McNamara takes Grafton Street shops off the market

Bids that emerged since last April for either the Richard Alan or Zerep shop suggest that there’s been a sharp deterioration in values on Grafton Street

DEVELOPER BERNARD McNamara has abandoned the sale of two Grafton Street shops after failing to attract a satisfactory offer for either the Richard Alan clothing store or the Zerep shoe shop.

The properties were quietly put on the market last April for a combined price tag of €42 million but it’s understood bids were at an unacceptably low level for the construction magnate who recently instructed selling agent, Savills HOK, to halt all negotiations on the retail units.

McNamara had hoped to offload the Richard Alan store, which has frontage onto South King Street and Grafton Street, for about €30 million while Zerep was expected to sell for around €12 million. Both prices equated to a yield of 3 per cent based on upcoming rent reviews.

However a report published by property consultants CBRE last July claimed values on Ireland’s most expensive thoroughfare have slumped by up to 50 per cent since the start of the year and it stated this downward trend would continue if there was no improvement in the availability of bank funds.

The agency stressed it has no transactional evidence to support such a claim, other than the widespread drop in demand for retail units across the country, which has resulted in yields moving out to 3.75 per cent on all high streets.

But industry experts pointed out the bids on McNamara’s shops are more likely to have been pitched at yields of between 4 and 5 per cent – representing a sharp deterioration in values on the thoroughfare.

According to one senior property consultant: “Even at that level the investment wouldn’t wash its face. Although bank margins might be lower for a Grafton Street property, you’re still looking at funding costs of around 5.5 per cent. Then when you factor in the additional equity needed to cover stamp costs of 9 per cent, plus agency fees for an independent valuation, you find the figures just don’t stack up. So buyers are walking away because they can’t get adequate funding on these deals.”

While McNamara’s decision to retain the shops adds to the stalemate that has gripped the market since the onset of the credit crunch, it also indicates the builder, who has been cashing-in assets recently, is willing to weather the storm rather than offload property at any price.

And as vendors balk at dramatic price cuts and buyers remain hamstrung by a deepening liquidity freeze, some in the industry are already labelling 2008 as a “complete write-off”. Yet there is also a palpable sense of relief in the market that Ireland has so far avoided the violent price adjustments seen in the UK, where a volley of fire sales from the institutions has thrust yields out as far as 8 per cent in some areas.

Within the next few weeks, Irish Life will become the first Irish property fund to brave the deteriorating conditions when it puts a €90 million office portfolio up for sale as an off-the-market transaction. Negotiations for the three buildings, which include Hambleden House, the head office of property agent Bannon Commercial and Colliers Jackson-Stops, will be closely watched, as any sale will provide long-awaited evidence on the extent yields have shifted.

The insurer’s decision to offload assets at such a challenging time has also prompted speculation over whether this will be the first in a series of institutional sell-offs as property funds battle to offset a liquidity crisis brought on by the heavy demand for redemptions.

Irish Life is among four institutions in Ireland that have imposed penalties on retail investors seeking cash withdrawals.

Yet it’s unclear whether even lower prices would be enough to revive this stagnant market. Demand for commercial property has collapsed as highly geared investors have been forced out of the market in the wake of the US sub-prime crisis.

And although industry sources have insisted there are plenty of cash-rich buyers willing to step back in once values fall further, the consensus is that banks must start lending again if normal business is to resume.

But according to Bank of Ireland’s chief economist, Dan McLaughlin, there is still “no end in sight to the credit crunch”. He described the recent reversal in oil prices and the drop in five-year swap rates to less than 4.7 per cent from 5.2 per cent, as “lights at the end of the tunnel” but pointed out that a downturn in commercial property was not unexpected as it is “a particularly cyclical sector”.

He also told The Irish Times – prior to Lehman Brothers’ bankruptcy filing last Monday – that there was “no substance” to the rumours that an Irish bank would buckle under the current financial turmoil and said that historically, residential mortgage defaults in Ireland have been “low to negligible”.

But as the credit crisis this week reached what the Economist characterised as a “new and extremely dangerous phase”, some are calling for radical Government action to stem the bloodshed.

Michael Gilmartin, head of commercial lending at IIB Bank, a subsidiary of the Belgian financial institution KBC, said a “strong first-time buyers’ market is crucial to both the residential and commercial sectors” and he claimed the forthcoming Budget “should revert to the way mortgage interest was dealt with 20 years ago in this country, whereby one was allowed full relief on interest paid on principal mortgage at marginal rate”.

He argued this would “force people to buy houses” and would have “an additional benefit in terms of social stability as opposed to having a renting culture, which is the way matters have drifted”. He added such a measure would also have “the effect of dulling the impact of excessively high interest rates over which we have no control”.

Yet with economic pundits predicting further shocks to the financial system after the Lehman Brothers’ collapse, most commercial property players may simply be hoping they can afford to follow in McNamara’s footsteps and ride out the storm.