Ireland's Sovereign Wealth Fund Could Have €10B To Spend On Real Estate. Here's What You Need To Know

With huge tax windfalls burning a hole in the State’s pockets and a potential pensions time bomb ticking down the line, the Irish government has floated the idea of setting up a sovereign wealth fund next year — with potentially huge implications for the country's real estate sector.

Modelled on the highly successful ventures established by other countries such as those in the Middle East, Singapore and, closer to home, Norway, the idea is to channel Ireland’s bumper budget surpluses, investing to amass the financial firepower to tackle long-term cost pressures, such as pensions and infrastructure.

Finance Minister Michael McGrath presented a paper on a future fund to a cabinet meeting in early May, aimed at leveraging government finances awash with corporate tax receipts, primarily from U.S. tech and pharma giants.

If Ireland's sovereign wealth fund, or SWF, follows the expected trajectory, it could have as much as €10B to spend on real estate. With a decision due imminently, Bisnow looks at the three big questions facing an Irish Sovereign Wealth Fund, including whether the fund could back domestic residential development and commercial investment. 

1. How Much Can Ireland Invest?

The figures are huge. Dublin expects to net €65B in budget surpluses between now and 2025 but the State appears mindful that the corporate tax bonanza could fizzle out. The paper presented by McGrath examined similar plans in Norway, Japan and Australia and set out criteria for the fund, which is to be managed by the National Treasury Management Agency.

“Clearly one of the factors Ireland is thinking about is scale, because while it will not be the biggest SWF, it is substantial nonetheless and that will help reduce fixed costs. The key will be to establish the objectives and then assure good governance,” LaSalle Global Partner Solutions CEO Jon Zehner said.

The Irish government is forecasting a general government surplus for 2023 of €10B, rising to €16.2B in 2024, compared with €8B in 2022.

However, the government has long warned that it cannot rely on its exposure to corporate tax receipts — more than half of which come from just 10 U.S. corporations — for day-to-day spending.

Corporation tax is expected to raise €24.3B in the current financial year, up 7% year-on-year. However, the government has warned that as much as half of this year’s projected corporate tax revenues could be one-offs. And by 2030, it expects to have to find an additional €7B-€8B to cover pensions compared with the start of the decade.

In preparing for this, it has already begun stashing some of its tax profits away and has a €6B National Reserve Fund, invested in low-risk government bonds.

Unlike that fund, the new vehicle will pursue a diversified investment strategy, the government said, and will channel a minimum of €34B, up to €90B, worth of corporation tax receipts and budget surpluses into an SWF by 2030, with a long-term outlook.

"SWF capital flows work in a slightly different way to pension funds," CBRE Investment Management Global Head of Strategic Accounts Michael Ness said. "So while they they're not unaffected by what's happening in global markets, they're affected to a lesser degree.

"One significant benefit they have is not just scale, but also the lack of volatility that others have through market cycles. That means that they can really take advantage with the capital dislocation that we're seeing at the moment so they can get really interesting opportunities." 

That is because there may be less competition and SWFs tend to be get better and larger deals, driving efficiencies and economies of scale through those deals, Ness added.

The stakes are high.

If Ireland opts to invest the higher number, earns a strong return on the money and reinvests it out to 2035, the total value of the fund could reach €142B, according to the Department of Finance’s report.

2. Investment: Home Or Abroad?

In terms of a role model, the most obvious place to look is Norway.

Fuelled by its oil and gas reserves, Norway has become a huge player on the global investment market since the creation of Norges Bank Investment Management in 1990.

It now owns shares or outright property investments in 14 countries, predominantly in Europe, covering 890 properties and currently valued at circa 2.7% of all of its investments. 

Among the headline property investments are a significant logistics portfolio with Prologis in the U.S. and UK; its joint venture with The Crown Estate for retail and offices in and around Regent Street, London; sole ownership of numerous London offices; a venture with The Pollen Estate Trust for offices and retail; plus a 50% stake in the West One Shopping Centre, London and a 75% holding in Meadowhall, Sheffield with British Land.

Norges has upped its target real estate allocation to 7% from 3%-5% and ended the year with an almost 15% stake in Germany’s Vonovia SE, valued at €2.5B, compared with an 11% stake a year earlier.

It also boosted its holdings in three U.S.-based real estate groups, including Alexandria Real Estate Equities, Equity Residential and Invitation Homes. 

As yet, it has not invested in Ireland, nor in its home market of Norway. And the decision from an Irish fund on whether to invest in domestic real estate will be crucial. If Ireland's fund put 7% into real estate that could be a €10B portfolio by 2035.

“Overall most SWFs tend to allocate 5-10% to real estate, across direct investment, funds and funds of funds, and they often invest overseas, partly as a function of diversifying risk and partly because they want to avoid overcrowding their own market,” PwC UK Global Sovereign Investment Fund Leader Richard Rollinshaw said.

“In Ireland’s case there will be a number of factors to determine. Firstly, will it invest in real estate at all and if so will there be other considerations? For example, the fund could invest in residential development, which could be a win-win scenario,” Lasalle’s Zehner said, given Ireland's housing shortage. 

Indeed, the relationship between fund investment and the objectives of the ruling politicians varies markedly between countries.

PwC’s Rollinshaw pointed to Saudi Arabia as an example of a sovereign wealth strategy that is intrinsically linked with state objectives, while Norway’s SWF reports into the Norwegian government but largely invests with autonomy, which is more typical of Western Hemisphere funds.

“In fact the Australian superannuation and Canadian state pensions funds are probably the likeliest models for Ireland to follow. While they are effectively investing state money, they are run quite independently from any political interference and have strong governance in place to maintain that approach,” Rollinshaw said.

"Traditionally SWFs operate a hub and spoke, with a main domestic office and then offices in perhaps London and New York, which covers lots of bases for them, with people on the ground that can develop local relationships and take responsibility for regions," CBRE Investment Management's Ness said.

A lot of the SWFs are in quite small countries and that means they could end up dominating their own market, whether it's equities or real estate, he added.

"You just become too big for your home, your home market. There's a balance there between your liabilities in your home market and the need to diversify to reduce volatility," he said.

3. What Happens Next?

Even if the proposals are accepted, it will inevitably take time to establish the fund and start deploying capital. But the State clearly wants to move forward sooner rather than later, which means from a real estate perspective it is likely to target markets that have already price-corrected, such as the UK.

It seems highly likely that domestic property would also be a target. However, it may encounter challenges around available stock, while SWFs should ideally remain outside short-term political or economic needs.

Ness pointed out that while sovereign wealth funds can get pulled back to be more focused on their domestic market, a clear objective should ensure that they are not diverted from their aims and that they can take advantage of a literal world of opportunities.

"Operating in global investment markets does require a certain amount of pace and cadence. So, a lot of them have learned how to do that and to invest well, which requires really good governance behind the organisation to take advantage of what comes towards them," Ness said.

Besides, many domestic markets are not large enough to support the weight of investment held.

“Singapore SWF Temasek was initially established to invest in the city state but the pool was not big enough and it soon ran out of investment product and began diversifying abroad," Zehner said. "It would be no surprise to see an Irish SWF follow suit."