The land grab by listed developers and bubble-era prices
US distressed debt giant doesn’t waste time selling down Irish house builder stake
Only 14,500 new dwellings were built last year – roughly half of estimated current annual demand. Photograph: Chris Ratcliffe/Bloomberg via Getty Images
With timing being everything in the property world, a move this week by Glenveagh Properties, which joined the stock market last year, to tap the market for more than €200 million would appear to be prescient.
Glenveagh, led by the triumvirate comprising a former National Asset Management (Nama) executive, distressed debt expert-come-ballet enthusiast and a builder who survived the crash, raised €550 million in an initial public offering (IPO) last October, making it the second house builder, after Cairn Homes, to float following the crash.
Having already used up €404 million of its IPO funds building up a land bank capable of delivering 10,120 homes, Glenveagh revealed in fundraising documents published on Thursday that it was in talks to buy up to €426 million of a land bank that could result in a further 7,000 units being built.
The company is also eyeing an expected €800 million worth of development assets coming on the market over the next 12 months, with sellers likely to include private equity firms, Nama, other state agencies and religious orders.
Raising additional equity now – and having secured a credit facility in April for up to €250 million – puts Glenveagh at an advantage as some would-be rivals are only getting their act together.
While Irish builders eschewed the public markets in the decade preceding the crash as banks fell over themselves to offer them cheap and easy debt finance, the Irish market may be home to five home development firms by the end of the year. A decade after the crash, cash equity remains king for developers, with banks only prepared to lend a maximum of 65-70 per cent debt funding for land that with planning permission.
Ross moves in
Developer Seamus Ross is known to be seeking equity backers as he aims to float a house-building business by reversing it into Dublin-listed Zamano, the former mobile technology company that’s now effectively a cash shell after selling its operating assets to management last year.
Elsewhere, American private equity group Lone Star is planning the IPO of another Irish home builder, with Patrick Durkan, managing director of Durkan Residential, being lined up as its chief executive.
Lone Star, one of the most active buyers of Irish real-estate loans and assets in the wake of the crash, is reportedly likely to roll two large sites – at Adamstown in west Dublin and Portmarnock in north Co Dublin – into the vehicle. The company is also be expected to raise hundreds of millions of additional capital in an IPO to finance further land-bank assets.
The backdrop couldn’t be better for well-funded companies in the industry. Only 14,500 new dwellings were built last year – roughly half of estimated current annual demand. Data published on Friday from the Central Statistics Office showed that residential property price inflation was running at an annual rate of 12.4 per cent, with prices having rallied by 78 per cent from their low point five years ago, while remaining about a fifth off their 2007 peak.
In the UK, 10 publicly quoted house construction companies are estimated to deliver about 40 per cent of national demand a year. At full tilt, Cairn and Glenveagh would be meeting a little over 10 per cent of Irish demand, leaving plenty of scope for more listed, well-capitalised home builders.
However, developer Michael O’Flynn, one of the few private players willing to raise his head above the parapet following the crash, warned at an event earlier this month in Cork that land, once again, is “being sold for far more than it is worth”, contributing to make housing too expensive.
The situation is unlikely to be alleviated with Glenveagh and two other IPO candidates under pressure to put cash to work in the near term.
All told, Glenveagh’s equity-raising efforts to date have generated €763 million in a little over nine months – eclipsing the €720 million raised by Cairn Homes in the past three years.
Glenveagh is targeting a gross margin of at least 20 per cent once it “achieves scale” – in line with what UK house builders typically operate off. While Cairn expects to post a gross margin of 20 per cent this year, it has not set out a medium-term target. But having bought most of its assets earlier in the cycle, it’s hard to see Cairn not beating its rival on the margins front.
Oaktree sells stake
Meanwhile, Glenveagh’s move to raise additional funds has taken the focus off its key backer, US private equity firm Oaktree, selling half of its 16 per cent stake in the company this week. Oaktree received €110 million of shares in the company at the time of the IPO in exchange for 14 sites it had snapped up during the downturn.
The prospectus document published at the time offered no details of the extent of the valuation uplift Oaktree enjoyed on rolling the sites in the listed vehicle. The Los Angeles-based firm has received a further boost by selling the shares it has disposed of this week at a 15 per cent premium to the IPO price.
Oaktree has left one of its former key European figures, Justin Bickle, as Glenveagh chief executive. However, the firm’s nonexecutive representative on the board, Caleb Kramer, is likely to leave as its stake falls to about 6.5 per cent.
The firm would argue that cutting its stake at this stage will allow Glenveagh to emerge from Oaktree’s shadow and flourish. But moving so quickly after a six-month lock-up period expired in April is surely a sign that the easy money has been made. Don’t expect Lone Star to stick around too long either if its house-building venture makes it to market.