I OVERVIEW OF THE MARKET

In recent years, there has been a welcome return to activity in the Irish M&A and real estate markets. At the end of 2013, Ireland exited the external assistance programme from the EU, the European Central Bank and the International Monetary Fund. Overseas investors and private equity groups have ramped up investment in Irish real estate amid confidence that the economy has stabilised and returned to growth. Commercial real estate in the Dublin area has been their prime focus.

While real estate investment trusts (REITs) have been a feature of international property markets for many years, Irish legislation allowing the establishment of REITs was only enacted in 2013. Three REITs are currently in operation under the Irish regime: Green REIT plc, Hibernia REIT plc and Irish Residential Properties REIT plc (IRES REIT). Green REIT and Hibernia REIT both launched in 2013. Green REIT raised €310 million on its admission to listing in July 2013 and approximately €400 million following a secondary offering in May 2014. Hibernia REIT launched in December 2013 raising €365 million, while IRES REIT, a subsidiary of Toronto-based Canadian Apartment Properties REIT, secured €130 million debt funding in addition to €200 million raised from its IPO in April 2014.

Irish REITs are predominantly held by international investors. Against this background, it is unsurprising that more than a quarter of all Dublin prime office space has changed hands in little more than three years since June 20132 (the proportion of space traded in the central business district was even higher at 38 per cent) with international investors accounting for 68 per cent of sales in the first three months of 2016. Institutional investors and listed REITs have become the biggest buyers of prime office space since the start of 2015, accounting for 41 per cent of purchases by volume and 80 per cent by value. It appears that overseas funds continue to monitor the Irish market because of the perception that, with yields close to 7 per cent for prime office space, Dublin still offers real value. Post-recession Ireland has unquestionably provided significant opportunities for REITs. A host of multinational technology and life sciences companies (Google, Facebook, LinkedIn, Pfizer, etc.) have substantial operations in Ireland and require prime office and commercial space. Ireland is currently the sixth fastest-growing property market in the world with a price increase of 7.74 per cent in the year to March 2016.3

Ireland has also recently introduced a new investment vehicle (in 2015) in the regulated fund space: the Irish collective asset management vehicle (ICAV). The ICAV is specifically tailored to the needs of the global funds industry and unlike its predecessors it can ‘check the box’ for US tax purposes. Since its creation, because of its particular characteristics, it has become the vehicle of choice for international property investors making direct investments into Irish real estate.

In 2014, a trend emerged whereby private equity groups began selling Dublin office buildings, acquired for low prices during the early part of the recession. This resulted in institutional investors and REITs raising capital and intensifying their acquisitions. The intensification is also the result of deleveraging by Irish banks and a number of foreign banks operating in Ireland including Lloyds, RBS/Ulster Bank, Bank of Scotland and pursuant to the liquidation of Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank plc before it was nationalised) (IBRC).

The National Asset Management Agency (NAMA) (the state ‘bad bank’) is a statutory body established in 2009 in response to the financial crisis and the deflation in Irish property prices. NAMA acquired most large property-related loans from Irish banks and initially acquired €77 billion-worth of loans along with the security over the (principally) real estate assets. The establishment of NAMA has been the catalyst for the large volume of property transfers that have taken place in the past few years and it has sold high-end property and property-related loans to private equity funds including Kennedy Wilson (now one of the biggest owners of commercial property in Ireland), Starwood, Davidson Kempner, Lone Star, Apollo and Blackstone. The Irish banks have now largely completed their deleveraging processes.

A more recent development in the market has involved the sale of underlying property-related businesses acquired through debt enforcement including:

a the sale of the Topaz Group (the largest filling station company in Ireland), which was acquired through a purchase of related secured debt in 2013, to Canadian retail giant Alimentation Couche-Tard for a price speculated to be in excess of €450 million; and

b the sale of Arnotts department store to Selfridges Group, which acquired the debt relating to the business from Apollo and NAMA.

Following on from the flurry of secured loan portfolio and property acquisitions, certain investors have recently signalled their intention to focus on asset management and development after years of rolling up assets. Others are in sales mode and assets that were acquired by private equity firms from receivers and loan book sales continue to come onstream. It is a very busy time for Irish property lawyers.

II RECENT MARKET ACTIVITY

i M&A transactions

Since the recession began in 2008, there have been no large-scale pure M&A property transactions, such as had been a feature of ‘Celtic Tiger’ Ireland. In the past, M&A real estate transactions were driven by a significant 5 per cent differential between the rates of stamp duty (i.e., transfer tax) on commercial real estate and stamp duty on shares (6 per cent real estate versus 1 per cent shares) resulting in certain large real estate transactions being structured as share deals. This differential has now closed to 1 per cent. Transactions of note include the following:

a Becbay Limited in 2008, a company that owned a large site in South Dublin with development potential (the Irish Glass Bottle site), was sold for €412 million.

b Listed company Jurys Doyle Hotel Group plc was acquired in a public takeover in 2005 valuing the company at €1.25 billion. Subsequent to the acquisition, various large real estate assets were disposed of by the privately held company.

c Following on from an unsuccessful management buyout proposal, which put the company in play, Irish Continental Group plc (a ferry operator with large city centre port property with possible development potential) became the subject of a protracted high-profile public takeover battle in 2007 with one of Ireland’s then-largest property developers taking a 29.3 per cent position in the public company. In the end, the competing bidders, who held large stakes in the company, did not reach a deal and no takeover took place.

Recent deals completed by REITs and Irish public companies include the following:

a In October 2015, UK-listed property company Hammerson acquired a portfolio of loans from NAMA for a reported €1.85 billion. The loans were connected with Chartered Land, an Irish privately owned property development company, and included the Dundrum Town Centre, Ireland’s largest shopping centre. The loans were acquired through a 50:50 joint venture with Allianz. In July 2016, a consensual agreement was reached with Chartered Land to take control of the underlying assets.4

b In early 2014, Green REIT and then-joint venture partner Kennedy Wilson (PIMCO) bought 50 per cent of a large development at Central Park in Dublin for €310 million. The development comprised five substantial office blocks, a retail building and a multi-family complex with 272 apartments. The complex was previously owned by Treasury Holdings, a former high-profile Irish private property development company that became insolvent and was wound up in October 2012 after coming under the control of NAMA. In November 2015, Green REIT acquired its joint venture partner’s (Kennedy Wilson) 50 per cent interest in Central Park for €155 million. In June 2014, Green REIT acquired a property portfolio from Cosgrave Property Group for €375 million. The company’s portfolio comprises 23 properties, 95 per cent of which are located in Dublin, and is valued at €1.2 billion.

ii Private equity transactions

Blackstone is reported to have entered into an agreement to buy the Blanchardstown Shopping Centre in Dublin in June 2016 for €950 million, which is expected to complete when antitrust approval comes through. The seller is Green Property, one of the few listed Irish real estate companies before it was taken private in 2002. It remains privately held. Blackstone had previously acquired the well-known Burlington Hotel in Dublin for a reported €67 million in 2012.5 The Burlington Hotel was subsequently rebranded ‘Doubletree by Hilton’ and is reportedly on the market guiding at €180 million.6

In 2015, Lone Star acquired Jurys Inns Group Limited, the Ireland-based owner and operator of a hotel chain, from a consortium of private equity firms for a total purchase price of €910 million. Jurys Inn operates hotels in Ireland, the United Kingdom and one in the Czech Republic. Lone Star has been very active in the Irish market in recent years, acquiring €540 million-worth of sub-prime mortgages from Start Mortgages and IBRC’s UK loan book for €4.7 billion.

III REAL ESTATE COMPANIES AND FIRMS

i Publicly traded REITs and REOCs – structure and role in the market

REITs were only introduced in 2013 and all three Irish REITs in operation are listed companies. The Irish Stock Exchange (ISE) has created a listing regime for REITs and has aligned the new requirements with those of the FCA Listing Rules in the United Kingdom to facilitate REITs that may seek a dual listing in Ireland and the United Kingdom. With a choice of adopting IFRS, US GAAP or Irish GAAP for financial reporting, the Irish statutory regime is sufficiently agile to integrate with the majority of global organisations.

Green REIT’s portfolio mainly comprises commercial real estate. Green REIT purchased commercial property during the recession when banks were in the process of deleveraging and is now focusing on delivering value for shareholders through ‘opportunistic investment, active property management and prudent use of debt finance’.

Hibernia REIT’s portfolio mainly comprises Irish residential and commercial real estate assets and its portfolio was valued at €928 million in March 2016. Hibernia REIT’s primary focus is on the office sector, but it also acquires industrial, warehousing and distribution, recreational, retail, residential and other Irish property assets.

IRES REIT maintains a mainly residential portfolio, and it is currently one of the largest private landlords in Ireland. The firm purchased loan portfolios from NAMA and others in 2014 and 2015. It has a current portfolio of over 2,000 apartments and net assets of €435 million as at 31 December 2015.

Cairn Homes plc, the Irish property development company, was floated on the London Stock Exchange in March 2015, raising approximately €440 million from investors in Ireland, the United States, the United Kingdom and other jurisdictions. Cairn was the first Irish property developer to float on the stock exchange since McInerney Holdings plc in 1997 (which delisted in 2010). Cairn focuses on acquiring greenfield or brownfield sites in Ireland that are suitable for residential development, with an emphasis on Dublin and the Dublin commuter belt, as well as other urban centres. Cairn properties include Cherrywood, a retail-led, mixed-use town and over 3,800 apartments and houses.

REOCs are not a recognised concept in Ireland, and as such there is no specific advantageous tax regime in place as there is with REITs. Given the success of Irish REITs, which are predominantly held by international investors, and the popularity of the REOC internationally, the agile Irish financial and tax system may adapt to bring the concept to Ireland.

ii Real estate PE firms – footprint and structure

International private equity groups have invested heavily in Irish real estate in recent years. During the recession, large transactions were primarily structured as acquisitions of loans secured by underlying real estate assets. Apart from loan book acquisitions, private equity houses have also directly acquired and developed trophy assets including Blackstone’s acquisition of the Burlington Hotel in 2012, and their acquisition of Blanchardstown Shopping Centre for around €950 million in June 2016 (subject to regulatory approval).7

Key private equity players in the Irish market include Blackstone (details of its activity are set out above), Kennedy Wilson and Apollo. Kennedy Wilson acquired Bank of Ireland’s real estate management business in 2011 and has become one of the largest property players in Dublin. It has 105 commercial and 128 privately rented sector leases in Dublin, and saw double-digit rental growth in Ireland in 2015, with full-year income coming in at €29 million. Kennedy Wilson’s Irish portfolio includes high-end hotels such as the Shelbourne Hotel, Portmarnock Hotel and Golf Links, shopping centres and prime office space. Apollo acquired loans secured on the Arnotts department store in Dublin following a lengthy bidding process. The loans, which had a face value of €230 million, were bought from the liquidators of IBRC. Apollo subsequently sold its interest in Arnotts to Selfridges.

In completing acquisitions, an Irish regulated fund is frequently used as the acquisition vehicle. This is now typically an ICAV or another variant of a qualified investor alternative investment fund (QIAIF), which generally holds the real estate asset directly or, in certain cases, through a wholly owned limited liability nominee company.

IV TRANSACTIONS

i Legal frameworks and deal structures
Private companies

In a private property sale, there is no codified system of protections afforded to a prospective buyer nor a codified set of obligations imposed on a seller. Instead, the common law principle of caveat emptor applies, and the buyer must build protections into the acquisition agreement. While authorisations from regulatory bodies are required in certain sectors, including banking, insurance, financial services and telecommunications, there are no restrictions on the foreign ownership of real estate or shares in companies owning real estate. Government policy encourages foreign investment and the applicable tax regime can be favourable depending on the structure used.

The primary means used to acquire real estate in Ireland is under private contract, by way of a direct purchase of specified assets (asset purchase) or purchase of the issued shares of a property owning company (share purchase). Consistent with international practice, the advantage of purchasing a company by buying its shares is that the buyer steps into the shoes of the seller as shareholder of the property-owning company and the company continues in its existing form. There is also a stamp duty saving of 1 per cent in buying shares rather than commercial real estate assets. A private share purchase would not be regulated by the the Irish Takeover Rules 2013 (the Rules, considered in detail below), giving the parties more freedom to agree the timetable of the transaction and to include and rely on conditions to completion. An asset purchase can be more advantageous in circumstances where the buyer is interested in a small number of (or specific) assets (e.g., a property) or where there are sizeable or unquantifiable liabilities in a company that would be acquired in a share purchase. A buyer can cherry-pick the assets while avoiding unquantifiable or unknown liabilities.

REITs and public companies

In light of their recent introduction in the Irish market in 2013, there has been no public takeover or spin-off of an Irish REIT to date. One must go back to 2002 to the takeover (by way of management buyout) of Green Property plc for a public takeover of an Irish-listed (pure) real estate company.

A potential takeover of a REIT with shares admitted to listing on the Official List of the ISE8 would typically take the form of a public offer, which will be regulated by the provisions of, inter alia, the Irish Takeover Panel Act 1997 (as amended), the Rules and the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 (the Regulations). The Irish Takeover Panel (the Panel) would monitor and supervise a takeover bid.

Court-sanctioned schemes of arrangement (which have become more prevalent in recent years, particularly in the area of re-domestications) can also be used to obtain control of a publicly listed company. The main advantage of a scheme over a public takeover is that the bidder acquires 100 per cent of the target through a cancellation of all of the shares owned by the target’s existing shareholders and the issue of new shares to the bidder in their place. The reserve created by the cancellation is capitalised and applied in paying up new shares in the target to the bidder. Using a scheme will usually confer a stamp duty advantage (no stamp duty of 1 per cent is payable), but a scheme is less flexible than an offer and typically takes longer than an offer to implement (largely because three separate court hearings are required).

On a takeover, the duties and responsibilities imposed by Irish law on a REIT’s board of directors are similar to those of directors of an Irish-listed company. Any successful takeover offer would likely have to be recommended by a REIT’s board of directors (although similarly to any other listed company, a hostile takeover is theoretically possible). When considering or recommending an offer or scheme, the directors must observe their fiduciary duties to the company, must act bona fide in the best interests of the company and not have regard to their personal interests.

Mandatory offer

Under the Rules, a bidder is required to make a mandatory offer, which must be for cash or include a full cash alternative, for the remaining securities in a target if:

a it (or any person acting in concert with it) acquires a holding of 30 per cent or more of the voting rights of the target;

b its holding (or holding combined with any persons deemed to be acting in concert with it) of less than 30 per cent of the voting rights increases to 30 per cent or more; or

c its holding (or holding combined with any persons deemed to be acting in concert with it) of between 30 per cent and 50 per cent of the voting rights increases by more than 0.05 per cent of the aggregate percentage voting rights in that company in any 12-month period.

Squeeze out or sell out

The bidder can compulsorily acquire the shares of minority shareholders under the Regulations and must receive a level of 90 per cent acceptances in value and voting rights of the shares subject to a takeover bid. If the Regulations do not apply to the target company, the Irish Companies Act 2014 (2014 Act) contains a procedure to compulsorily acquire the shares of minority shareholders, which necessitates a level of 80 per cent of acceptances. The Regulations also provide for rights of ‘sell out’ for shareholders. The main condition to be satisfied to enable the exercise of sell-out rights is that the bidder has acquired, or unconditionally contracted to acquire, securities that amount to 90 per cent in value and voting rights attaching to the securities affected.

Stakebuilding

Under the Transparency Rules issued by the Central Bank of Ireland (CBI), every time a bidder for a publicly listed company reaches or passes through a whole percentage integer from 3 per cent to 100 per cent, a notification to the target and the CBI (via the ISE) must be made within two trading days and the target must itself notify the markets by the end of the next trading day. Additional legal constraints to stakebuilding are set out in the 2014 Act and the Substantial Acquisition Rules 2007 (SARs), which restrict the speed with which a person may increase a holding of voting securities between 15 per cent and 30 per cent. The SARs also apply where persons are acting in concert.

Other typical deal structures
ICAVs

The ICAV is a bespoke corporate collective investment vehicle used in regulated fund structures and it has been the preferred form of collective investment undertaking for large property acquisitions since it was introduced in 2015. ICAVs have two clear advantages over certain other property holding structures. From a corporate perspective, ICAVs avoid the need for compliance with certain Irish company law requirements,9 resulting in reduced administrative obligations and costs. However, as they are regulated by the Central Bank of Ireland, there are higher establishment expenses and ongoing regulatory costs. From a tax perspective, ICAVs have the advantage of being able to elect in their classification, under the US ‘check-the-box’ taxation rules, to be treated as transparent entities for US federal income tax purposes. This may give rise to advantageous tax treatment for US investors in certain circumstances.

Limited partnerships

Another type of structure being used regularly for substantial property deals is the limited partnership (LP). An LP is established pursuant to the Limited Partnerships Act 1907 and must consist of at least one general partner and one limited partner. The general partner (GP) of the LP, who manages the LP’s business, has unlimited liability (although the GP may be a limited liability company, effectively limiting the liability of the LP). An LP is transparent from an accounting and taxation perspective and is not subject to Irish company law. There are also fewer public filing requirements for an LP than a company. The use of LPs, as a component part of a tax-efficient structure for holding Irish real estate has increased recently. It would be highly unusual to use an LP in a public offer.

ii Acquisition agreement terms

In Ireland, loan portfolio sales (secured by real estate assets) are nearly all conducted as private contract auction sales. Guarantees, deposits, equity commitment letters or net asset value covenants are typically required by sellers in loan portfolio sales. Terms are extremely seller-friendly, with limited title and capacity warranties (and none in relation to enforceability of security), low caps on liability compared with market practice in typical M&A private company transactions (e.g., 10 per cent of overall consideration) and other extensive limitations on liability. However, pricing also reflects the fact that, on the basis of the overall acquisition framework, there is a very remote chance of being able to bring a successful warranty claim. The use of warranty and indemnity insurance and title insurance is increasingly used to bridge the risks sellers refuse to cover commercially.

Type of consideration

The principal form of consideration in real estate transactions in Ireland is a deposit on signing with a single cash payment on completion. Shares, loan notes, warrants, promissory notes or any combination of these may be offered as consideration, but it is uncommon.

As noted above in relation to public companies, in the case of a mandatory offer or where a bidder acquires any shares in the target company for cash during the offer period, the Rules require that the consideration is cash or a cash equivalent. Where cash is being offered, the legal requirement for a cash confirmation means that the financing must be in place at the time of the Rule 2.5 announcement (an announcement of a formal intention to make an offer) in respect of a target to which the Rules apply.

Representations, warranties and indemnification

In common with practice in most common law jurisdictions, a private property acquisition agreement can, and would typically, include certain buyer protections, such as warranties and indemnities. Liability is usually resisted by the seller for information made available (possibly to a number of potential suitors) at the due diligence stage. In a real estate acquisition via shares, disclosures are made in a disclosure letter and a seller’s liability is usually limited to the extent of matters fairly disclosed in or by the disclosure letter. Indemnities may be negotiated in circumstances where specific issues of concern are discovered during diligence (but indemnity protection is the exception rather than the rule).

Closing conditions

Common conditions to closing include antitrust or regulatory approval, shareholder approval (in public deals) and availability of financing (only in private deals). The Competition and Consumer Protection Commission (CCPC) is the antitrust regulatory body in Ireland. Subject to certain financial thresholds, a bidder proposing to acquire direct or indirect control of a company with a trading business must provide advance notice to the CCPC and get its approval. Any transaction that requires CCPC approval will be void if put into effect before the approval of the CCPC is obtained. Recent changes in Irish antitrust law have resulted in many individual hotel acquisitions (as they are trading businesses) requiring CCPC approval.

iii Hostile transactions

Hostile transactions rarely occur in Ireland and none have ever successfully been executed in relation to a real estate listed company. A public takeover can either be by way of public offer or a scheme of arrangement. A hostile bid is highly unlikely to be structured as a scheme (as a scheme typically requires the cooperation of the target). Typically, the announcement of an offer would be a joint announcement and the target would provide important input into the announcement, which needs to comply with the Rules. Because of the nature of real estate assets, the asymmetry of information between the hostile bidder and the resisting target in its response document would present something of a challenge for any hostile bidder.

iv Financing considerations

Transactions are typically structured with a combination of equity and senior bank debt. However, in order that the financing requirements do not jeopardise a deal, private equity firms often acquire either the assets or the loan portfolios from their own cash reserves and seek to put in place bank financing afterwards. As business confidence has returned to the Irish market, more Irish companies appear to be accessing the equity capital markets (both in Ireland and overseas) to facilitate acquisitions.

v Tax considerations

REITs and QIAIFs (including ICAVs) benefit from special tax treatment in Ireland, both in relation to the direct taxation of the vehicle itself and in relation to the taxation of the shareholders in those vehicles.

A REIT is exempt from Irish corporation tax on income and gains arising from its property rental business (subject to certain clawback rules). Investors in a REIT are subject to Irish tax on distributions from the REIT and a REIT is required to distribute 85 per cent of its property income annually. In the case of non-Irish investors, income distributions from the REIT are subject to 20 per cent dividend withholding tax, which must be withheld by the REIT regardless of whether the investor is resident in a double tax treaty jurisdiction. This differs from the position, for example, in respect of treaty-resident investors in normal Irish-resident companies, where various dividend withholding tax exemptions are available. This is essentially the trade-off for the REIT’s tax-exempt status on property rental income. Certain non-residents may be entitled to recover some of the tax withheld on distributions from the REIT under the provisions of a double tax treaty or otherwise should be able to claim credit against taxes in their home jurisdictions. Exemptions from withholding tax will apply for distributions to pension funds, insurance companies and certain investment undertakings.

Irish QIAIFs (including ICAVs) are exempt from Irish tax on income and gains regardless of where their investors are resident. In addition, provided that they have made the necessary declaration of non-residence in Ireland, no withholding or exit taxes apply on income distributions or redemption payments made by an Irish QIAIF or ICAV to non-Irish resident investors. Accordingly, Irish QIAIFs are considered to be a highly tax-efficient vehicle for non-Irish resident investors to invest in Irish real estate. As previously noted, ICAVs have the added tax advantage of an election to ‘check the box’ such that the ICAV would be treated as a ‘partnership’ or ‘disregarded entity’ for US tax purposes, potentially saving tax for US investors.

Unless Irish-resident shareholders are exempt (e.g., by virtue of being a pension scheme, life assurance company or certain other specified person), the QIAIF is obliged to deduct tax at the rate of 41 per cent (25 per cent for corporate investors) from any distributions made to such shareholders and remit the tax to the Revenue Commissioners. Tax must also be deducted by the QIAIF from any gain arising on an encashment, repurchase, cancellation or other disposal of shares by a non-exempt Irish-resident shareholder at the rate of 41 per cent (25 per cent for corporate investors). Any gain will be computed as the difference between the value of the shareholder’s investment in the QIAIF or ICAV at the date of the chargeable event and the original cost of the investment.

There is also an eight-year deemed disposal rule that applies where the total value of shares in a QIAIF, held by non-exempt Irish resident shareholders, is 10 per cent or more of the net asset value of the fund.

LPs are transparent for tax purposes, meaning that no tax will be chargeable at the LP level. Instead, the investors are subject to tax directly. As noted above, LPs must have at least one general partner and one limited partner. Such partners could include companies, individuals or corporate vehicles with special tax treatment as described above.

An Irish-resident company is subject to Irish corporation tax at 25 per cent on rental income.10 In addition, in the case of a closely held Irish-resident company, a 20 per cent surcharge applies in respect of rental income held by the company that is not distributed within 18 months of the end of the accounting period in which the income arises. In contrast, non-Irish resident companies are subject to Irish income tax at 20 per cent on Irish rental income and the close company surcharge on undistributed rental income does not apply. For individual investors, rental income derived from Irish property is subject to Irish income tax at marginal rates (20 per cent or 40 per cent depending on the level of income).11

Stamp duty and VAT are considerations for any acquisition of property, regardless of the property holding structure used or the tax residence of the investor. Stamp duty applies at the rate of 1 per cent on a share sale and at the rate of 2 per cent on an asset sale. VAT is not chargeable on a share sales but may be chargeable on asset sales depending on the circumstances and the nature of the property. Any such VAT may be recoverable by the buyer depending on its VAT status and the use to which it is applying the real estate.12 However, the purchase of an undertaking or business that is capable of being operated on an independent basis should qualify for transfer of business relief, eliminating any VAT charge.

Sales of Irish property generally give rise to capital gains tax (CGT) at the rate of 33 per cent on any gain realised, irrespective of the tax residence of the person making the disposal. CGT also applies to share sales where more than 50 per cent of the value of the shares is derived from Irish land. As previously mentioned, such a CGT charge should not arise for disposals from REITs or QIAIFs.

vi Cross-border complications and solutions

There are no Irish constraints on foreign acquisitions of Irish property or shares in an Irish property holding company.

V CORPORATE REAL ESTATE

The global recession resulted in propcos owning devalued assets, which breached the terms of their loan-to-value covenants, while the ability to service their debt from the opco income stream became fragile as opcos struggled to meet their rent payments. Nevertheless, to date, there appear to have been no separate opco/propco structures implemented in Ireland at the REIT or other large corporate level. However, such structures are now typically implemented at individual asset level, primarily in the hotel sector but also in industries that have valuable property assets used in a trading capacity.

VI OUTLOOK

The Irish economy is growing at one of the fastest rates in the eurozone – GDP increased by 26.3 per cent in 2015 according to latest Central Statistics Office figures.13 Notwithstanding this anomaly, the IMF estimates Ireland’s GDP will grow at 3.2 per cent in 2017 (reduced from 3.6 per cent due to Brexit). Consumer sentiment is at a 10-year high, unemployment levels continue to fall, access to capital remains buoyant and exchequer returns are exceeding expectations. A weak euro also enhances the attractiveness of Irish assets. These factors positively influence demand and ability to execute transactions in the Irish market.

One key factor of concern is that on 23 June 2016, UK voters opted to leave the EU. Clarity on the eventual form of the relationship between the United Kingdom and Ireland and the United Kingdom and the EU will take a number of years to appear. In the meantime, it is clear that some inbound real estate investors might choose to delay investment decisions until there is more clarity on how the Irish economy, which is intrinsically linked to the UK economy – our largest trading partner – will be affected. The next 24 months are likely to be volatile, but present opportunities. In particular, as a result of Brexit, with many UK multi billion-pound commercial property funds (for example, Aviva, M&G and Standard Life) halting trading and barring investors from withdrawing their cash, many opportunities could arise for the well-capitalised Irish REITs. Separately, multinationals considering locating their European headquarters in the United Kingdom may decide to switch to Ireland, which, if Brexit is actually implemented, will be the only English-speaking member of the EU.

Footnotes

1 Paul Robinson and Ailish Finnerty are partners, and Sophie Frederix is an associate at Arthur Cox.

2 Savills Research – Ireland office – June 2016.

3 Global Property Guide, 4 January 2016.

4 www.irishtimes.com/business/commercial-property/hammerson-becomes-major-

player-with-dundrum-deal-1.2715635.

5 The property was purchased in 2007 for €288 million, which shows the extent of the collapse in property values in the recession.

6 Irish Times, 27 May 2016.

7 Irish Independent, 18 June 2016.

8 The shares of the REIT must be listed on the main market of a recognised stock exchange in a member state of the EU. QIAIFs may seek to list their shares on a recognised stock exchange but are not obliged to do so. REITs must be listed on the main equity market whereas QIAIFs will list as investment funds.

9 For example, it will not be necessary for the ICAV to produce consolidated accounts and the ICAV may dispense with the ability to hold an annual general meeting by giving at least 60 days’ written notice to all ICAV shareholders.

10 Various deductions are available in computing taxable rental income, including interest on borrowings to purchase or develop Irish property, although deductible interest on borrowings in respect of residential property is restricted to 75 per cent of the interest.

11 They may also be liable for pay-related social insurance (PRSI) and universal social charge, although exemptions may apply in the case of non-Irish resident individuals.

12 VAT on property is a complex area and the VAT position will vary depending on the nature of the property (residential or non-residential property, freehold or leasehold), whether developed or undeveloped, when it was acquired or developed, whether VAT was recovered on its acquisition or development and other factors.

13 This is not a typographical error, however, the ‘normalised’ rate for 2015 would be much lower. The 26.3 per cent rate appears to have been mainly caused by large companies moving assets to Ireland that were previously held in other jurisdictions. The overall 2016 rate is likely to be single-digit.