IRISH PROPERTY MARKET
Private equity leads as overseas capital re-enters Irish investment market, reports Jane Roberts
Nowhere in property is the fallout from the years of gorging on cheap debt more starkly obvious than in Ireland, where a sea change in ownership of assets is under way, as international buyers start to replace Irish owners backed by domestic banks.
Commercial property values have fallen 66% since the market peaked in 2006/07, according to IPD (see graph below). The Central Bank of Ireland’s figure is 70.5% and many assets suffered even more calamitous drops as yields doubled and rents halved.
So it’s no surprise that for several years, private equity investors have been scanning the market for signs of the bottom. Last year was the turning point; sales started slowly in the first half, as banks prepared to release properties.
By September they were steadily drip-feeding investments into the market and buyers were snapping up bargains, such as Blackstone’s acquisition of Dublin’s largest hotel for €67m, which had sold in 2007 to an Irish buyer for €288m (see table,below).
In 2011 there were just €192m of investment deals and no loan sales, but last year about €600m of mainly Dublin offices and multi-family housing changed hands, in 36 deals, plus €146m of hotels, according to CBRE. Jones Lang LaSalle recorded an additional €560m of loan portfolio sales.
Including the loan portfolios – which were bought to trade the assets – €1.3bn of real estate changed hands last year. Compared with the 2009/2010 trough and the €3bn-3.5bn peak trading volume in 2006, “that is a normal market”, says John Moran, Jones Lang LaSalle’s managing director, Ireland.
Pat Gunne, managing director of Green Property, which manages Irish assets for Lloyds, AIB and GE Real Estate and invests on its own account, says 75% of the capital at the 2006 market peak was effectively debt, whereas most of the past 12 months’ purchases have been made with cash.
Equity investment on the up
“Plus values have crashed, so €1bn now was €3b-4bn then. Therefore (equity invested) is actually up, and will stay up for the next few years because of the amount of real estate that has to go from banks’ balance sheets.”
Marie Hunt, CBRE’s head of research in Ireland, calculates that at least 60% of buyers last year were international investors “in complete contrast to 2002-2007, when Ireland’s investment market comprised 100% domestic investors, most of whom were debt-financed”.
The arrival of international investors has been driven by Ireland’s repriced real estate market and the fact that it has bottomed out ahead of others. Improving economic conditions also help; “we’re seen as a country that’s taken its medicine” Gunne says.
Investors’ appetites have been whetted, Hunt says, by “the extent of the Irish market’s pricing correction from the 2007 peak and the attractiveness of yields and values relative to other investments, including those in other jurisdictions.”
Opportunistic buyers, especially US and European private equity firms, have been active bidders, including: Apollo Global Investors, Blackstone, Benson Elliott, CarVal Investors, Delancey, GIC, Hines, Kennedy Wilson, KKR, London & Regional, Lone Star, Northwood Investors, Signature Capital and Starwood.
AM Alpha, a manager of German money, bought the Riverside II Docklands building, let to Bank of New York Mellon, while a Russian billionairess snapped up Dublin’s Morrison’s Hotel. Other sources of capital eyeing the market include UK REITs Land Securities and Hammerson, German open-ended funds and Israeli investors.
There are also a handful of Irish investors who emerged fit and strong from the crisis, including Green Property, which bids on €100m-plus deals with US private equity giant TPG and on smaller opportunities on its own account.
One of the hardest fought-for acquisitions in Q4 2012 went to Irish magnate Larry Goodman, who topped a 14-strong field to buy the empty former Bank of Ireland headquarters in Baggot Street.
“The pace of rental value decline eased as the year progressed and prime rents in all sectors showed signs of stabilising,” Hunt says. “Prime yields stabilised and showed signs of hardening toward the end of 2012.”
JLL’s Moran adds: “The office market is poised to recover and we forecast rental growth at the end of this year. Take-up has been steady for modern Dublin office space, at around 1.6m-1.7m sq ft in the past two years. Although the city’s overall vacancy rate is 18.2%, it is lower in central postcodes, for example 11.9% in Dublin 2.”
Deepening demand for prime property
Savills investment director Domhnaill O’Sullivan says: “The demand is for prime and it’s getting deeper, from private equity or private individuals, while institutions have started to come back and we can see more. Investors need to bid two or three times before they become competitive, but it means buyers are very educated; they are not just flying in, they want to build a platform.”
Kennedy Wilson has certainly planted its flag in the Irish market. It outbid crowded fields to buy The Alliance building at The Gasworks, with 210 flats, and Sanford Lodge with 119, and made the year’s largest office acquisition, State Street’s HQ at Sir John Rogerson’s Quay, via a contract race with KKR and Delancey. It also bought the Project Prince non-performing loan portfolio and came a close second to Larry Goodman in bidding for Bank of Ireland’s former HQ.
Ireland managing director Peter Collins, who took his former Bank of Ireland European team to the US investor 18 months ago, says: “The reason we’re here is we think the market has repriced, or gone a long way to repricing, and we’re confident in the Irish economy. Yes, it has problems, but if you take a five to 10-year view, it will recover.
Buying into rental growth
“In residential, for example, previously high ownership levels will fall. People are not taking on so much debt, they are more mobile. We are buying into rental growth and to some extent a premium for professional management. It is a very long-term strategy.” The company owns almost 14,000 multi-family homes in the US and Japan.
CBRE investment director Caroline McCarthy says: “We saw interested foreign investors from 2009 onwards, as the market repriced, but usually all seeking the same product: Dublin grade A offices, well let, on long leases. As time has gone on and foreign buyers have become more familiar with the market and the recovery story, they are prepared to take more risk.
“For example, when Bank of Ireland’s Baggot Street former HQ came to the market, there was very strong interest from foreign buyers. While in a very prime location, this was effectively an empty, listed building in need of a comprehensive refurbishment.”
Moran, who advised the banks that sold the 220,000 sq ft Bank of Ireland buildings, says cash buyer Goodman has a track record in development, while the sale is an example of pricing exceeding vendors’ expectations:
“The guide price was €30m-€35m; it sold for €42m in a two-stage process, with eight bidders in the second round.”
The momentum that built up during last year is expected to continue, particularly the prime office and residential recovery. Now interest is focused on whether NAMA and the banks will test the market with property portfolios rather than single assets, and less-than-prime stock. NAMA is said to be about to market €1bn of loans in two portfolios (see news, ‘Goldman’s and BoI’s €400m lending supports Irish revival’).
Gunne says: “In 2013 more and bigger assets will be traded, because once the market picks up, it gathers momentum and begins to trade more.” McCarthy adds: “We hope to see a healthy level of product coming to the market to satisfy demand, including offices, shopping centres and portfolios, which may offer buyers an opportunity to add value through asset management.”
Christmas trading was “reasonably solid”, says Larry Brennan, Savills’ director of retail in Dublin. “The amount of retail sold has been very small, which is understandable – the retail consumer market has been weak.”
He says prime rents are “going sideways”, not down, but the consensus is that further falls in rents and capital values can’t be ruled out for secondary and provincial properties. Ireland is oversupplied with shopping space.
“One of our issues is there is major distress on everything that’s not prime,” says Moran.
The influx of international capital is already underwriting prime values and is an important first step in the market’s recovery.
As Gunne says: “The move to private equity is helpful and shows the market has repriced and trades are taking place.” However, as private equity is likely to hold properties only for five to seven years, a longer-term question is who will be the ultimate holders and funders of Irish real estate?
Budgets boost property with rent review reprieve and REIT moves
Ireland’s past two Budgets have included measures to help the property market, most notably the December 2011 decision to drop a plan to retrospectively ban upward-only rent reviews – a proposal that had probably delayed the investment market’s recovery.
In 2011, investors priced assets off estimated rental value to factor in potential downward rent reviews, while vendors were pricing off the passing rent, creating a price gulf between them. “The change was key, because for the previous 12 months you couldn’t value, which stopped sellers putting property on the market,” says one agent.
Now new leases, or fundamentally varied existing leases, cannot have upward-only clauses, but may have fixed uplifts, such as RPI-linked clauses. Agents say landlords are being pragmatic as they’d rather keep a tenant for a longer term, even if they might have a downward review in five years’ time. “But rents are so low now that they are saying: ‘That doesn’t bother me’,” says one.
The same budget also included a cut in stamp duty, from 6% to 2%. The December 2012 Budget included proposals for REITs. “We welcome this as a way for others to get access to Ireland without having to invest directly,” says CBRE’s Marie Hunt.
But JLL’s John Moran cautions: “We have not got a tradition of a public property sector here and though it would be positive and less risky if ownership was more widely spread, there’s a certain naivety in thinking that REITs are a panacea for all our issues.”