Foreign investors still dominating Irish real estate market

The real estate investment market continues to be dominated by foreign investors. Ownership of a high proportion of our most valuable commercial assets has passed to overseas interests since the financial crisis erupted in 2008 and with the turnover this year set to exceed €4 billion for the second time (it also did so in 2014) foreign buyers look set to account for more than 70 per cent of the total spend.

The number of high value sales has increased steadily since the start of 2013 with the turnover reaching €13.19 billion to date. More than half that spend (€7.07 billion) was made by overseas investors with 68 per cent of the capital being sourced in the US, according to agents Cushman & Wakefield.

The huge overseas appetite for these investments is all the more surprising because up to the time of the crash eight years ago only a handful of funds – virtually all of them from the UK – ever showed any interest in the Irish market. Even up to the late 1980s British pension funds and insurance companies were the only ones with Irish portfolios, usually confined to office blocks and high street shops let to long-standing traders. Towards the end of the 1980s, several UK groups including British Land, Ryde, Grosvenor and Bryant got involved in new office and retail developments but in time only Grosvenor stayed on with its interest in Liffey Valley shopping centre.

The question of whether this year’s €4 billion investment turnover will be reached and possibly exceeded will be determined by the reported €600 to €640 million sale of Liffey Valley shopping centre which is scheduled to close before year end.

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Investments

Even as things stand, the sale of retail investments has already exceeded the office turnover because of the demand for big ticket retail centres and regional shopping centres. Figures compiled by Cushman & Wakefield show that, up to the end of September, retail investments totalled €1.48 billion while the office sector attracted €1.03 billion or 33 per cent of the turnover. Mixed use was the third largest sector with investments reaching €325 million.

The exceptional overall spend on retail investments has stemmed in part from the €950 million sale of Blanchardstown Town Centre to Blackstone, the American multinational investment giant. The follow up sale of Liffey Valley in October to the German pension fund BVK for around €600 million plus possibly €40 million for development land underlines the strong recovery in retail values over the past 24 months as this west Dublin centre was reported to have traded in 2014 for only €250 million.

The other high value shopping centre sale was the Whitewater Shopping Centre in Newbridge, Co Kildare, developed and managed by Sean Mulryan's Ballymore Properties, before being sold to German fund Deka Immobilien GmbH for €180 million.

There were also three significant office sales this year, the largest being the 21,000sq m (226,040sq ft) PwC head office in the north Dublin docklands which was sold for €240 million to a private Middle Eastern international fund.

Next highest sale at more than €140 million was the mixed office/retail development known as The Oval at Shelbourne Road in Ballsbridge, Dublin 4, which was sold to German real estate fund Patrizia.

The other significant deal saw UK fund Meyer Bergman join BCP to buy a retail and office portfolio on Dublin's Nassau Street at €93 million.

Increasing concern

There is increasing concern that future pricing and yields will be affected by not only Brexit and the election of Trump but by taxation changes announced by the Irish government. The plan is to introduce a 20 per cent withholding tax and a 20 per cent capital gains tax on Irish property assets held in tax efficient funds.

Kevin Donohue of Cushman Wakefield says the changes should create a level playing field, allowing in more traditional funds which were outbid in the past by investors availing of the ICAV tax structures. He expected that the core assets such as Dublin office and retail remaining unaffected as these sectors were dominated by the Irish and overseas institutional funds which did not use such structures. "Regional and very secondary assets which have been the traditional hunting ground for the funds using the ICAV structures may see a slight cooling off in pricing levels achievable as they will now factor in these new holding costs which will no doubt hit their returns."

Adrian Trueick of Knight Frank fears that the tax changes could have a knock-on effect on the prices achievable for non-core assets and provincial investments as well as reducing the buyer pool. He noted that the market continued to mature over 2016 with the rapid growth rates of 2014/2015 slowing to more normal levels.This, in turn, had resulted in a change in market participants with the US private equity funds being replaced by core domestic and European pension funds.

For the present the US funds are still taking advantage of a strong US dollar to buy up shopping centres with attractive yields. Only two weeks ago Davidson Kempner acquired a 66 per cent stake in Navan Town Centre for €62 million, equating to a yield of 7.31 per cent. In the same week another American fund, Oaktree, was happy to settle for a return of 8.13 per cent when it paid €12 million for the Fairgreen Shopping Centre in Mullingar.

Anyone taking a close look at the list of distressed sales over the past eight years will be surprised at the vast number of shopping centres that apparently ran into trading difficulties either because of over borrowing or problems in letting shops at economic rents. On the other hand, some shopping centres such as Blanchardstown were sold because the owners, Green Property, were happy to take a good profit and move on. However, the fact that 43 shopping centres have changed hands since 2013 suggests that many of them had run into trouble.

This year alone, shopping centre sales accounted for 83 per cent of the overall retail spend. The balance was made up from the sale of retail parks and high street shops.