€60m portfolio in 2006 now at €30m

The dramatic fall in capital values in less than 28 months underlines the collapse in investor confidence as a result of the downturn and banking crisis, writes JACK FAGAN.

SEVEN BRANCHES of the Bank of Ireland sold to Friends First in November, 2006, for slightly over €60 million are about to change hands again at around half that value.

Davy Stockbrokers has apparently agreed to buy the portfolio for wealthy investors in a sale and leaseback deal that is likely to show a return of almost 7 per cent compared to the original yield of 3.35 per cent.

The dramatic fall in capital values in less than 28 months underlines the collapse in investor confidence as a result of the economic downturn and the banking crisis. The sale, which is due to be completed shortly, will provide firm evidence of the slippage in values at a time when transactions are few and far between.

The London-based researcher Investment Property Databank has already reported that capital values in the Irish market fell last year by 37.2 per cent. The slippage has undoubtedly continued over the last three months as the recession wreaked even more havoc on the financial sector and an increasing number of developers faced looming debt problems.

Friends First will not be the only entity to take a hit on the bank investments. A range of private investors, as well as institutions and family trusts, also bought bank branches in the past three years at yields of 3–4 per cent.

Most will undoubtedly hold on to them in the expectation that valuations will eventually bounce back and returns will get better as guaranteed rental uplifts kick in.

The decision by Friends First to offload the seven branches at this stage is likely to have been prompted by a demand for redemptions by retail investors. Friends First is being advised by Lisney while Savills is acting for Davys.

Property developer Joe Layden was the single largest purchaser of Bank of Ireland branches. He paid €94 million for 29 retail branches as well as its call centre in Kilkenny in a deal that showed an initial yield of 3.9 per cent. Mr Layden is understood to have sold on some of the branches within months of purchasing the large portfolio in June, 2007.

Robert Murphy of CB Richard Ellis handled the original sale of the seven bank properties which are spread throughout Ireland and produce a rental income of over €4.1 million.

The €30 million reputed to have been agreed by Davys for the seven branches suggests that the Bank of Ireland branch on Dublin’s O’Connell Street is valued at around €5.9 million compared to the original price of €12 million. The rent stands at €442,663 and this is due to rise to €509,028 in 2011.

Friends First had been seeking €10.8 million for the Bank of Ireland branch at South Mall in Cork which is producing a rent of €752,000. This is due to rise to €864,000 in 2011. At this price, the investment shows an initial yield of 6.42 per cent and 7.38 per cent after the uplift.

The next highest price sought was €4 million for the bank branch at Blackrock, Co Dublin, where the rent of €239,000 is due to rise to €275,000 in two years. At that price the initial yield stands at 5.51 per cent and rises to 6.34 per cent after the uplift.

Friends First also put a value of €3.8 million on the Bank of Ireland branch at Clanbrassil Street in Dundalk where the rent of €265,000 will rise to €304,000 in 2011. This would show an initial yield of 6.43 per cent and 7.38 per cent after two years.

The bank branch in Newbridge, Co Kildare, has a revised valuation of €3.5 million and, with the rent standing at €237,000, it produces a return of 6.24 per cent. The yield is due to move out to 7.18 per cent once the rent increases to €272,500 in two years’ time.

Friends First also sought €2.1 million for the bank branch at Church Street in Athlone where the rent of €147,500 represents a yield of 6.48 per cent. This will rise to 7.47 per cent when the rent goes to €170,000 in 2011.

The lowest value bank branch in the portfolio – Phibsborough, Dublin – was valued at €2 million and, with the rent at €134,500, it shows an initial return of 6.18 per cent. This is set to rise to 7.12 per cent when the rent moves to €154,500 in 2011.