Saturday 10 December 2016

Who's calling the top of the Irish property market? Not Stephen Vernon

Two of Stephen Vernon's companies are selling properties. But the widely respected developer still says he remains positive, writes Dan White

Published 07/02/2016 | 02:30

Stephen Vernon
Stephen Vernon

Last week the Green Reit announced that it was putting a portfolio of six properties up for sale. The properties - four in Dublin and one each in Naas and Limerick city - have been put on the market with a combined guide price of €168.7m.

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The announcement from the Green Reit came just a fortnight after Green Property (which manages the Green Reit) put its trophy asset - Blanchardstown Shopping Centre - up for sale. Green is reported to be looking for offers of €1bn or more for Blanchardstown.

Green Property chairman Stephen Vernon, who is also chairman of Green Property Reit Ventures (the Green Property subsidiary that manages Green Reit's property portfolio) is one of the most respected figures in the Irish property business. During the Noughties - when most of his competitors were losing their heads - he kept his.

In 2002 he took Green Property, which had been a stock exchange-quoted company since 1993, private in a €1.85bn deal. With no outside shareholders to keep happy, Green Property's newly private status allowed it to sit out the final mad years of the boom. Mr Vernon's foresight in calling the top of the last property cycle correctly meant that he was one of the few major property market figures to emerge from the post-2007 bust with his reputation enhanced.

Then in 2013, while most of his competitors were still tied up in Nama, Mr Vernon floated the Green Reit on the stock exchange. Despite the recent market turbulence, shares in the Green Reit are currently trading at €1.44 - up over 40pc on the July 2013 issue price of €1.

With a track record like that, the market pays very close attention to what Mr Vernon says and does.

In addition to putting major assets up for sale, Mr Vernon and Green Reit chief executive Pat Gunne have been making what could be construed as at least slightly bearish noises about the future prospects of the Irish property market.

Speaking at the announcement of Green Reit's most recent annual results last September, Mr Gunne said that the Dublin office market was facing "possible oversupply" from 2018 onwards, while Mr Vernon wondered if what he described as a "golden period" for Irish commercial property returns was now over.

So why are Green Property and the Green Reit selling up?

Mr Vernon is anxious to stress that the reasons for Green Property's plans to sell Blanchardstown and the Green Reit's announcement that it was selling a property portfolio are quite distinct.

"I'm 65-and-a-half. Jim McKenna [Green Property's operations director] is 72-and-a-half. We bought Blanchardstown in 1993. Blanchardstown needs new owners to take it to the next stage", says Mr Vernon.

"All of the other major shopping centres now have institutional owners. I don't want to be the next Mrs Guiney [the former owner of Clerys who remained in situ as chairwoman of the Dublin department store until her death at the age of 103 in 2004], who hung on too long. We have taken Blanchardstown as far as we can."

The changing nature of the market and the fact that Messrs Vernon and McKenna aren't as young as they used to be certainly goes a long way towards explaining Green Property's decision to sell Blanchardstown. However, they were almost certainly helped in coming to their decision by the extremely high price Nama received last September when it sold the loans secured on Dundrum Town Centre.

The €1.85bn price paid by German insurance giant Allianz and UK property company Hammerson for the Project Jewel loan portfolio implied a value of at least €1.6bn for Dundrum - very much at the top end of expectations.

By international standards, the Irish property market is a small one, with most transactions being in the tens rather than hundreds of millions of euro. Most overseas investors aren't interested in such - relatively - small deals. This means that when, as is currently the case, Irish property is flavour of the month, there will be very strong interest from overseas buyers when big assets such as Dundrum come on the market.

In light of the strong international interest in Dundrum, Mr Vernon will surely be seeking to interest some of the Dundrum under-bidders, who reputedly included the likes of the Kuwait Investment Authority and specialist US property investors Colony Capital, Hines and Davidson Kempner.

Having been jilted at the Dundrum altar, will one of these buyers choose to go up the Blanchardstown aisle on the rebound instead?

As for the Green Reit, Mr Vernon points out that Reits (real estate investment trusts) are primarily income-generating rather than development vehicles. They must pay out 85pc of their income to shareholders as dividends and can borrow a maximum of 50pc of the value of their assets - Mr Vernon believes that a 25pc gearing ratio is more appropriate for a Reit.

"Reits are conservative vehicles. We need to cap risk. We are not going to take Green Reit shareholders into high-risk, full-on development," says Mr Vernon.

Last month, the Green Reit announced that it had acquired full control of Central Park, a mixed office and retail development located in the south Dublin suburb of Leopardstown. It currently has a combined floorspace of almost 700,000 square feet, generating an annual rent roll of €16.4m. There is potential to further increase the rent roll as Central Park also comes with 7.4 acres of development land.

Buying out the other 50pc shareholder, US investment fund PIMCO, and acquiring full control of Central Park cost the Green Reit €155m. The company has also announced plans to redevelop a site at the junction of Dawson Street and Molesworth Street in Dublin city centre, for which it paid €23m in 2014. In addition, the Green Reit paid €50m for the newly built One Albert Quay office building in Cork in 2015.

That's a gross spend of over €200m.

As a result of all these deals Green Reit needs to sell assets in order to keep its gearing under Mr Vernon's self-imposed 25pc ceiling.

"The market is changing. Up to recently, the people selling had been mainly the banks and Nama. Now, companies such as the Green Reit are looking to develop assets", says Marie Hunt, head of research at property advisory firm CBRE.

This deleveraging phase, where Nama and the banks offloaded loan books, is now largely complete.

"As deleveraging efforts wind down, it is inevitable that a greater proportion of transactional activity in the Irish commercial property market this year will emanate from secondary trading," she says.

As was the case with the Dundrum sale, a large part of this deleveraging process involved the sale of property-backed loans by Nama and the banks to overseas buyers - many of whom are not long-term holders of Irish assets.

What happens when these early buyers seek to cash in their winnings and sell? Will there be a rush to the exits and a crash in prices?

Probably not. The overseas buyers who snapped up bargains earlier in the decade have been gradually offloading their Irish assets. However, instead of offloading their portfolios in single transactions, they have been splitting them up into individual properties - PIMCO's sale of its 50pc shareholding in Central Park is a good example of this.

A gradual unwinding of their positions by the early overseas buyers, with individual properties rather than entire portfolios being sold, is far less likely to hit values.

Last September's remarks by Mr Vernon were widely interpreted at the time as his calling the top of the market. He is anxious to correct this misapprehension, pointing out that his actual remarks were much more nuanced than much of the media coverage implied.

"I am not at all bearish about the property market. For the next few years it is going to be a great market. In the long term, the supply of offices will increase but retail is only beginning to recover," he says. "We have returned to a more normalised market. We are no longer in an opportunistic phase. We are now in the development phase."

For property investors, the key number is the gap between long-term interest rates and rental yields (the annual rent as a percentage of a property's value). Ms Hunt points out that average Dublin office yields of 4.65pc still compare favourably with 10-year bond yields of less than 1pc.

With both the US Federal Reserve and the Bank of England apparently retreating from their earlier plans to increase interest rates and the ECB set to leave eurozone rates unchanged well into 2017 and possibly 2018, that gap isn't going to disappear any time soon.

Until it does, even the sight of a wily operator like Mr Vernon taking cash off the table is unlikely to deter property investors.

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