New fund to offer stake in two Dublin retail centres

A €255 million geared property fund from Anglo Irish Bank features some of the institution's most high profile Irish and UK acquisitions, writes Gretchen Friemann

A redeveloped South King Street and an 18 per cent stake in the Arnotts department store are among the investments Anglo Irish bank is offering private clients in its new €255 million geared property fund.

The portfolio of six properties features some of the institution's most high profile Irish and UK acquisitions, including the Metquarter shopping centre in Liverpool, as well as two prime London office blocks, which were recently purchased in partnership with the developer Bernard McNamara.

According to the fund's sale brochure, which has been seen by The Irish Times, bank borrowings on the fund will total €339 million while the portfolio's value is estimated to be €615 million.

South King Street, where Zara and H&M are to be the main tenants, accounts for the majority of the fund's cash. Anglo's private banking arm recently shelled out €100 million for the retail element of the fashion complex and is now offering it to its clients at a 2.9 per cent yield - the lowest rate in the fund's portfolio.

Under a section titled "investment rationale" the bank's brochure points out that "rents for the property have been set at a discount to those achieved on Grafton Street" and it claims the "key to this development will be to drive rental values going forward, narrowing the gap to Grafton Street rents."

In total, 24 per cent or €63 million of the fund's equity will be invested in South King Street, which is being developed by the property magnate Joe O'Reilly, and is opposite the St Stephen's Green shopping centre.

However, it is Anglo's involvement with what is referred to in the brochure as the "€1 billion urban regeneration and development" of the Arnotts department store's landbank, known as the Northern Quarter, that is likely to quicken the pulse of prospective investors.

By purchasing a 25 per cent share in the Arnotts Holdings Ltd (AHL), a holding company that will acquire 100 per cent of Arnotts, the bank's private clients will have a stake in both the property and retail side of the project. The remaining stakeholders in AHL are financier Niall McFadden's private equity vehicle Boundary Capital, and the Nesbitt family, fronted by Arnotts' chairman, Richard Nesbitt.

The fund's brochure claims this massive project will deliver the "largest department store in Ireland", ranking among the "top 10 retail centres in Europe".

But the bank's well-heeled clients will have to stomach a lengthy planning process before enjoying such spoils. Eight parties appealed the 153,290sq m (1.65 million sq ft) scheme, which runs between Henry Street and Middle Abbey Street, to An Bord Pleanála last month. The objections centred largely on the project's scale and increased traffic congestion.

Aside from the €25 million raised from private clients, Anglo Irish bank has also committed to bankrolling the project's development costs. The bill for this urban regeneration scheme could shoot up to €1 billion and would involve massive bank borrowings. However, the fund's brochure states "the details of any debt will be decided on an arm's length basis by AHL".

A source within the institution denies that last summer's turmoil on global credit markets will increase the cost of funding for investors or reduce the potential returns on the fund. He says borrowings are "hedged for each transaction" and points out that the cost of funds have decreased over the past few months on five to 10-year spreads.

The portfolio's UK properties include Finsbury Dials, a six-storey City office block let to JP Morgan Chase Bank, and Great Minster North, a five-storey central London building occupied by the Department of Transport. Yields on the properties are comparatively aggressive with Finsbury Dials offering investors 4.4 per cent while Great Minster North is set at 4.36 per cent. Although Bernard McNamara holds a stake in both, the fund has a majority 89 per cent stake on each building.

Investors in the "Select Geared Property Fund" will also have a 90 per cent stake in the Metquarter shopping centre in Liverpool. Alanis Capital, run by the family of Dublin-based financier John McCormack, and Anglo Irish bank teamed up earlier this year to purchase the €127 million property whose main tenants include Armani, Hugo Boss, MAC, Hobbs and Coast.

The fund will sink a total of €50 million in the property for a yield of 4.47 per cent.

A €6 million investment has also been agreed on Green Property's Walton Court office block in Surrey which is let to Lever Faberge Ltd. Although this accounts for just 2 per cent of the fund's cash, it supplies the highest yield in the portfolio at 7.4 per cent. The building's redevelopment potential is cited as the chief factor behind the investment with Lever Faberge, a subsidiary of Unilver Plc set to vacate the property in 2009.