Luck of the Irish: Behind the Emerald Island’s Long-Running Success

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Spencer Levy
I'm Spencer Levy, and this is The Weekly Take, as businesses, consumers and investors have grappled with the challenging global events over the past two years one nation has emerged as a steady story of economic and real estate success. On this episode, we read into that story of a small island nation that's been doing big business: Ireland.

Bill McMorrow
We were one of the really first movers in Ireland. I'm not bragging, but we were.

Spencer Levy
That's Bill McMorrow, the chairman and CEO of Kennedy Wilson, an L.A. based investment firm that holds $16 billion in assets under management. Bill’s led the firm since 1988, betting big on the Emerald Isle around 10 years ago to become one of the top commercial property owners in the country and counting.

Denis Curran
Over the last 70 years a key pillar of our enterprise policy has been making Ireland, one of the most competitive and attractive locations in the world.

Spencer Levy
And that's Denis Curran, Head of Regions, Property and Enterprise Development for IDA Ireland, based in the capital city of Dublin. IDA is the government agency charged with attracting and facilitating investment foreign and domestic, with a host of support and incentive programs that we’ll hear about on this show and to help put it all in perspective, we also welcome CBRE’s Marie Hunt.

Marie Hunt
When you ask the ‘Why Ireland’ question, there's never one simple answer.

Spencer Levy
Marie is the Executive Director and Head of Research and Consulting for CBRE Ireland. Also based in Dublin, with more than 25 years of experience at CBRE, Marie works with occupiers, developers and investors who are now powering the Irish markets and economy. We'll look at the programs and business practices that have driven the trends all over Ireland, and we'll find out why it's become a go to for corporate relocations from around the world. Coming up, real estate in Ireland and the luck of the Irish economy. That's right now on The Weekly Take.

Spencer Levy
Welcome to The Weekly Take, and this week, we are going to be talking about Ireland and why it's been such a great economic and real estate success story with three terrific experts on Irish real estate. Let's start very big picture: Why Ireland is an attractive investment option for you when you could invest anywhere?

Bill McMorrow
Well, thanks Spencer. But in 2011, when we first started investing there, the 10 year bond rate in Ireland was over 15 percent. Today, it's 70 basis points. The unemployment rate was over 15 percent. In fact, as I recall, it was close to 16 and a half percent. The banking system was in great difficulty. And so kind of against that backdrop, we were one of the really first movers in Ireland. I'm not bragging, but we were. And, you know, we invested during that period of time, probably $5 billion US dollars in the last 10 years. And we've got roughly another billion and a half dollars of construction that we're doing in Ireland. And so for us, we're all about building businesses over the long term. And we looked at Ireland really as a 20, 30, 40 year decision that we were making. And fortunately, it's all now proven out to be the case. And I think when you think about Ireland more than maybe any place in the world, the growth in the country, the tax receipts, the young population, the education system, all of the things that are so important, the job growth in tech and pharmaceuticals and in the financial services industry have all supported the thesis that we had 10 years ago. It's very rare that you can see that combination happen.

Spencer Levy
Denis, why don't we get your perspective of how you've seen Ireland grow and why over the last decade?

Denis Curran
Yeah, I think Bill has given a good summary. There are probably, Spencer, go back, maybe a few decades more and, you know, Ireland from a government and industrial policy perspective over the last 70 years, key pillar of our enterprise policy has been making Ireland one of the most competitive and attractive locations in the world for foreign direct investment targeted at certain sectors like life sciences, technology, international financial services and global engineering activities. Underpinning that has been the stability and the consistency of a policy framework, which makes it easy and attractive for companies to come and establish and scale here. So regardless, really, who has been in the makeup of our government over the last 70 years, we've been able to provide a consistent and predictable policy environment that investors have welcomed and to the point where today we have over 1700 multinational FDI companies with international operations located in Ireland. And when we go and talk to investors about why they chose to locate in Ireland, what they constantly tell us is access to local and international talent. Our membership of the European Union you know a population of over nearly 450 million people at the moment, you know, the GDP value of around 17 trillion dollars.

Marie Hunt
I would echo what our previous two speakers have said. When you ask the Why Ireland question, there's never one simple answer because it's a combination of many things. It's the economic story. It's the demographic story, the rising population, the euro denominated English speaking and the highly educated workforce. And I think it's also the caliber of the types of occupiers that make cities like Dublin and Cork their homes. If you talk about Google, Facebook, Twitter, LinkedIn, any of the big technology firms they have, their headquarters are, they're a mere headquarters out of Ireland, so they're servicing Europe from this country. And I think also there's been a lot of discussion around how Ireland managed to achieve positive GDP growth during the pandemic and why it was the fastest growing economy in the world last year. And I think it's because 50 percent or more of our GDP growth is coming from both pharma, life science, ICT technology type companies, all of whom are based here. So it's a combination of all of that. And I think from a real estate perspective, if these guys are going to choose to locate here, they're going to have to find office buildings, industrial logistics facilities and residential accommodation to accommodate that. So it has been very beneficial for the real estate sector. But before I finish, just to say a lot of discussion around the global financial crisis, I think it's really important to point out that before 2010, all of the investment into Ireland was 100 percent domestic, and the arrival of firms like Kennedy Wilson into the Irish market was transformational because now every year consistently investment spend, over 50 percent of it is coming from non-domestic locations, U.S., Germany and other parts of Europe. And that's a very healthy position to be in because it means we're not as exposed as we were pre global financial crisis and we won't hopefully ever have to go through a crisis like that again.

Spencer Levy
Well, Marie, they just want to reemphasize one point that you made there. Ireland was the fastest growing country in the world last year. Is that correct?

Marie Hunt
That's correct

Spencer Levy
At what rate? Ballpark

Marie Hunt
About 13 and a half percent now in Ireland? What we tend to do is we go to rates. So we quote that overall GDP growth rate and then we strip out the multinational activity. But even when we do that, it's still six and a half percent growth year on year at a domestic level. So you can see there just how significant the multinational activity is to Ireland and achieving those sort of phenomenal growth rates.

Spencer Levy
Denis, let's turn back to you. What types of incentives does Ireland give these companies to come there?

Denis Curran
Sure, Spencer. Yes, IDA Ireland does provide a suite of financial supports that our client companies can access. These financial supports are part of a wider, more comprehensive service offering that IDA provides to its clients, and that's to both union companies that are seeking to invest in Ireland for the first time and also to companies that are already established and operating out of Ireland. The suite of supports and service offering straddles financial supports and non-financial supports. So we would work with companies when they're at the commencement of their Ireland evaluation process, gathering information and data on Ireland, and we can assist companies in that regard. We also facilitate site visits to Ireland, where we can facilitate meetings with peer companies. Where these companies can share their insights on their own due diligence that they carried out on Ireland before establishing an island. And they also can share their experience of what it's like to operate and scale out of Ireland as well. And in addition to that, we facilitate and broker meetings with legal providers, tax advisors. We also facilitate commercial property viewings and also can source property and strategic site options that our clients may be seeking. Going back to the suite of financial support that our clients can access, there's a wide variety of them. We also offer a variety of programs that support research, development and innovation investments. We work a lot with our companies and upskilling and retraining their staff and employees, and we have financial programs that can support companies that are making investments in that and those particular areas. We also have financial support programs that can assist companies that are making investments in green economy type areas, sustainability type areas and biodiversity type areas as well. So it is quite comprehensive

Spencer Levy
Bill that you own or have bought about $5 billion of product in the last decade. You got another billion under construction. So tell us a little bit about the types of real estate you buy in Ireland.

Bill McMorrow
It's been every asset class. We invest in office buildings. We have a big multifamily rental business in Ireland. We have an industrial business in Ireland. We have retail and the one hotel that we all of course, that is kind of, I would say, our pride and joy as the Shelbourne because of so many reasons. But I would say also to. It's been the support that we got from the governmental agencies like IDA. When we bought Clancy Key, which is the biggest apartment complex now in Ireland. We started with two hundred and eighty units there. We now have 900 units, but the buildings that we had to restore there are some of the buildings were, were 200 years old. And so we have to do that under the framework of a historian that watched every single move we were making on the property. But it was always in the sense of supporting us. So today, now finished its largest single and multi-family property in Iowa, but every asset class that we've invested in in Ireland has actually turned out to be a sound decision.

Spencer Levy
Marie just walk us through how the fundamentals are doing today, starting with office and then some of the other sectors.

Marie Hunt
Well, I would say structurally, the drivers of the Irish market are no different to anywhere else in Europe, really. But I suppose being an island nation, there are some obvious changes as we start with offices and not unlike any other country across Europe a lot of people decanted to their home countries or home counties during COVID and our lockdowns were pretty severe. So Dublin City Center, for example, emptied out quite a bit, but it started to come back and it's come back in a big way, particularly in recent weeks now that we're back in office buildings again. So we're very confident that the supply demand situation is very much in balance. Rents are starting to grow again, and the level of decline from peak to trough since the beginning of the pandemic is about 10 or 11 percent. Now that compares with almost a 50 percent peak to trough decline after the global financial crisis. So that tells us that the supply demand balance is very much in balance. If anything, we need to encourage people that have planning for offices to get building now so that we keep that consistency of supply and that we can cater for all the companies that the Denis and his colleagues are bringing through. So I would have no issue whatsoever in terms of the office market, albeit the hybrid model will evolve and we may use buildings in a slightly different way. And demand is still very strong, I think, in the industrial logistics sector. Again, in the same way we've seen globally over the last two to three years, there's been huge structural shifts and I think Ireland has really benefited from that because on the one hand, we had Brexit. On the other hand, we had the pandemic and supply chains were very low in country. So being a small island, a lot of the goods that come into Ireland come in through ports and airports, and a lot of occupiers are now deciding to bring more inventory in country and have more stock in country. And as a result, we're seeing the big online players starting to set up operations here as well. So the demand for industrial logistics has really increased over the last 12 months. It's been the best performing sector. And then there's this very strong demand for multifamily. We need housing and we particularly need rental housing to cater for all the migrant labor that we're seeing coming into the cities in particular and right across the board, we're seeing demand for life sciences and other alternative forms of investment as well, although in Ireland's case, things like film studios and energy infrastructure life sciences, it's a much smaller, investable universe. So the bulk of activity is still going into office, retail, industrial, logistics and multifamily.

Spencer Levy
So Denis, if you'll indulge me, let me reminisce for a moment. I've been to Ireland three times and the first time I was there was in 2000, where I went on a golf trip with my father, my father in law and my good buddy Greg Smith. And we did the ring of Kerry. I remember the trip not just for the golf and the great times we had at the restaurants and pubs afterwards, but also the infrastructure in 2000 was night and day different than the infrastructure I saw when I went back the second time in 2016. And so I want to ask you a two part question first. What changed between 2000 and 2016 to give you really modern infrastructure number one? And number two, I know that Dublin is the nexus of economic activity there, but how much is this a broader Ireland story in addition to Dublin?

Denis Curran
I think you make it very, very good point there. Spencer, we might have you back soon, maybe in the summer Northwestern or playing Nebraska in the college.

Spencer Levy
Can't wait!

Denis Curran
Football game during the summer, and you're probably aware that you know the Ryder Cup is going to be held in Limerick in 2027. But in terms of that investment in the carrying capacity and capability across the country and Ireland historically would have benefited on funds sourced from the EU, maybe twenty twenty five years ago and a lot of that investment was put into productive assets and road infrastructure in relation to physical capital infrastructure, improving the productivity and reach of our regions. And there has been a continuation of that investment. Obviously, the investment levels have peaks and troughs since then, but at the moment we’re undergoing our current version of our national development plan, which maps out demographic population growth and investment supporting that to 2030. In addition to that, there's a core focus on enterprise development at a regional level. And if I was to give you some examples of that, in the last six weeks, we've announced over a half a billion euros of investment from two US multinational companies. So if I look at the geographical distribution and choice that we're able to give investors, I mentioned of the 1700 companies, multinational companies that are situated are located here in Ireland and the two hundred and fifty seven thousand people that they employ year round, fifty five percent of all employment is outside of Dublin. And a lot of that investment is predicated on the universities that we've located outside of Dublin. The investment into the road and rail infrastructure and also the air transportation infrastructure, the port infrastructure. And because if I look at the life sciences sector, it's over a 100 billion euro business for Ireland and, you know, close to 100 percent of that is exported out of the country. You don't have to bring it all to Dublin. There are transport nodes in reasonable locations that can facilitate access from regional locations to the rest of the world.

Spencer Levy
Well, Denis, first of all, I want to thank you for the invite back to Ireland, and I will tell you I was supposed to come back for my 50th birthday two years ago, which got messed up because of COVID. But I decided two things. Number one, I am coming back as soon as possible and number two, I'm not going to turn 50 until I show up in Ireland. That's when I'm going to turn back the clock. So Bill, let's talk a little more nitty gritty real estate returns, relative returns give us a sense of some of the cap rates some of the returns you're seeing there versus other places in Europe or even in the United States

Bill McMorrow
Look everywhere in the world over the last 10 years, returns of have gone down as people have searched for yield and the amount of capital that has been generated and raised all over the world has created that situation where there's too much money chasing too few high quality assets and markets. And so Ireland has been no different. We got spoiled in the early days of 11 and 12 and 13 in the sense that we were there on our own, and it turned out that a number of the properties we bought also have land adjacent to it, like Clancy Key, that we didn't attribute a lot of basis to it because we didn't know what was going to happen with land values. It turned out we were very conservative and that's why we started building on this land. But I'd say that the cap rates in Ireland are similar to what they are here in the western United States. The good multifamily assets are being sold at cap rates of anywhere from three and a half percent into the low fours. The office is a little bit more and retail is actually starting to come back in a pretty big way right now. And so even though there's a lot of rhetoric around interest rate increases, it hasn't changed people's appetite to buy high quality real estate. Ireland has become a very favored place for investors really from all over the world. We don't really see the fundamentals changing at all in Ireland long term.

Marie Hunt
What was very interesting to me was that when the pandemic started and there was all sorts of doom and gloom about the future of the office and what might happen with rents. And cap rates were at circa four percent at that point, and they'd been stable at that level for a number of years, and they did not change at all throughout the last two years. Even though we went through a very challenging time and office take up would have would have been down year on year. At the same time, yields stayed exactly flat at four percent. And I think what's unusual right now is that you have industrial logistics cap rate is exactly the same level of four percent. So the expectation is that they will compress a little bit from here because I think if you compare yields in Ireland with the rest of Europe, sometimes there's a gap there and there's a reason for that gap. And the main reason being that we have upward and downward rent review legislation. So, as rent review, which is typically every five years, the rent can arguably go up or down. So investors, if you're a European investor coming into the Irish market, you always have to leave yourself that bit of a cushion to allow for what might happen at rent review.

Spencer Levy
You used a term called rent review, which quite handily is new to me. Explain what it is and how it works.

Marie Hunt
Well, typically in Ireland for commercial property leases are quite long, so we would typically have 15, 20, 25 years and usually the rents are reviewed every five years. And up until about 2010 most of those commercial leases were on an upward only basis. Meaning at the five year review period, if there was no market evidence the rents stayed the same, but if there was evidence to show that rents had increased that rent could increase. And from then on, the Irish government brought a new legislation which said that rent reviews can now be upward or downward. So that means at review at the five year period, if there's market evidence there to show a lower level of open market rent, arguably rents can fall. So I think when investors are investing into the Irish market, they need to be mindful of this because some leases, particularly those that were signed in recent years, will be subject to this upward and downward rent review legislation. But there's still quite a few leases floating around that would have been signed pre this legislation coming in. So it's still possible for investors to find opportunities to invest in upward only leases. And again, this is specific to the commercial property market

Spencer Levy
When you say commercial, you mean office, industrial and retail, not multifamily.

Marie Hunt
Everything other than residential.

Spencer Levy
Yeah, is what you're saying that people have shorter term leases by design there. The trend that we're seeing in the United States right now, interestingly in the logistics sector, is that shorter term leases are trading better than long term leases at the moment, simply because rent growth has been so extraordinary. Would you say that's the same thing in Ireland or a little different?

Marie Hunt
I think it's a little different. I think the fundamentals of the market here are quite different. There's a huge shortage of space. The vacancy rate in industrial logistics space in Dublin is sub two percent. And a bit like Bill was saying, when you're building a brand new industrial logistics facility, it's going to be left before practical completion is probably going to be, you know, pretty much left up halfway through construction, such as the demand for modern buildings and ESG is starting to play a part in that space, too. So I think most of the bigger leases still are 15 20 year terms because maybe from a funding perspective, you need that length of longevity of income in order to get the funding in place.

Bill McMorrow
This is a really important point you're making about the office market. Our lease terms that we're doing in Ireland are typically 10 to 20 years with upward only rent reviews. And when you're looking at here in the United States, the lease terms typically are five years and sometimes shorter now. And so you're always constantly putting capital back into the office buildings here in the United States over shorter durations of time. And the real, real positive thing in Ireland is that you're getting these longer lease terms. One of the reasons we're about to do a pretty big lease is 15 years with a 12 years term certain. It's very hard to find that in other parts of the world.

Spencer Levy
Well, it's becoming increasingly important this debate over term versus flexibility. That I would say that's probably the global debate right now, but it's becoming mission critical and certain major markets where you're seeing TI costs now exceed 200 bucks a foot in some instances, sometimes higher than that. And how do you do a short term lease if you're paying to 250 a foot in TI”s?

Bill McMorrow
Very, very hard to make the numbers work? And even if you're not doing TI’S, the clients that we have here in the United States are demanding that capital be spent somehow. It might be spent on furniture and might be spent on other things. And they have options of where they can go. Whereas in Dublin, it's a pretty confined market, but I would say to Spencer the like, we do have other investments in Cork, for example, and I think you will see over time, as Denis was pointing out, that some of these other markets, like Limerick and Cork are going to really attract companies as costs go higher in Dublin, and they inevitably will.

Denis Curran
That's what we're seeing as well. If I look at Galway, for example, and they have a very, very strong, unified communications cluster, financial services clusters, companies like MetLife, Fidelity, Cisco and Polly, all with significant software engineering operations teams and technology development teams located there. And the same in Cork by companies like Apple and companies like McAfee in the cybersecurity side. And we're also seeing some of the financial services companies also look beyond Dublin around funds administration, funds, accounting those types of activities as well. So we're seeing an increasing amount of geographic spread across the country in these particular locations. And as a result of that, Spencer, we are seeing more private sector office build happening and city center locations in locations that I just mentioned there.

Spencer Levy
I'm going to ask a wrap up question to each of you. Bill, let's fast forward five years from now looking back, how do you see your Irish story five years from now, looking back,

Bill McMorrow
You know, Spencer was thinking, why you're talking so much of this revolves around this education system in Ireland, where an Irish citizen can get a top quality education. They can go to a university, top flight, university and high school and so on for free. And so they're not burdened with the costs that you have, for example, here in the United States. And so the 1700 companies that Denis is talking about are going to grow to 2500 companies. I'm telling you over the next five to 10 years. And so to support that growth, you've got to have this younger, well-educated population. The younger people are also seeing the success of companies like Stripe, which was started by two young Irish men. Other small or Irish tech companies that have now monetized themselves. And so the younger people are seeing this all happen. The point you made to about how much Ireland has changed I would say physically, even over the last 10 years, it's just become an extremely attractive city. Appearance wise, the architecture, the buildings, all of these things add up to a huge quality of life decision that people have to make. I just see these as very, very positive underlying investment themes in Ireland. And then, you know, I lived and this is a silly one really Spencer, but I live in the western United States, where we've been in drought conditions now for three or four years, and it is going to be a major influencer of development in this western United States, particularly in the state of California. There is no shortage of water in Ireland. And you know, you can kind of belittle that, but that natural resources are really important assets to have. So look, we're very bullish, as I said at the beginning. We're not like a private equity firm that is trying to come in and take advantage of whatever corrections going on. We're building a business that's going to last 40, 50, 60 years and that's still our thesis

Spencer Levy
Well, shameless plug for this podcast we have as a guest Parag Khanna, who was a noted demographer globally and his basic thesis is around water. Is around natural resources a. how the world is going to evolve to go further north, b. to go to some places that have these natural reservoirs of water. So it's not a silly idea at all. But please listen to The Weekly Take when we have that episode too. So, Murray, same question to you five years from now. Looking back, what do you see?

Marie Hunt
I think we're at the beginning of the next big cycle for Dublin. I'm very bullish about where the economy is going and where we are in the cycle from a real estate perspective as well. I think we learned very valuable lessons after the global financial crisis. I mentioned the split between domestic and international investment previously, but also supply demand. I think we're much more controlled now in terms of the delivery of that, and it's much more consistent and having learned those lessons and we're very well placed right now to capitalize on the growth that's going to come through over the next five years.

Spencer Levy
And Denis will give you the last word. I will have you put on your five year hat as well to look through that prism.

Denis Curran
Yes, Spencer seeking to look out five years from now in an operating environment, which there's a lot of volatility can be challenging. But maybe if I bring you back to our strategy document, which we launched in Q1 of 2021. In that document, we highlight a number of key areas which we are going to focus on and invest in over the next four to five years. And many of these areas are very much aligned with the innovation, technology, sustainability, operations and digitization roadmaps of the key sectors where Ireland has an international expertise. And I mentioned earlier that Ireland is a global leader in the area of life sciences, both in the bio pharmaceuticals and medical technology areas, and we'll be working in the biopharmaceutical areas to support companies on next generation investments in the area of advanced therapy medicinal products and also in cell and vaccine therapies. And to do that, we're going to be investing in key enabling infrastructure. We're also going to be opening in 2022 a brand new advanced manufacturing center of excellence. And this is going to be a national resource which our client companies can access, and by them to be able to leverage this new advanced manufacturing center. And we're hopeful that they'll be able to deploy all these disruptive manufacturing technology and leverage these particular technologies may be quicker, better, faster maybe than some other locations globally. So those are some of the particular areas where we're looking to work with our our client companies over the next four to five year, but also as a country areas where we're going to be investing.

Marie Hunt
One thing that just struck me, I was reading a speech that Janet Yellen made when she visited the Irish parliament last year, and one she said Ireland is more than its rate of corporate tax, so there's other reasons why people are coming here. And the second thing she said was it's the United States' great fortune to have a friend such as Ireland.

Spencer Levy
Well, it's true because I don't know what the exact number is, but it's something like 50 million Americans have some Irish descent. It might be more than that. It's an enormous number.

Bill McMorrow
So it's close to 60 million

Spencer Levy
Sixty million thanks, Bill. And I've never felt more welcome as an American overseas than I have in Ireland. It's like, you know, one family. So it's wonderful and I'm sure the relationship will continue. I note that our president has Irish roots Joe Biden, so that'll probably certainly enhance it as well.

Denis Curran
And maybe Spencer, just to build on what Mary said, there are – 53 percent of the foreign direct investment comes in from the United States. And what Marie said there are – companies evaluate multiple criteria and different sets of criteria before they make their investment choice in terms of location. And finally, I would say that it's just the operating environment here, given that we've been in the foreign direct investment business for the best part of seven years now, Ireland has proven itself to be a very tried and trusted location. And we're owned sixty five percent Spencer of all the investment we get is repeat investments that this is existing investors doubling down on their investment in Ireland. We look forward to that trend continuing.

Spencer Levy
Well, that and the finest golf courses in the world. So after you were done with your business, you could find the time out there as well. So on behalf of The Weekly Take, what a great discussion about Ireland. First, I want to thank Bill McMorrow, chairman and CEO Kennedy Wilson, for joining us today. Bill, thanks for joining the show.

Bill McMorrow
Thank you, Spencer. Great to be with everybody.

Spencer Levy
Great to have you. Then I want to thank my friend and colleague Marie Hunt. Marie Hunt, runs our Irish research operations. She's executive director, head of research and consulting. Marie, thank you so much.

Marie Hunt
Thanks, Spencer.

Spencer Levy
And last but certainly not least, we have Denis Curran, head of regions, property and enterprise development for IDA Ireland. Denis, next time I hope to see you in Ireland.

Denis Curran
Yeah, and thank you very much for the opportunity to join you today Spencer
and look forward to seeing you back in Ireland.

Spencer Levy
For more on the Irish success story and on our show, please visit our website CBRE.com backslash The Weekly Take. You can also find links to the latest research prepared by Marie Hunt and her team at CBRE Ireland, including our outlook for 2022 and the current edition of their bi monthly market report. We hope you enjoyed this conversational trip to the Emerald Isle and if you did please remember to share the show with your network around the world. You can also share your feedback with us, subscribe rate and review The Weekly Take wherever you liste. And we'll return with another international star. Bestselling author Parag Khanna in a face to face conversation we recorded at the recent CBRE Institute conference. Dr. Khanna will share his deep and sometimes dramatic views on business, real estate and the future. It's sure to be thought provoking, no matter your line of work. We look forward to you joining us for that next week, and of course, we thank you for joining us now. I'm Spencer Levy. Be smart. Be safe, be well.