Signs of stability amid the gloom

Ireland’s crisis-hit commercial property market has come alive in recent months. Investment sales since the start of the year have exceeded €400 million and, with a further €700 million available in recent months and much of it either agreed or in legals, the overall turnover could well exceed €650 million.

That is a long way from the €198 million in sales recorded in 2011 when values were plummeting and the banks were still in shock over the number of dud property assets clogging up their balance sheets.

Most of the buying activity in recent months has centred on discounted office blocks in Dublin city centre, particularly those with strong covenants and long leases.

Office highlights

The high point of the year was the scramble to buy State Street’s new Irish banking headquarters in the south docklands. The sale attracted 14 bidders and the much coveted block – which came with a three-acre development site – was bought for €108 million by Californian investor and Bank of Ireland shareholder Kennedy Wilson.

It had previously acquired three other high-value investments: the Sandford Close apartment complex in Ranelagh (€27 million); a residential block at the Gasworks in Dublin 4 (€40 million); and Brooklawn House office block in Ballsbridge (€15 million).

More recently there have been over a dozen bidders for a bank building of a different sort: the rundown former HQ of the Bank of Ireland on Baggot Street, which sold last week to the Goodman family. Although no value was put on that deal, the guide price of €30-€35 million bore no resemblance to its 2006 selling price of €212 million.

Selling agent Jones Lang LaSalle acknowledged that the new owners would probably have to spend significant sums on refurbishing the complex and even more to extend it. The listed complex has 20,493sq m (220,599sq ft) in one of the best locations in the city.

The high level of interest in other big ticket office investments and the better than expected selling prices could possibly deter some of the unsuccessful international players who came to Dublin with a plan to capitalise on Ireland’s eventual economic recovery.

Even if some of the American, German and other continental funds drop out of the bidding by the end of the year after failing to pick up a bargain, there have been signals that other international funds – including UK players such as Prudential and Standard Life – will be joining the fold in the new year to monitor investment opportunities. Discounted assets with high income yields will always attract an international audience.

Values

Though underlying property values have fallen by a cumulative 67 per cent since the peak, the slippage is rapidly slowing down and all the indications are that before long we may have found a floor. But this ultimately depends on whether the Irish economy contracts further as a result of austerity measures in the Budget.

In the meantime, investors will find consolation in the fact that in the 12 months to the end of September, total returns were in positive territory at 4.8 per cent as against 3.5 per cent in the much-vaunted UK market. The improved performance was largely attributable to the vibrant Dublin docklands, where most of the international companies are still prospering and expanding and where much of the sales activity will resume in the new year.

Apart from a number of large loan books, Nama has managed to offload only a handful of distressed properties in Dublin over the past year, largely because the Lloyds-owned Bank of Scotland (Ireland) and Royal Bank of Scotland’s Irish subsidiary, Ulster Bank, made the running by offering properties at heavily discounted prices.

Significant Irish sales by Nama included office investment One Warrington Place at Mount Street Bridge, Dublin 2 for €27 million; Edward Square, a Galway shopping enclave (€27 million); a 49 per cent stake in the K Club (more than €40 million); Morrison Hotel (€22 million); and Bank of Ireland branches at St Stephen’s Green (€7 million) and Arran Quay (€1.3 million).

Nama will tread carefully in the coming months, hoping to bring greater stability to the market by renegotiating leases and rents, and in some cases pumping in additional funds to maximise returns from commercial properties.

Notwithstanding the huge build-up of distressed properties on its books, Nama will avoid fire sales at all costs in the belief that they would prolong the agony and leave taxpayers open to even greater losses.

Nama will continue to seek buyers for top-end office investments while the market remains buoyant and may attempt to offload a string of retail parks that are only partially occupied and others that were built but never opened. The owners of most of the loss-making parks cannot turn them around because large multiple traders are no longer opening new outlets.

Retail

While the demand for retail investments is nothing like the office sector, Nama will eventually have to sell a number of relatively new provincial shopping centres built at highly inflated costs during the boom and now unable to meet bank repayments because of high vacancy rates, reduced rent rolls and a fall-off in consumer spending. Many centres are open only because of bank forbearance. Life has been equally difficult for some well-known high street traders who are looking at ways of targeting new customers away from their core young, price-conscious shoppers.

In the meantime they are surviving only because of rent reductions of 50 per cent and more.

Despite the pessimism, Dublin managed to pin down American fashion giant Abercrombie Fitch, which is bucking the trend by trading exceptionally well at its recently opened landmark College Green store.

The former la Senza shop on Grafton Street is being cited as a good example of the difficulties facing landlords in the retail sector. The shop closed last January and despite a long running marketing campaign it was only let in recent weeks at a rent of €305,000 – 53 per cent below the original rent of €650,000.

The more challenging trading environment in the shopping centres has meant that most of the overseas fashion chains will now move in only if the landlord settles for a relatively small base rent and a top up of between 5 and 10 per cent of the overall turnover.

This arrangement means that the landlord will have to continue to promote the centre and the shop to keep his rent roll in reasonable shape.

The problem is even more severe in some of the struggling provincial shopping centres, where landlords are willing to let vacant units to pop-up shops at nominal rent.