US developer to cash in on Liffey Valley stake

Gerald Hines, the nonagenarian Texas-based developer behind an $89 billion (€79 billion) global property empire, recalls most fondly the deals he carried out in the 1960s and 1970s.

Like the story of pitching a plan in 1966 to build a 50-storey tower for Shell in Houston, or constructing Pennzoil’s award-winning headquarters and a vast shopping mall – modelled after Milan’s Galleria Vittorio Emanuele II – in the same city less than a decade later.

"They were the early ones, when I was skating on thin ice," the 91-year-old, known as Gerry to friends such as former US president George W Bush, told American lifestyle magazine Modern Luxury.

Few of these deals, however, are likely to deliver the type of return his Hines Group is set to make after a 2½-year investment on a 73 per cent stake it and banking giant HSBC bought in the Liffey Valley Shopping Centre in early 2014 for €250 million. Having secured planning permission last month for a 51,545sq m (554,825sq ft) extension to almost double the size of the centre, including a 2,500-seat Olympic-sized indoor ice arena, the Liffey Valley centre is now back on the market – with a touted price tag of between €500 million and €600 million.

Hines has led a number of Irish property deals since setting up a Dublin office at the height of the crisis in 2011. Could its exit from the Liffey Valley centre be read as the end of a recovery of prime retail property?

Many industry followers think not.

"While rents started to rebound much quicker in the office sector following the crisis, a lot of that has played out. While office rent increases still have a bit more to go, it's really only starting in retail," according to Marie Hunt, head of research at commercial property consultants CBRE Ireland.

“There were four or five years when literally nothing on the retail space changed hands, but activity has really picked up in the last few years.”

BNP Paribas Real Estate recently named US investment giant Blackstone’s €945 million purchase of the Blanchardstown Centre from Green Property in June as the most expensive single property deal ever in Ireland.

It comes at a time when the New York-based group, among the first wave of investors to snap up Irish asset s during the crisis, is flipping other investments in Dublin.

Investment doubled

Last month, The Irish Times reported that Blackstone had picked German asset manager DekaBank as preferred bidder for the former Burlington Hotel with a price tag of €180 million – a deal that would double its investment in four years. It also made a €43 million profit in two years when it agreed to sell on a pair of office buildings in the Dublin's south docklands late last year.

However, Anthony Myers, head of European real estate at Blackstone, said during the summer that the Blanchardstown purchase "underlines our commitment to Ireland and belief in the strength of the economy".

Blackstone would also be mindful of the development potential of the 112,000sq m retail complex, comprising more than 180 stores, restaurants and a nine-screen cinema. There is scope for a further 150,000sq m of retail, residential, office and leisure facilities under a master development plan for the site.

Meanwhile, UK retail property group Hammerson, which in July, with German insurer Allianz, acquired joint control of the Dundrum Town Centre, covering an area of about 140,000sq m, says it is in for the long haul.

They previously bought the loans attached to the mall and 50 per cent interests in the Ilac Centre in central Dublin and Pavilions Shopping Centre in Swords from National Asset Management Agency last year for €1.85 billion.

"We bought this asset with a 20-year investment horizon," said Simon Betty, who heads up Hammerson's operation in Ireland.

While Betty said “the big rerating of Irish property values happened 18-24 months ago”, the attraction for investors from here on in is the prospects of driving up rents as consumption continues to recover.

“When we were underwriting the [deal] we saw a lot of opportunity for rental growth,” said Betty. “The consumer is in good health, employment is good, internet penetration in Ireland is lower than in other parts of Europe, and the Irish have a higher propensity to consume than other European countries, such as the Nordic states and Germany.”

In the most recent round of rent reviews at Dundrum, the average uplift in rents was 10 per cent, according to Hammerson.

Consumers started to play a role in the economy’s recovery in 2014, taking the pressure off exporters and foreign direct investment, which had cushioned the country during the financial crisis.

Figures released by Central Statistics Office on Wednesday showed personal consumption had risen 1.8 per cent in the second quarter from the same period last year, albeit down from an annual rate of 5.1 per cent in the first quarter.

The unemployment rate has dropped from a high of 15.1 per cent in 2012 to 8.3 per cent last month.

Consumer sentiment

The latest KBC Bank Ireland/ESRI consumer sentiment index rose to 102.7 in August, reversing most of a decline seen in July after the UK's vote to leave the European Union. The index averaged about 59 during the economic crisis.

“The UK’s Brexit vote didn’t cause the economic sky to fall, even if it made it a lot cloudier,” Austin Hughes, an economist with KBC, said on the release of the data last week, adding that consumers still appeared to be cautiously optimistic in relation to the outlook for the economy and their own finances.

"The retail market was really hit during the downturn, but it is definitely picking up," said Sharon Walsh, divisional director and head of retail at property agent HWBC in Dublin.

“Retailers started to make inquiries about space about 18 months ago, but it’s really only in the last six to nine months that they have actually been taking up more space and rents have been going up.”

Walsh added: “We consider the first cycle of up-and-down rent reviews, introduced in February 2010, to be an important factor for investors as this will crystallise the rent growth already seen in market.”

Green Reit, the country's first real estate investment trust to float following the property crisis, said on Monday that while prime office rents are close to peak levels, the retail property sector continues to improve.

“Prime retail is performing strongest, hampered only by limited vacancy on the prime high streets and shopping centres,” Green Reit said as it unveiled its results for the first half.

“Rental growth is becoming more evident and not just for prime Dublin retail. Partly as a result of rents coming off such a low base and partly due to limited vacancy, the agents are reporting rental growth of 10 per cent to 15 per cent in provincial locations, depending on the location.”

Transactions are also on the increase outside the capital.

Last year saw New York-based hedge fund Davidson Kempner spend about €118 million on a portfolio of six provincial shopping centres, including the Athlone Town Centre, a stake in MacDonagh Junction in Kilkenny and the Orwell Shopping Centre in Templeogue, Dublin.

US investment banking giant Goldman Sachs bought the Bridgewater Shopping Centre in Arklow for €33.25 million in June, while Swiss rival Credit Suisse purchased the Golden Island shopping centre in Athlone in March for €43.5 million.

Local money has also been active in the sector, with Irish Life snapping up Limerick's top-performing retail park for about €46 million. In doing so, it beat a rival offer from Dolores McNamara, the Limerick woman who won €115 million in a Euromillions draw in 2005.

Meanwhile, it emerged this week that Northern Ireland businessman Dr Gerard O’Hare has decided to put the Fairgreen Shopping Centre in Carlow on the market, with his advisers CBRE quoting €36 million for the 14-year-old complex. O’Hare’s Parker Green International also owns the Quays shopping centre in Newry, Co Down.

HWBC sees more transactions involving regional centres in the near term as the economy continues to improve.

Meanwhile, Hines’s Irish outfit and its partners in the Liffey Valley centre have attracted overseas pension money as they prepare for firm offers for the west Dublin property by the end of this month.

The Canadian Pension Plan Investment Board, which was narrowly beaten in the race to buy the Blanchardstown Centre, and Germany’s largest public pension fund, Bayerische Versorgungskammer in Munich, are among a handful of suitors circling the asset, according to sources.

“A lot of very sophisticated, very sticky money has come into Dublin in the last two months,” said Betty of the general market.

“These types of investors operate at a fundamentally lower leverage than the type of people that owned these assets in the previous cycle. That will dramatically lower the volatility of Irish property in future.”

Dukes, developers and hedge funds: the buyers and sellers of Irish retail

SELLERS

Grosvenor Group

The imminent sale of the Liffey Valley Shopping Centre is also set to see the mall’s long-standing backer, the Grosvenor Group, sell its 27 per cent stake.

Grosvenor Group, involved in the centre since it was developed and opened in 1998, is the UK property giant operated and held in trust mainly on behalf of the new Duke of Westminster, Hugh Grosvenor (25), who is set to inherit his father’s £9 billion (€10.6 billion) estate following the latter’s death last month.

Grosvenor’s core portfolio, founded on 300 acres of prime central London land and property in Mayfair and Belgravia in the 17th century, has been built up through shrewd succession and tax planning. The group directly owns 1,550 properties globally, including shopping centres in Vancouver, Stockholm and Shanghai as well as luxury developments in Hong Kong and Tokyo.

Joe O’Reilly

Publicity-shy developer Joe O’Reilly was one of the biggest borrowers whose loans were transferred to the National Asset Management Agency in 2010.

The Longford native, who started out as a foreman with Manor Park Homes, co-established housebuilding company Castlethorn Construction in the mid-1980s.

In 1999 he set up Chartered Land, which would go on to develop the Dundrum Town Centre, take a 50 per cent stake in the Ilac Centre in Dublin and Pavilions shopping mall in Swords, and develop some high-profile offices, including two south Dublin docklands buildings housing Facebook’s European headquarters.

Chartered Land sold the Facebook buildings in 2015 to German asset manager Union Investment for €232 million to help pay down Nama borrowings. O’Reilly told the Oireachtas banking inquiry in July last year that he expected his personal and group loans from Nama, which totalled more than €2 billion, would be repaid.

Nama subsequently sold loans attached to Dundrum, the Ilac and Pavilions for €1.85 billion last year to Hammerson and Allianz. They reached agreement two months ago to take control of the Dundrum, while Hammerson is set to take over the Ilac and Pavilions soon.

Chartered Land, meanwhile, teamed up with Abu Dhabi’s sovereign wealth fund to buy the 6.8-acre prime Ballsbridge site which once housed the Berkeley Court and Jurys Hotel and previously owned by developer Seán Dunne. Chartered Land is current redeveloping the Berkeley Court site into exclusive apartments.

BUYERS

Davidson Kempner

New York-based hedge fund Davidson Kempner has been among the most active bidders in recent years in the Irish retail property sector.

The group set up a tax-efficient special-purpose vehicle, called Burlington Loan Management, in 2009 to buy up distressed assets across Europe. It has since acquired billions of assets, including tranches of bonds in failed Icelandic banks, loans from Spain’s so-called bad bank, and debt secured by Irish property.

Last year, the group agreed to pay €118 million for six shopping centres across six counties, which were brought to the market under receivership by AIB. The Cornerstone Portfolio included the Athlone Town Centre, a stake in MacDonagh Junction in Kilkenny, Gorey Shopping Centre, Westside Shopping Centre in Galway, Tipp Town Centre and the Orwell Shopping Centre in Templeogue in Dublin.

It followed up the deal by acquiring a the Nutgrove Retail Park in Rathfarnham in Dublin as well as retail parks in Letterkenny, Sligo, Tullamore and Killarney, for a combined €170 million. The parks were in receivership at the time and sold under the instructions of Bank of Ireland.

There is some speculation in property circles that portfolios such as these may ultimately be wrapped up into a retail real-estate investment trust and floated on the stock market as the buyers ultimately seek an exit strategy.

Hammerson

Founded in 1942, originally as a developer of apartments, Hammerson became a public company 12 years later and began partnering with local authorities to redevelop UK cities’ retail hubs.

In 1976 it opened Brent Cross Shopping Centre in North London, Britain’s first covered mall, before expanding into the European commercial market. It had a property portfolio worth almost £9 billion (€10.6 billion) at the end of June.

Hammerson’s first foray into Ireland was to take a stake in the Kildare Village luxury retail shopping outlet, which opened in 2006, before joining forces with German insurer Allianz to acquire loans attached to the Dundrum Town Centre and stakes in the Ilac Centre in Dublin and the Pavilions in Swords.

Having taking join control of the Dundrum asset and on track to take over Chartered Land’s 50 per cent stakes in the Ilac and Pavillions by the end of the year, Hammerson will also find itself in possession of a total of 27 acres of development land, including a site stretching from the former Carlton cinema on O’Connell Street to Moore Street in the heart of Dublin.