Making an investment in a country with a different currency introduces exchange rate risk. Ideally, a UK investor would buy the property at a time of a strong Pound versus the Euro and then have the Euro strengthen to increase the real value of the subsequent rental income.

Of course, if one can accurately predict currency fluctuations, fortunes await them trading FX markets directly without the need to use property as a vehicle to give vent to such predictions. In any case, the two currencies have been quite stable over the past five years with the Pound gaining approximately 1% per annum or 5% over the last five years. With both the British and European Central Banks thought to be approaching, or indeed at the end of their respective tightening cycles with the prospect perhaps of slight reductions in interest rates next year, hopefully after engineering the much sought-after soft landing, it would be reasonable to assume relative stability between the currencies in the medium term at least. 

Buying property in a country is a bet on the health of that country’s economy into the future. In this regard, Ireland would appear promising. The population has been growing steadily over the past number of decades from as low as just 3.6m people in 1996 to over 5m in 2022 and expected to reach 5.5m by 2040. Demographics as well as inward migration from less affluent 

European countries have driven this growth which has created shortages in housing which have driven house prices and rents strongly upwards.

However, one could argue that the time to capitalize on these gains was back in 2013 by which time prices had halved from their 2008 highs. This value destruction took a decade to repair with house prices only having recovered to 2008 levels this year, over a decade after bottoming out. The growth in prices has stalled out this year with prices in many areas slightly below 2022 levels as the post Covid boom finally ran out of steam. The Irish Central Bank did its bit to prevent further drops by relaxing the macro-prudential restrictions on borrowing from 3.5 times salary to four times at the start of the year. 

Pushing in the opposite direction of course has been the ever increasing interest rates being driven by a European Central Bank determined to get inflation back under control. To put the scale of the dampening impact on purchasing power in context, a couple earning average salaries who could afford monthly repayments of €1300 (€650 each) could have borrowed €395,000 in 2022, at 2% APR. The same couple this year can only afford €315,000; that’s an €80k swing in this couple’s plans. You can’t take that amount of buying power out of a market without seeing an impact on pricing. 

So those looking for capital appreciation may be coming to the party a little bit too late as the decade-long growth that followed the 2008 collapse is now running out of steam as buyers bump against the macro-prudential borrowing limits. In the long term of course, price growth has to mirror salary growth as salaries are used to purchase property. 

Those who could swallow lower capital appreciation in return for the prospect of strong rental growth buoyed by population expansion unfortunately will be disappointed. The Irish Government, under immense pressure from the left in Irish politics, introduced rent caps in 2016. These originally stipulated that rents couldn’t increase by more than inflation. When inflation took off, the Government had to amend the legislation to a regime of the greater of inflation or 2% per annum increases. 

This witch’s brew of higher interest rates, flat or declining capital appreciation and rents capped below the rate of inflation has precipitated an exodus of small-scale landlords from the market over the past number of years.

The measures introduced to help tenants actually hurt landlords, so they left the market in their droves, drying up the stock of rental properties available. It appears that Irish legislators failed to follow the advice of Warren Buffett who states that whenever introducing economic measures, be sure to ask “and then what?” Had the Irish legislators asked this question, they may have left a more benign regime in place for landlords instead of punishing them as this ultimately was detrimental to the very cohort that they were trying to help i.e. renters. 

This malaise in the prospects of the returns in the Irish residential property sector is evidenced by the share price of a company set up to profit from the demographic and economic factors mentioned earlier. IRES REIT, a company which owns thousands of Irish residential units, primarily in Dublin, has seen its share price collapse to well below the €1.16 that it launched at back in 2016. In fact, the enterprise value of the company is now a couple of hundred million Euro less than the value of the property it holds. That is a damning assessment from the market as to the company’s prospects into the future, despite 99% occupancy rates. It’s all very well being full, but if you can’t raise your rents to keep up with, let alone beat inflation, the value of one’s holdings is being eroded year by year. 

If the foregoing hadn’t sufficiently depressed any would-be investor in the Irish residential sector, the fact that a general election is expected within the next 18 months might be the final nail in the coffin. The “housing crisis” has pushed the leftist Sinn Fein party to the top of the polls. And while Fianna Fail, Fine Gael and the Greens bound together last time to hold off Sinn Fein’s advance, it would seem likely that they will be part of the next Government. 

A party whose raison d’etre is to turn housing into a human right and not a commodity from which to profit would not make a comfortable bed fellow with investors in the sector. Many have decided to get out before Sinn Fein get in. 

All considered, UK investors may be better advised to keep their cash on the sidelines for the time being! 

* Eddie O’Driscoll is a director of Ireland’s largest fixed fee estate agents & auctioneering agency, Auctioneera *