A quest for good yields, diversification, growth opportunities and long term income is leading real estate investors to look beyond traditional office, industrial, leisure and retail investments. They are now focussing on the real estate and infrastructure supporting specialist sectors. The hotel and private rental sectors were among the first to see the recent surge in sector specialist investment in Ireland with health care, student accommodation, energy and data centres among the sectors following suit.
The interest is easily understood owing to a number of different factors.
Yields: Capital values for these assets have not been affected as much by the rising economy as traditional investment assets and so yields have remained comparatively attractive.
Diversification: The diversification these assets can bring to an investment portfolio spreads risk by protecting against over-exposure to a narrow concentration on prime or more traditional markets. Investments in specialist sectors are also often set up so that leases or management agreements are put in place with operators of the business to allow the property owner to take a certain share in the profits of the underlying operating business. This links the investor’s return from the asset not just to the real estate but to the particular business sector – further diversification.
Opportunity & Growth: There are opportunities for investors to work with secondary assets in specialist sectors.
- Investors can take single assets which may not be attractive individually and compile them into larger portfolios. In putting in place a management platform, they can achieve efficiencies, build expertise and increase the attractiveness of the combined asset pool to third parties looking for a particular tranche of asset type, return and risk on that scale within their portfolio.
- These assets lend themselves to development and active engagement by investors, allowing investors to add value in more tangible ways than they might in the case of a prime office investment with a sitting blue chip tenant.
What, then, are the legal issues for investors in specialist sectors to consider?
- Structure: At the most basic level, the legal issues are no different to those that are present in any real estate investment transaction. A consideration of the most appropriate and tax efficient structure for the investment is, for example, key. But these investments are multidimensional and work on a number of different levels. The challenge is to structure the investment in a way that maximises return whilst also protecting the investment and ensuring flexibility to expand, develop, consolidate, change direction or create a more saleable investment. Real success with these types of investments is all about forward thinking – not just by the investor but also by its advisors.
- Vehicle: Fundamental to having the right structure is having the right investment vehicle. There are now more options than ever in the choice of investment vehicle for Irish real estate, including ICAVs, alternative investment funds and unit trusts. Each has its own tax and regulatory regime and each offers certain advantages to investors. Knowledge and experience of the various structure options is key to informing how each might suit the particular specialist business sector and how debt funding, where this is required, would work.
- Due Diligence: Early engagement with the target asset and its legal structure is important. The sophistication expected by overseas investors and their funders in title structures and commercial agreements was not generally there for these types of assets until quite recently. Early identification of title or structuring issues that need to be remedied or otherwise accounted for in the proposed investment structure will ensure a much smoother transaction. In particular, foreign investors often come to Ireland with existing working models, structures and preferred methodologies and documentation. It can require particularly expert local advice to adapt that working model or approach for Ireland or the particular asset. Ultimately most issues arising will be capable of resolution but our experience is that a forensic legal documentary review is required to ensure that the commercial and investment aims of the stakeholders can be achieved in the way they envisage.
- Stakeholder Rights and Interaction: The relationships underlying the investment are the foundation on which the investment is based. Where two or more investors come together whether as co-owners, joint venture partners, funder and manager, owner and developer or otherwise, the role and rights and obligations of each must be reflected in the appropriate legal agreements. This is relatively standard fare but hugely important to get right.
- Business Sector Norms: Whilst not strictly a legal issue, an understanding both by the investor and its funder of the business sector norms for the relevant sector (for example, the funding model prevalent in the healthcare sector) are centrally important to both the commercial and legal approaches on certain issues.
In summary, sector specialist investment requires sophisticated, forward-thinking, expert advice on structure and funding. It also benefits fundamentally from an understanding of the underlying dynamics of the relevant business sectors and an expert understanding of how the minutiae of Irish law can impact on investment models being imported from other jurisdictions.