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Ireland – time to analyse the fundamentals?

The Irish “Boom and Bust” is well documented; the expansion of credit due to low ECB rates led to the dislocation of property prices from the real economy. Irish banks, already over-exposed to the Irish property market, came under severe pressure in September 2008 due to the global financial crisis. This resulted in a debt to GDP ratio increase from 25.00% (2008) to 106.40% (2012) when the government guaranteed all local banking liabilities.

However, Ireland’s gradual economic recovery has continued, real GDP growth is positive for 2012 and prospects in 2013 are for a modest increase in growth to just over 1.00%.

Market conditions for Irish bonds are much improved with benchmark yields now below 5 per cent, underpinned by Ireland’s robust policy implementation under its EU-IMF supported programme. The significant yield compression also reflects the euro area leaders’ statement on June 29 of this year and the ECB’s announcement regarding Outright Monetary Transactions (OMT) in early September.

This ‘no fail’ policy is being underestimated by financial markets and combined with Ireland’s progressive attitude to austerity, significant further yield compression is possible over the coming months. This will prove beneficial to the local equity market – in particular the local financial institutions and a multi-year rally in property related assets.

The Dublin Property Market
Ireland has experienced one of the most severe property downturns amongst modern developed economies. Current house prices are down 53% from their peak with Dublin city centre prices down 56% on the whole. Average residential apartment prices in Dublin are 63% below peak levels seen in 2006. The market is at distressed levels with opportunities arising in ‘prime’ Dublin areas. Our own internal research and mathematical models suggest that the market may have overshot to the downside by as much as 30%.

Ireland has a unique demographic profile amongst its European peers as it has seen rapid population growth approximately four times faster than the EU average (2006-2011). Eurostat projects Irelands population growing >20% over the next twenty-five years and is likely to be centred on urban areas, with Dublin being the main beneficiary. The local workforce is highly educated and the flexible nature of the Irish economy should see a continued influx of multi-national corporations.

There has been little or no new property development over a five year period and this has added further pressure to what can already be described as a chronic supply shortage of both residential dwellings and good commercial office space in central Dublin.

Market sentiment remains at historic lows, however, prices have shown signs of stabilisation. Our internal macro view is that the Eurozone is now beginning to make huge strides towards stabilising the region’s problems and Ireland can be the main beneficiary given its rigid and exemplary implementation of policies to overcome its fiscal problems.

Should the EU/ECB succeed in implementing its existing strategy, we should see a large increase in mortgage availability over time. This return of credit should see the property market inflate leading to more domestic consumption and the improvement of the debt position, therefore resulting in greater internal and external investment.

Given historic analysis across all financial markets, it has proven fruitful to deploy capital when investor sentiment is at its worst. We believe it is impossible to try and call the bottom in any market cycle but when analysing the demographic profile in conjunction with prices being below build cost and yields being considerably higher than the historical mean, the case for investment is compelling over a multi-year period….