US buyers led overseas charge to buy distressed assets

Irish property investors have taken time to replicate confidence shown abroad

 

The Irish commercial property market has turned on its head since the 2008 crash.

Ownership of a large proportion of our best properties has passed to overseas interests at a fraction of their original value, and with the sale of the final batch of assets with distressed debts being planned for early next year by Nama and the various banks and receivers, there is no reason to believe that the outcome will be any different from the past three years.

Up to the time of the financial crisis only a handful of overseas property companies ever showed any long term interest in the Irish market. They generally were happy enough to manage relatively small office portfolios and the odd retail investment, usually for UK assurance companies and pension funds.

British development companies were occasionally attracted from the late 1980s by the financial prospects offered by single projects, such as standalone shopping centres and office blocks. There was little or no interest in apartment schemes. Irish Life was then probably the only public company owning blocks of flats in the city and even they got out of this sector in the early 1990s.

The visiting UK groups included Heron, which joined Owen O’Callaghan in delivering Merchants Quay shopping centre in Cork; Ryde, which developed the Sweepstake offices in Ballsbridge; Grosvenor, which took a substantial leg of Liffey Valley shopping centre; and Bryant, which developed and later moved on from Cruises Street in Limerick.

None of the UK companies stayed around for long, the exception being British Land, which struck up a successful partnership with Mark Kavanagh’s Hardwicke Group to develop what turned out to be the city’s largest ever development project, the International Financial Services Centre. British Land had previously been involved in the Setanta Centre off Nassau Street, and in the late 1980s developed the St Stephen’s Green shopping centre. It also held substantial stakes in the Swan shopping centre in Rathmines, the Ilac off Henry Street and even Cherrywood. Within a relatively short time of completing the IFSC – and stubbornly refusing to get involved in the CHQ shopping centre in the IFSC – they duly pulled out of Dublin, selling off all their interests here.

For a company so familiar with the Dublin market and with a well-earned reputation for astute management skills, it was a surprise they were not tempted back when property values hit the floor after 2008.

Distressed assets

In spite of the close proximity of the Irish market and the strength of sterling, UK funds have been responsible for no more than 3.5 per cent of the entire overseas spend –a mere€126 million.

However, that figure may well underestimate the true value of foreign capital, as investments by Reits are typically defined as domestic investors, though the source of funding is not easily determined.

Marian Finnegan, head of research at DTZ Sherry FitzGerald, says the level of international capital invested in Ireland was perhaps not surprising, given the perilous state of the financial markets here for much of the last three years. It was perhaps equally true to say the confidence in the property market first emerged outside of Ireland and it took some time for domestic investors to truly believe in the recovery story.

The fact that a total of €8.98 billion was invested in the Irish market between 2013 and the third quarter of this year will be viewed as exceptional by either historical or international standards given that the average annual investment level in Ireland before the crisis stood at around€500 million.

Some of the early overseas investors got exceptional value and are continuing to benefit because of the ongoing recovery in rents and values, and the fact that Ireland is on track to be the fastest-growing economy in the euro area for four years in a row.

Irish investors Meanwhile, a number of Irish investors as well as local funds have followed the example of foreign buyers by seeking cover in the perceived safety of residential assets for the first time.

While the foreign investors have been the focus of considerable attention for their purchase of big ticket investments, two domestic funds, Irish Life and Iput, have made particularly good use of their much improved liquidity by acquiring a range of top-class investments.

Irish Life was happy to settle for a high street yield of 4.5 per cent when it paid €154 million for the Sovereign portfolio, which included nine first-rate shops on Grafton Street, Henry Street, Dawson Street and O’Connell Street, and four other properties that have since been sold on.

Irish Life makes no secret of the over- weighting of its property portfolios in Dublin offices in the early part of the recovery cycle through a range of core and value- added office acquisitions including 30 Herbert Street, 2 Grand Canal Square, 1 Warrington Place and Blocks 2, 3 and, most recently, Block 4, George’s Dock in the IFSC.

Iput was an even bigger investor in the past three years, spending over €800 million on office, retail and logistics properties at a blended income yield of 6 per cent.

The top-performing assets include 1 Grand Canal Square in Dublin’s docklands, which was bought in 2013 for €93 million and is showing an income yield of 6.4 per cent; and A&L Goodbody’s building at North Wall Quay bought for €58 million and showing a yield of 6.7 per cent.

In the past year the fund also purchased phase 1 of The Park in Carrickmines for over €90 million and the McCann FitzGerald headquarters in the south docklands for €80 million.