Business Irish

Saturday 23 August 2014

Porsche-driving Irish property tycoon revs back into action

Green's Stephen Vernon is betting on this being a sustained commercial property recovery – with a return to development and rising demand, writes Roisin Burke

Roisin Burke

Published 13/04/2014 | 02:30

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Stephen Vernon - illustration by Don Berkeley

We step out on to the sweeping terrace off Stephen Vernon's plush penthouse office and look out over the panorama of Dublin city on a warm blue-skied spring day.

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There's Howth in the distance, the Spire, several church steeples and just below us the lush Iveagh gardens. To Vernon's mild annoyance his view of the Dublin Mountains has been obscured in recent years by the Clancourt -owning Kenny family's big block across the road.

There isn't a crane in sight, as he points out, on a skyline once bedecked by them.

Still, though, things appear to be percolating. Demand for prime offices is rising, some development has started, rents are creeping up, Google, Yahoo, and Dropbox are expanding their space in Dublin, Nama and the banks are accelerating sales.

One of the few major figures to emerge unscathed from the Irish property market bloodbath, Vernon is betting on this being a sustained commercial property recovery with a return to development and rising demand.

After an almost 10-year absence he's got his game on and is doing deals. He and Pat Gunne, an experienced player and member of the Gunne real estate dynasty, form a savvy team heading up Green Property. They are also key players in Green REIT, with the global investor-backed listed fund announcing a further €400m in fresh funding as it gears up for a shopping spree.

Thought to be worth around €200m personally, Vernon put €10m of his own money into Green REIT at the start, it is believed.

Neatly dressed in a pinstripe suit, he is chatty, avuncular, sharp-humoured and extremely good company. He is beautifully well spoken, something he attributes to his time working in the City in London, but he doesn't have those braying Hooray Henry tones.

He says later that he enjoys hunting, and it's difficult to square the solicitous persona with a gun-toting wildlife shooter, but some might say that to survive the property game you probably need to be able to channel your inner bloodthirsty killer.

He has surprising petrol-head tendencies, though he recently got rid of his powerful Japanese superbike, favouring a 1995 Porsche Carrera.

A nasty wrist injury has kept the accomplished skier off the piste but he plays tennis and loves to sail, particularly on a friend's 45-footer in the Caribbean.

He is from Bristol originally, with Irish parents.

During the Nineties he built the then listed Green Property up from a €24m-valued company to a €2bn Irish and UK property-owning force. In 2002 he took it private, managing a bank-backed €1.85bn buyout of the company.

A massive sell-off followed, paring back Green's assets to the prime Blanchardstown Shopping Centre and some offices and a logistics park and ultimately giving Vernon and his team control.

The sell-off was needed to pay down debt and Vernon would be the first to say the timing was jammy given the subsequent carnage from 2007, but he says that even then he viewed prices as "very, very high" and "wasn't keen to buy".

A fallow period followed. Green badly needed a recession-survival plan.

"In '08 I began to think, 'How on earth are we going to get through this whole thing and, most important, keep all the staff and keep the show on the road?'" he recalls.

"And then Pat came along and we started really what was almost like a new business, Green Property Ventures. Pat and I are partners in that."

Green began managing bank clients' then unsellable asset portfolios, including running Lloyds's massive €1bn asset workout vehicle. It also runs AIB's shopping centre assets and manages property here and in the UK for Bank of Ireland, Lloyds and GE Capital.

Pat Gunne put together the plan for Green REIT and they hustled like hell to be the first to launch. Other funds have followed suit.

"All this hype about REITs is creating the impression that there's 'one for everyone in the audience'," he observes, "and I don't really think there is. And how many of them will survive in the long run I don't know. In order to survive in the long run you've got to be really good at development, at asset management."

There seems to be no lack of opportunity, though. For five years to 2012, things were basically stagnant, but deals are in full tilt now – in prime central Dublin, that is, where top office rents have risen by about 40 per cent. Last year, €2bn-worth of commercial property transactions were done. This year €1bn went through in the first quarter alone.

Some headline properties stand out as pretty expensive, he thinks, but there is still plenty of value.

"We've raised this money now because we're heading for another absolutely vintage period," Vernon says.

Green REIT is focusing on what happens when the 'vulture' funds' short cycles of ownership are over and who the long-term buyers of assets will be. "We can afford to give them a profit and still make it a very attractive purchase for ourselves, but only on certain assets," says Vernon.

Nama is due to put its first shopping centre portfolio on the market within weeks, industry sources say. Ulster Bank has at least two major sales processes soon and Lloyds, too, has sales coming up. But the most exciting property suggested to be heading for the block is Dundrum Shopping Centre, a €1bn-valued trophy Nama asset that should trigger a bidding battle royale. Vernon is extremely reluctant to be pressed into speculation ahead of it actually coming into play, but it's an obvious target.

"If that comes on the market we'll certainly sit up and take notice.

"Our strategy would probably be that we would be interested, but we would have to share it with others and we might play a role in the management of it through that syndication. Within the terms of our reit you can't have more than 40 per cent in any one asset. Obviously it's a very fine asset."

Powerful international fund contacts could be teamed up for bigger plays. Green REIT brought €2trn global investor Pimco in to buy Central Park for €310m, and Green Property narrowly lost out to Larry Goodman on buying Bank of Ireland's Baggot Street headquarters in a partnership with the Singapore sovereign wealth fund GIC.

Meanwhile in London, Green Property is developing what is being billed as the most expensive office block in Europe. Within that is a luxury seven-bedroom period mansion aimed at the billionaire oligarch/ Qatari wealth fund type players snapping up trophy buys in the capital.

Number 7/8 St James's Square in Mayfair is a former asset of poker-playing Greek Achilleas Kallakis which Green Property controversially acquired from AIB. Sources say the mansion would sell for in excess of €60m when renovated.

"That's our most prestigious project ever anywhere and will be worth in the hundreds of millions," says Vernon. "It will command a new high in the London market in terms of the rent we expect. We'll be trying to lease it through this summer and then we'll try and sell the house. That's a very exciting project."

Last year Green sold Nine Elms, a London site with planning for a big residential skyscraper, for €105m to a Chinese fund.

At home, Blanchardstown Shopping Centre has come through the recession "really well" according to Vernon. Green was the first big retail landlord to wake up and do deals with struggling tenants on rents, and has kept it fully tenanted and even expanding.

Green REIT will remain Dublin centred. To date, investment has been 65-70 per cent offices, slightly more than targeted, so focus will move to retail and industrial acquisitions. It has strong income flow, delivering over €25m a year in rents.

It's going to seek planning to build offices at the €23m Molesworth Street, Dublin 2, site it bought, and develop on 100 acres attached to the Horizon Logistics Park that it bought last year.

Green Property and Pimco will develop at Central Park, with planning permission there for substantial commercial development and additional residential.

As regards the overall economic outlook, "There are good straws in the wind here," Vernon says. "The decline in the live register has been really consistent and encouraging. Almost every week new jobs and foreign investment. I think good quality retail has turned around, one or two foreign retailers coming in, people taking new space. There are a few green shoots there."

"What we really need to see is an improvement in SMEs. I'm not the person to comment on that, but my gut feeling is there is an improvement. We're feeling now that there's some sort of sense of continuity and stability about things that wasn't there. Because the last five years you never knew what was going to happen."

And what about the next five years? Interest rates will inevitably rise, but so will inflation. Prime commercial property demand should be strong, he predicts.

"When rental rates were at €60-€65 a square foot in 2006/2007 there was enormous supply during a vast development boom. And now we have good demand and almost no supply."

But things could still go awry international economy wise, he says.

When planning the Green REIT IPO six months ago one of the risks identified was another global tech crash.

"We thought of it as a theoretical risk rather than anything we had to give any serous thought to, but I'm not so sure that's true now," Vernon says.

But he's back. And there are big ambitions.

"Now we're going back to our roots as a developer and investor – that's what we do."

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