Six investment properties to make €93m

PortfolioSaleThere will be keen interest from private and institutional investors in KBC Asset Management's property portfolio, writes Gretchen Friemann

KBC Asset Management is selling its Irish property portfolio for over €93 million following a decision by the company's directors to exit direct property investment in favour of unit-linked funds.

Although the portfolio has only six properties, which together generate an annual income of €4.4 million, it's expected there will be keen interest in the sale from private and institutional investors.

This is partly because of the long-standing supply constraints in the commercial market but also a function of the properties' good covenants and central locations.

John Moran, investment director at Jones Lang la Salle, is handling the negotiations and expects an initial yield of around 4.25 per cent. Best bids are to be submitted to the agent by November 22nd.

The key properties in the portfolio are the Argos store in Cork city, the IBM headquarters on Pembroke Road and the Cisco Systems office in East Point Business Park.

The remaining properties are a multi-let office block on Mount Street, which houses the Fianna Fáil headquarters, an industrial site in Clonshaugh and the National Irish Bank in Donnybrook.

While the leases on five of the properties are long term, IBM's tenancy is due to expire in three to four years.

The building's premier location in leafy Ballsbridge means there is an obvious development opportunity to convert the 2,941sq m (31,645sq ft) block, which is valued at €23.75 million, into residential apartments, but the short-term lease could also prove a disincentive to risk-averse institutional investors.

It's this anomaly within the portfolio that is thought to have prompted KBC's decision to sell the fund either as a single lot or as individual units. According to Moran, any deal "will be guided by market interest" raising the possibility that the fund could be divided between private and institutional investors.

KBC's portfolio is widely regarded in the market as superior to the Scottish Provident property fund that was bought by Irish Life for over €140 million earlier this year because of its reduced exposure to suburban areas.

However, industry sources question whether there is potential rental growth in its most valuable property, the Cisco Systems office at East Point Business Park where the technology company occupies 5,463sq m (58,782sq ft) of floor space.

Demand for the development has been relatively weak and many occupants have managed to secure generous break-options in their lease agreements.

If Cisco also availed of break-options, it would probably take a considerable time to relet the space, which is valued at €23.9 million. There are unlikely to be such concerns for KBC's largest property, the Argos store at Patrick Street in Cork's city centre. Stretching to 1,144sq m (15,543sq ft), the shop's capital value is put at €21.92 million by Jones Lang la Salle.

While the building is regarded as prime retail property, it's valuation is still a fraction of what could have been generated by KBC's two Grafton Street properties, which were sold three years ago. It's understood the asset management company disposed of the Vera Moda and Permanent TSB outlets as part of a restructuring of the Ulster Bank pension portfolio.

But property experts claim the two shops, one of which was bought by developer Johnny Ronan, have appreciated by about 20 to 30 per cent in the three years since they were sold.

KBC is selling its remaining Irish portfolio in order to focus on indirect property investments and it's likely the proceeds of the sale will be shifted into a unit trust fund centred on European property.

The asset management company signalled its preference for indirect property investing last year when it bought the British Lothbury Property Trust fund for €462 million.

It was the company's first acquisition since the purchase of Ulster Bank Investment Managers in early 2000.

KBC Asset Management has €5.8 billion in funds under management and is a subsidiary of the listed Belgian financial services group, KBC.