Looking for an alternative investment other than cash? Commercial real estate may be worth considering.
Large numbers of Irish investors continue to utilise cash deposits with the banks as their primary investment strategy. The central bank reports that households are the largest source of deposits from the Irish private sector, with total cash in banks standing at €91.2 billion at the end of February this year.
With interest rates on cash deposits gradually reducing from their recent high levels, more and more people are looking for an alternative home for their funds that will provide both security and a hedge against inflation.
Traditionally, investors achieved this by splitting their portfolio between a mixture of bonds and equities, with bonds being seen as a ‘safe’ investment. However, with recent high profile losses for bond holders in Ireland who invested in products such as the ISTC bonds and the Morgan Stanley Saturn ‘guaranteed bond’, where a large number of credit unions and individuals lost some or all of their investments, investors are more wary. For example, it is reported that an amount of €8.4 million was invested in the Saturn bond on behalf of more than 3,670 solicitors, but the bond has turned out to be worthless. Although investors in Spanish, Italian and Irish bonds can achieve yields in excess of 6%, a recent report from the property market highlights the current yields on commercial property in Ireland, which are at an all time high.
Example of commercial real estate yields in Ireland
Retail High street/Shopping centre
*Source CBRE research July 2012
The advantages of an investment in a tangible property asset particularly in a good location/market that the investor may be familiar with and also generates a rental income is not to be underestimated. Unlike bonds, it is difficult to see one losing 100% on a commercial property investment in the right location.
One of the key factors when assessing the yield/return is to look at the future ‘market rent’, which one should expect to receive on the property, notwithstanding that a upward only rent review may be in place. Many investors have found that this upward only clause is of little benefit should the tenant be unable to meet the historic high rent previously paid and go out of business.
The tax implications of a property investment need also to be factored in when comparing the after-tax investment returns. These include DIRT rates on deposits at 30%, availability of rental/CGT losses on other property investments, 100% deductibility for mortgage interest etc.
The above information is provided as a guide only. If you would like assistance with your tax affairs, please contact Coll & Co Chartered Accountants, Barna by phone on 091-592080 or by email at firstname.lastname@example.org.
Coll & Co specialises in personal tax and pensions advice. Coll & Co, Chartered Accountants is regulated by the ‘Chartered Accountants Ireland’ to provide investment advice.