UK occupiers have tested Dublin for potential Brexit-related relocations, but is there enough financial liquidity to support subsequent real estate market activity? Daniel Cunningham reports.
Ireland’s economic fundamentals are compelling. Economic growth for 2017 is forecast at 3.5 percent, outstripping the wider European Union’s expected 1.6 percent and predicted US growth of 2 percent. Economic recovery has been impressive, with employment breaching the two million mark for the first time since the crisis.
Demand across the main real estate sectors of offices, retail and industrial remains strong. Rental growth continues and is expected to peak this year. Supply is tight and the market is in the development phase of the cycle, with several new office schemes and refurbishments underway in Dublin. CBRE calculates that up to 2.4 million square feet of office stock will be added in the capital this year.
The outlook is tempered by concerns about the strength of US investor demand and the effects of the looming exit from the EU of Ireland’s biggest trading partner, the UK. However, as UK occupiers consider their post-Brexit future, there are hopes in Ireland that the country will be a major beneficiary if there is a ‘Brexodus’ of companies from across the Irish Sea.
“Straight after the UK referendum there was a lot of fanfare about companies relocating, which frankly none of us really believed,” says John Moran, head of JLL’s Dublin office. “Towards the end of last year the level of real inquiries increased significantly. A couple of legal firms took space. We are seeing real interest in the market.”
As for whether banks will move space to Dublin, he says: “We’ll find ourselves in competition with the likes of Paris, Amsterdam and Frankfurt.”
Last November, Citigroup fuelled Irish hopes for relocations when it announced that it was preparing to move as many as 900 jobs from London to Dublin as part of its Brexit plans.
“We will see some Brexit deals for functions such as back office, fund administration, asset management,” suggests Moran, “maybe more than we initially thought. But it’s a continuation of a pre-Brexit trend. Fidelity and Deutsche Bank have moved jobs over in recent years. It might help to extend the occupational cycle by 12-24 months, to the end of 2018.”
Greater occupational demand would be a spur to an already relatively buoyant property investment market. Traditionally a low-key, sub €1 billion per year and mainly domestic market, last year’s investment volumes were in the order of €4 billion, not including loan portfolio acquisitions, with a diverse array of international investors.
Stand-out deals included Blackstone’s acquisition of the Blanchardstown shopping mall for €950 million last June and German pension fund BVK’s €630 million purchase of the Liffey Valley shopping centre last December. Liffey Valley had previously been bought by US investor Hines for €250 million in 2014. Once an opportunistic market, Ireland now attracts core buyers.
If investment and development activity, driven by promising occupational demand, is to flourish, debt provision will be crucial. In this respect, the Irish market has become more liquid, although there is still a funding gap in parts of the market.
“Although there has been a notable improvement in the availability of bank funding for Irish commercial real estate over the past two years, this is coming from an extremely low base and segments of the funding market in Ireland could arguably still be described as dysfunctional compared to the regime that prevailed in the previous cycle,” CBRE Capital Advisors’ Patrick Phelan, said in a recent market report.
Large investment and development deals tend to attract finance, although many office schemes are being undertaken by REITs and large property companies using corporate debt. Lenders remain selective. Ireland’s domestic banks – mainly Bank of Ireland, AIB and Royal Bank of Scotland subsidiary Ulster Bank – are lending, although they tend to focus on the sub-€100 million deals.
Ciaran Mooney, AIB’s head of commercial real estate lending, says there is significant potential for occupier relocations from the UK to boost the market. “There is definitely an increase in inquiries, even if actual requirements are questionable at this stage. Firms are positioning themselves, especially in the financial sector with the likes of Lloyds, Credit Suisse and Barclays for example, for the possibility that they may need to move or increase existing operations in Dublin.”
Brexit is also, like in the UK, a source of concern. Mooney’s colleague, real estate senior lending manager Derek Treston, says: “We run additional scenarios across all of our lending applications and existing deals, a layer of Brexit analysis, and we have seen investors consider the Brexit impact before doing a deal. But Brexit is probably priced into the market now.”
In general, Mooney describes a “two-tier” Irish property finance market, with €100 million-plus financings typically arranged and underwritten by international lenders. That, he explains, provides opportunities for domestic banks to participate. When Morgan Stanley arranged a €750 million financing of Blanchardstown shopping centre for Blackstone, AIB Real Estate Finance took a position in the senior and mezzanine debt.
According to CBRE’s figures, Irish banks and international lenders alike are providing investment finance, between 50 and 70 percent LTV, at between 225 and 350 basis points over Euribor. Development finance is available up to 60 percent LTV from domestic banks, and 70 percent from international lenders, for north of 400bps.
In the most prime deals, pricing has come in, with last summer’s Blanchardstown financing reportedly done at around 200 bps, down from 225 bps when it was financed in a deal also led by Morgan Stanley for the previous owner, Green Property.
It is in development finance in particular that the limits of Ireland’s liquidity are demonstrated. “Investment finance is obtainable but development finance is where there is a struggle,” says JLL’s Moran. “The stuff under construction is either all equity finance or an expensive blend of senior and mezzanine finance, with mezzanine priced at 8-12 percent.”
Beyond the largest, most prime deals, the provision of finance can be patchy,
but as long as Irish real estate market fundamentals remain strong, international lenders will keep the market on their radar.
Cardinal steps into the high-leverage void
High-leverage finance is limited in the Irish market. Dublin-based alternative debt fund lender Cardinal Capital is one of the few providers. The firm has a €300 million mezzanine fund, a joint venture with the US hedge fund WL Ross, which is around 18 months into its lifespan.
The fund lends €5 million-€50 million, typically up to the 80 percent LTV mark, with pricing on a blended senior/mezzanine basis generally around 6 percent for investment deals. The fund finances offices, retail and industrial properties, plus student accommodation and hotels, but can also fund commercial and residential site acquisitions and construction loans.
“The fund was established to fill the gap between the level of debt which the local senior lenders will provide and the limited equity available,” says Cardinal’s Paul Corry, who notes strong demand from debtors aiming to refinance themselves out of legacy situations.
“International private equity firms came into the market through acquiring debt portfolios, so when a debtor agrees to an exit figure, they will generally be allowed six to eight weeks during which to refinance. We can provide the required debt to close the transaction during such a timescale and then work with senior banks to provide longer-term senior/junior funding solutions, typically for a term of up to five years.”
Cardinal also lends on speculative commercial development when the local senior lenders are unable to do so due to a lack of pre-lets.
It recently funded a 120,000 square foot prime office development in Dublin’s South Docks for Irish developer Park Developments, which also includes a scheme of 40 apartments.
Given the volume of debt sold by institutions such as Ireland’s National Asset Management Agency to international private equity firms, refinancing activity is likely to continue for a few years and with flexible funding hard to come by in the traditional market, niche players like Cardinal will continue to be opportunistic.