Thursday 14 December 2017

Commercial property funds ready to take advantage of Brexit relocations

Dublin's docklands
Dublin's docklands

Peter Flanagan & Darragh Doyle

Near Dublin’s riverfront, the cranes are back, busy replacing U2’s iconic recording studio with a vast office complex.

Less than a decade after a property crash sank the financial industry in Ireland, banking and real estate are reconnecting in the heart of the country’s capital. The plan is to provide a home for bankers leaving London after the UK decision to exit the European Union.

Investing in real estate investment trusts like Hibernia Reit, which is behind the development in Dublin’s south docks, and Green Reit is a way to play that Brexit trade, analysts say. Both are sitting on sites and offices that may eventually host firms looking for an Irish passport to sell into the EU should the UK also walk away from the single market. The Irish government has said it’s aiming to add another 10,000 international finance jobs by 2020.

“A hard Brexit and the ensuing movement of financial staff to Ireland would support Dublin office rents at their projected peak for longer,” said Colm Lauder, an analyst at Goodbody Stockbrokers in Dublin. “Hibernia has more capacity at present and can build quite quickly at a number of sites, while Green has a strong mix of rented space and offices under construction in the capital.”

Among Hibernia’s sites is Windmill Lane, where U2 recorded tracks such as “Sunday Bloody Sunday.” The company acquired it following Ireland’s crash, when the value of commercial property dropped by two-thirds. The development is due to be finished around June and talks with potential tenants are “ongoing,” Hibernia said this week.

“We are well placed to cater for Brexit-related demand should inquiries turn into more concrete activity,” said Kevin Nowlan, a former international rugby player for Ireland who now runs Hibernia.

Brexit Hit

In the UK, funds investing in commercial property that were among the most popular in 2015 got whacked after last June’s Brexit vote because of concern that international companies might shut or scale back London operations.

The Irish REITs could also do with a boost. Property funds have fallen out of favor with investors expecting global central banks to start raising interest rates. The FTSE NAREIT All Equity REITs Index has declined 9pc since July. Green has dropped 6 percent, while Hibernia is down 7pc.

“Both Green and Hibernia are well positioned to benefit from any influx of banks to Dublin,” said Ben Richford, analyst at Credit Suisse Group AG in London. Still, “the concern about a potential bubble is always at the back of your mind.”

A report by Oliver Wyman on behalf of TheCityUK lobby group in October estimated that almost 70,000 British jobs are at risk from Brexit. It leaves cities including Paris, Madrid and even more far-flung places like Warsaw touting for business. Dublin’s advantage is language and traditional ties to the U.K.

Dublin Hub

Barclays Plc has settled on Dublin for its main hub inside the EU after Brexit and is planning to add about 150 staff there if U.K.-based finance companies lose easy access to the trading bloc, according to people with knowledge of the decision.

Developers meanwhile are racing to finish more offices. Last year, about 800,000 square feet of space opened in Dublin, 10 times more than in 2015, according to HWBC, a Dublin-based real estate broker. It forecasts prime office rents in the city will rise 8 percent this year after 9 percent in 2016.

The decline in the shares of Hibernia and Green “jars with the strong fundamentals of the Irish REITs,” said Philip O’Sullivan, an analyst at Investec in Dublin. “The office sector here is characterized by very low vacancy rates, especially for prime buildings, and robust demand, in part due to Brexit relocations.”


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