There has also been a significant increase in demand for office space quarter-on-quarter in 2021. Office investment made up 26% of the total invested in the Irish commercial real estate market in 2021. It appears that concerns about the future of the office were unfounded as many of Dublin’s biggest employers continue to grow their office footprints and, despite the increase in people working from home, demand has increased significantly for office accommodation in both central business district and suburban locations.
The Dublin industrial and logistics sector is also thriving. Brexit and Covid-19 changed how Ireland’s supply chain and stock holding system operate. Industrial real estate investment hit record levels during 2021 (18% of total investment) and the Dublin vacancy rate of c. 1% has never been lower.
Another sector that has seen strong recovery since the covid-19 pandemic restrictions were lifted at the end of the second quarter of 2021 is the retail sector. It accounted for 14 per cent of total investments in Q3 of 2021 – the first time it has accounted for more than 10 per cent of sales since Q1 of 2019, and this volume is expected to continue. There is also a significant increase in letting activity, including in relation to anchor units, which is very encouraging. A full recovery of the retail sector is expected in 2022.
The availability of finance in the Irish market remains good. Some lenders are adopting a more cautious approach and may seek additional guarantees or other assurances to bolster the security package being provided by a borrower. Overall, the outlook for 2022 appears positive with both the Irish real estate sector and the Irish economy experiencing a robust recovery.
Foreign investment is prevalent in the Irish real estate market. Initially foreign investors are predominantly, European Asian or American. There are no restrictions on ownership of real estate assets by foreign investors in Ireland. Compliance with anti-money laundering requirements is the same for Irish and foreign investors. Ireland’s favourable tax system, as well as its status as the only native English-speaking EU Member State post Brexit, makes Irish real estate an attractive choice for foreign investors.
Structuring the investment
The following investment structures are the most popular ones that are currently used in Ireland for the acquisition of real estate:
- Irish companies
The three most common forms of Irish companies used by investors to acquire real estate are a private company limited by shares (LTD), a designated activity company (DAC) and a public limited company (PLC). An LTD, a DAC and a PLC are all separate legal entities and have the capacity of a natural person and may sue or be sued in their own names.
An LTD, DAC and PLC must all be registered with the Irish Companies Registration Office (CRO). The differences between the three are as follows.
- Limited Company (LTD)
An LTD has full capacity to undertake all activities without restrictions and specific objects do not need to be set out in its constitutional documents. The members’ liability in an LTD is limited to the amount, if any, unpaid on the shares that they hold if the LTD is wound up. An LTD may have a single director.
- Designated Activity Company (DAC)
In contrast to an LTD, there are restrictions on the activities that a DAC may undertake. The constitutional documents of a DAC set out its objects, and a DAC only has the power to undertake these activities and is restricted in this way. DACs must have at least two directors. The members of a DAC have liability in two ways if a DAC is wound up:
- the amount, if any, that is unpaid on the shares they hold; and
- the amount that they have undertaken to contribute to the assets of the company if it is wound up.
- Public Limited Company (PLC)
Some institutional investors also use PLCs to acquire Irish real estate. The liability of members in a PLC is limited to the amount unpaid (if any) on shares held by them. PLC’s must have at least two directors.
- Real Estate Investment Trust (REIT)
A REIT is a type of PLC that was introduced in Ireland in 2013 to facilitate collective investment in real estate. A REIT is a tax-efficient structure, and if it fulfils certain criteria, it will not be liable for corporation tax or income tax on its real estate profits, real estate rental income or capital gains tax on disposals of certain real estate assets in Ireland. The Finance Act 2019 limited the previous provisions that allowed a REIT to avoid any latent capital gains tax exposures when it ceased to be within the regime so that the provisions apply only where REITs have been in operation in the jurisdiction for a minimum of 15 years. A REIT must also be registered with the CRO. REIT’s have fallen out of favour as their total share values have been consistently lower than the value of the assets they hold.
- Non-Irish Companies – a Luxembourg company
International investors frequently use non-Irish companies such as Luxembourg companies to acquire real estate in Ireland.
- Irish Regulated Partnerships
Limited partnerships are also used to acquire Irish real estate assets. A limited partnership must consist of at least one general partner and one limited partner. A partnership does not have a separate legal personality. A general partner is liable for all debts of the partnership whereas a limited partner is liable for its contribution only and is not liable for debts beyond this. Frequently, the general partner is itself an LTD. A limited partnership must be registered with the CRO.
- Irish Regulated Funds – the Irish Collective Asset-Management Vehicle
Investors in the Irish real estate market have most commonly used Irish regulated funds, qualifying investor alternative investment funds (QIAIFs), to acquire Irish real estate. QIAIFs may be established as several different structures, including unit trusts, Irish collective asset-management vehicles (ICAVs), investment companies, common contractual funds, and investment limited partnerships. The ICAV has been the most popular structure for a QIAIF investing in real estate in recent years.
The ICAV is a corporate vehicle similar to an investment company. The ICAV was specifically created for the Irish funds industry, and it is a more flexible structure from a corporate law perspective. An ICAV may be structured as an umbrella fund with segregated liability between sub-funds; as a result, many large-scale real estate investors use this structure to hold different real estate assets in different sub-funds under the same ICAV. The main advantage of QIAIFs (as set out above, the ICAV is a type of QIAIF) is that the usual restrictions of the Central Bank of Ireland (CBI) relating to asset diversification, borrowing and leverage are disapplied; for example, there are no borrowing or leverage limits for a QIAIF. This is because the CBI restricts the availability of QIAIFs to professional and institutional investors only, and a minimum subscription of €100,000 applies. Historically, regulated funds such as the ICAV offered some tax advantages; however, because of legislative changes in 2016 and 2019, this position has now changed. Such funds are subject to a 20 per cent withholding tax on profit distributions to investors and are exposed to a deemed income tax charge of 20 per cent if they have debt costs above certain thresholds. Although they remain common, the tax advantages of such structures have been eroded.
The Local Government (Planning and Development) Acts 1963–1999 and the Planning and Development Acts 2000–2021 (the Planning Acts) govern land use and planning and zoning matters in Ireland. Planning permission is required for the development of property or for a material change of use unless the development is categorised as ‘exempted development’ under the Planning Acts.
To obtain planning permission, an applicant must apply to the relevant local planning authority providing all necessary documentation, including any maps and drawings. A public notice of the proposed development must also be made, and this can be done by placing a notice in a local newspaper and erecting a site notice at the property. Generally, a planning authority decides in relation to an application for planning permission within eight weeks. If the application for planning permission is refused, then this decision may be appealed to an Bord Pleanala (the Planning Appeals Board). If a decision to grant the application for planning permission is made, then third parties may appeal this decision to an Bord Pleanala. If no appeals have been lodged by third parties within the relevant time frame, then a final grant of planning permission will be issued by the planning authority.
Usually, the entity that caused environmental contamination will be liable for the contamination and any clean-up required in respect of it. In some circumstances, however, an owner or occupier of property on which environmental contamination has occurred may be held liable due to the principle of strict liability that applies under Irish environmental laws. This may be the case where the owner did not cause the contamination or even where the owner did not own the property at the time the contamination occurred. An owner or occupier may also be liable for part of the cost or even the entire cost associated with the clean-up where the entity responsible is not in a financial position to pay. As a result, where compliance with environmental laws is a concern, a buyer should appoint an environmental expert to provide a report on the property to ensure that it does not inherit any environmental liability. Sellers frequently seek to limit liability for any environmental issues under the contract for sale and, for this reason, a buyer should either insist that any environmental issues identified are dealt with prior to completion or alternatively an indemnity from the seller could be obtained under the contract for sale. There is also a risk that lenders that enforce security may become secondarily liable for environmental contamination. As a result, lenders may be reluctant to enforce security where environmental issues exist in relation to the secured asset.
Stamp duty is payable on the acquisition of Irish real estate. A buyer is generally the party that is liable to pay stamp duty. Current stamp rates are:
- Residential property: 1% up to €1 million and 2% on any consideration over €1 million.
- Since May 2021, where 10 or more residential units are acquired in a 12-month period, an increased rate of 10 per cent stamp duty applies to all units acquired.
- Commercial property: 7.5%.
- Where non-residential property is transferred and is subsequently utilised for construction of residential accommodation, a stamp duty refund is available that effectively reduces the rate from 7.5 %to 2%
- A 7.5% stamp duty charge will also apply on the sale of shares in entities where the entity derives over 50% of its value from Irish land that is intended for development, held as trading stock, or held with the sole or main object of realising a gain on disposal.
Corporation Tax remains internationally competitive at 12.5%. Individual taxation is a progressive system with a top rate of 40% on earnings above €36,800 for a single person. There are various tax credits and allowances available.
Finance and security
Lenders in the Irish real estate market usually require the following security:
- a debenture that incorporates a fixed charge over the real estate asset and any book debts of the borrower entity;
- a security assignment of all material contracts pertaining to the real estate asset;
- a charge over any rent accounts or other bank accounts relating to the real estate asset; and
- a floating charge over all assets of the borrower entity, where the borrower is a corporate entity.
A lender will be focused on ensuring that its security can be registered as a first ranking charge against the real estate asset and that there are no prior charges already registered that will not be discharged prior to completion.
Commercial leases in Ireland are either short term or long term. A short-term lease is a lease with a term of up to five years and a long-term lease is a lease with a term of between 10 and 25 years. It is unusual in the current market to have a lease with a term more than 25 years although some legacy leases of 35 years remain. The terms of a commercial lease are freely negotiable between the parties and the rent, the terms of any rent reviews and tenant covenants will all be subject to commercial agreement.
A long-term commercial lease usually contains rent review provisions providing for the review of rent every five years. The review provisions may either be linked to ‘open market rent’ or may be based on changes in the consumer price index. Prior to the enactment of the Land and Conveyancing Law Reform Act 2009 (the 2009 Act), a lease could provide for an ‘upward only’ rent review (i.e., a review mechanism where the reviewed rent could increase only and would never be less than the original contracted rent). However, since the commencement of the 2009 Act, rent review provisions must be on an upwards or downwards basis, meaning that the rent can either increase or decrease in line with the market rent or the consumer price index on each review of the rent.
While the terms of the lease will dictate a tenant’s liability under it, a tenant will provide numerous covenants, including in relation to the payment of rent, insurance rent, service charge and other outgoings, repair, decoration, alterations, alienation, user and compliance with statutory obligations and notices. Most commercial leases in Ireland are known as full repairing and insuring leases (FRI leases). Under an FRI lease, a tenant takes on extensive covenants in relation to the repair of the premises. These obligations may either be by way of a direct covenant in the lease or where the premises forms part of a building or an estate that the tenant may covenant to pay a service charge to the landlord as a contribution towards the costs incurred by the landlord in repairing and maintaining the common areas of the building or estate. A landlord usually insures the premises, and the tenant refunds the landlord this cost by paying insurance rent. The repairing obligation can refer to a schedule of condition at commencement or in more onerous leases (from a tenant’s perspective), can require the tenant to repair a property to tenantable condition irrespective of how it was handed over.
A tenant may be entitled to security of tenure of a premises. The most commonly claimed equity is based on the occupation of a business premises. A tenant may be entitled to business equity where it has been in occupation of a business premises for more than five years and it has not renounced its right to a new tenancy. Legal advice must be obtained by a tenant renouncing its renewal rights in order for such a renunciation to be valid. The respective bargaining power of the landlord and the tenant will dictate whether a deed of renunciation is required when a commercial lease is entered into. Practically speaking, one of the effects of the five-year qualifying period for business equity is that certain leases of business premises will provide for a term no longer than four years and nine months to prevent this entitlement from arising. There is, however, a risk that the term will inadvertently run over five years, so a deed of renunciation is safer from a landlord’s perspective.
There has been a move towards green leases in recent years particularly in relation to leases of new or refurbished premises. These leases frequently include reference to Leadership in Energy and Environmental Design (LEED) requirements. LEED is a certification system developed by the US Green Building Council to encourage the construction of energy efficient buildings.
Market sentiment is strong in all sectors. Retail and office occupancy levels are improving and there is evidence of yield compression, particularly for well-located assets with good tenant covenants. Industrial / warehouse assets remain in short supply. Value-add investors are well-funded and there is strong competition for suitable assets.
Irish GDP grew by 15.2% in 2021 with exceptionally strong performance from multi-nationals underpinning much of the success.
Ireland’s property market has weathered the Brexit and COVID-19 storms much better than some commentators had expected. The consensus now is that 2022 and the years to follow will record strong value growth and investor returns.
If you have any specific queries or need advice on investing in Ireland, please contact us.