Ireland’s real estate market recovery has attracted overseas banks, writes Daniel Cunningham.
Between 2008 and 2013, there was not much of an Irish commercial real estate finance market to speak of. The global financial crisis hit Irish real estate hard and many private investors who had snapped up the country’s property in highly leveraged deals hit the wall.
The domestic banks that had done much of the lending almost all retrenched, while foreign banks such as Lloyds shifted to shedding non-performing debt piles.
In 2011, a wave of opportunistic investment began, with US private equity firms swooping on distressed properties or pools of non-performing real estate loans.
Sellers including Ireland’s bad bank, the National Asset Management Agency (NAMA), gave investors a route into property through large-scale debt sales. As investors such as Lone Star and Kennedy Wilson ventured to Ireland, international lenders were enticed to finance their deals.
The market is very different in 2016. On the back of an impressive recovery in Irish real estate values, transitional owners of assets are gradually selling them to longer-term institutional investors.
Last May, German fund Union Investment beat the likes of Hines, JP Morgan and Irish Life to buy Facebook’s EMEA HQ in Dublin Docklands, sold by NAMA, for €230 million, more than €14 million above the asking price. The deal’s yield of just over 4 percent is the sort of level investors expect in London’s West End.
Last March, Lone Star sold four prime Dublin offices, acquired through non-performing loan deals, to US-based mortgage REIT Starwood Property Trust for around €350 million. Morgan Stanley financed the portfolio and nine additional Dublin assets with a €300 million loan, of which €150 million was syndicated to Allianz, in the German insurer’s debut Irish deal.
Last year’s stand-out deal was perhaps Morgan Stanley’s April underwriting of a €750 million whole loan to Green Property to refinance its 1.5 million sq ft Blanchardstown shopping centre on the edge of Dublin. The loan, comprising €587 million of senior and €163 million of mezzanine debt, is understood to have been syndicated to various parties including Irish banks.
It looks like 2015 was the year that a functioning Irish real estate debt market returned, served by a raft of international lenders this time. Last March even saw Ireland’s first post-crisis CMBS, when Deutsche Bank securitised multi-family housing loans to sponsors including Kennedy Wilson, in the €175 million Deco Harp.
Investment banks including Goldman Sachs and Deutsche Bank, and insurers such as MetLife, have been active in Ireland, while European lenders such as DekaBank and Deutsche Hypo are also in the market, helped by the fact that they lend in Euros.
Of the domestic banks, Bank of Ireland continued to lend through the lean years, while AIB and Ulster Bank, Royal Bank of Scotland’s Irish arm, have dipped their toes back into the water.
“The profile of lenders in Ireland has become far more diverse in the past 18 months,” says Andy Tallon, a director in CBRE’s debt advisory team. “For UK-based lenders looking for business outside London, Dublin can make more sense than regional UK cities like Manchester or Birmingham. Lenders can often benefit from better spreads than in the UK.”
While senior loan-to-value ratios are similar to those in the UK, at around 60-65 percent, Irish margins command a premium. Prime Dublin property tends to be financed at margins of around 200 basis points, although lower margins have been reported. With prime UK margins creeping up from the low 100bps, the premium is narrowing.
“Investment finance is still pretty cheap,” says John Moran, managing director of JLL Ireland. “The all-in cost of finance including the margin can be less than 3 percent.”
Wells Fargo is one of the foreign banks doing business in Ireland. Among its four deals last year was a €73 million loan to finance Blackstone’s Atrium buildings in Dublin’s south suburbs.
Max Sinclair, head of the bank’s UK commercial real estate division, says Wells Fargo lends to a mixture of private equity clients and institutional investors, including domestic REITs, with a greater Dublin focus.“Currency aside, we don’t see Ireland as a fundamentally different market to the UK for lending in,” says Sinclair. “The clients are familiar, language is the same, the legal system is very similar and there is a similar level of market transparency as the UK.”
Sinclair’s colleague, Richard Craddock, adds: “Greater Dublin has a large stock of high-quality real estate across all core asset classes. Being a capital city, and benefitting from strong technology, media and telecommunications, and bio-pharma industries, the occupier base includes a wide range of blue-chip companies from across sectors, including all the major tech companies like Amazon, Google and Twitter.”
While banks and other lenders compete for the big financing mandates, local agents report more difficulty sourcing finance for sub-€20 million deals – a gap alternative lenders aim to plug. Last April, Dublin-based debt adviser LeBruin Private established €100 million senior debt fund Origin Capital to target €3 million to €15 million deals.
Mezzanine debt is also starting to feature more, with alternative lenders prepared to top up 60 percent LTV ratio deals up to 80 percent and above. Dublin’s Cardinal Capital Group teamed up with US investor Wilbur Ross to launch WLR Cardinal Mezzanine Fund, which writes sub-€50 million loans.
Also in the high leverage bracket is Earlsfort Capital, which partnered with New York-based Garrison Investment Group to deploy €300 million in the past 18 months. It has built a business providing loans at up to 80 percent LTV ratios to borrowers often aiming to refinance loans bought by private equity firms.
Few options for smaller deals
“Excluding the large, prime deals there is a lack of finance options for borrowers, particularly local ones,” says Earlsfort co-founder Fergal Feeney. “We established Earlsfort to target this market gap and provide debt to established Irish borrowers who require a more flexible debt package – typically active asset managers buying assets to reposition for sale in two or three years.”
The question of whether real estate markets have peaked is being asked across Europe, including in Ireland. As Real Estate Capital went to press, Blackstone was attempting to sell two adjacent Dublin Docklands buildings for €120 million, just two years since it bought the properties from NAMA for around €80 million.
With investors paying high prices for prime Dublin stock, should lenders be concerned that the market is overheating? “Much like the UK, yields have compressed in the past 12 to 18 months,” says Craddock, “but there is still a good rental growth story, given the supply-demand fundamentals.”
Research by the Society of Chartered Surveyors Ireland last year showed that members expected prime Dublin office rents to rise to as much as €592/m2 by the end of 2015, with a further increase in 2016 to €645/m2 deemed realistic. Ireland’s real estate rebound is likely to remain compelling for lenders.
Development finance market is slow to build
Development finance is not widely available in the Irish market. Before the crisis, Irish banks were prolific lenders to developments, many of which failed.
“Ireland’s investment market is well financed but there is a severe shortage of development finance,” John Moran, MD of JLL Ireland, says. “It is very difficult to source unless a secure pre-let is in place.”
In July, Frankfurt-based Union Investment forward-funded a speculative 172,000 sq ft office development, Burlington House. The site was acquired by U+I (formerly Development Securities), Colony Capital, Paddy McKillen and developer Johnny Ronan in June 2014.
“There have been a couple of forward funding deals and I suspect we will see more, but the market is lacking straightforward domestic bank debt for CRE development,” says Moran.
In June 2014, the Irish press reported that Bank of Ireland was returning to development finance, with deals including backing homes developed by Kennedy Wilson at Dublin’s Clancy Quay and refurbishment of the Burlington Hotel.
Public sector-initiatives have aimed to kick-start the development finance market. NAMA has advanced more than €1 billion to help complete stalled projects and sees potential for as much as €3 billion more.
In November, Atlanta-based debt fund manager Quadrant Real Estate Advisors formed a joint venture with Irish state-owned investor Ireland Strategic Investment Fund to invest €100 million in office development loans.
Quadrant CEO Kurt Wright sees this as an “important gap in the market” and said at the time: “We will work with developers in the early stages of projects where the risks are higher but the rewards are greater.”