Wednesday 21 March 2018

Ireland a thing of the past as 'vultures' turn their focus elsewhere

The Private Equity Real Estate investor conference is where the vulture funds go to compare notes - but when Peter Flanagan visited last week he found that their attention has moved on from Ireland

Take a stroll around the IFSC, and it can seem exactly the same as if you were walking around Mayfair or The City (Stock picture)
Take a stroll around the IFSC, and it can seem exactly the same as if you were walking around Mayfair or The City (Stock picture)
Peter Flanagan

Peter Flanagan

For many people, there is almost no difference between the London and Dublin business scene.

Take a stroll around the IFSC, and it can seem exactly the same as if you were walking around Mayfair or The City.

In truth though there are small, but notable, differences. For one thing nobody wears brown shoes. It's black or, well, black. Every man wears a tie, everyone carries a Moleskin-style notebook, and Blackberrys are still very, very popular.

And if you're male, there is a good chance you don't wear a belt on your suit trousers. Why? Because the suit has been made bespoke for you, of course.

Such is the way things work in this global capital of capitalism, and so it was at the annual investor conference on the European property market hosted by industry magazine Private Equity Real Estate (PERE).

Every year the great and the good in the world of private equity meet here to discuss the state of their industry, and where the opportunities are for making money.

When politicians and commentators use that much-abused term "vulture funds", these are the kind of people they are talking about.

These "vultures" don't look like their evil caricature. They are calculating for sure, and rational. But at their heart, they know that if they don't make money for their clients - teachers' pension funds, family offices, and private investment groups - they'll be out of a job pretty quickly.

In recent years, one of the most popular ways to make money has been to buy property and distressed loans in Ireland. Since at least 2013, Ireland has been a key topic among the private equity community.

But not this year. Investors familiar with the Irish market spoke to the Sunday Independent on condition of anonymity because they did not want to alienate potential clients. They painted a generally bleak picture - from their point of view - of the state of the Irish market.

"In general, we operate on a three- to five-year time horizon," said one real estate specialist at an alternative investment manager.

"Three to five years ago you could have bought almost any asset in Dublin, sat on it, and then sold out at a substantial profit.

"That isn't the case any more," he said.

The consensus within the market is that anyone buying a property in Ireland now who is looking to flip it in a few years needs to improve the asset in some way if you want to make a worthwhile profit. A prime example of this strategy is the biggest real estate investor on the planet - Blackstone.

The New York-headquartered private equity firm, headed by Stephen Schwarzman, paid €67m for the former Burlington Hotel in Dublin in 2012. It spent €17m refurbishing the hotel, and rebranded it under the Doubletree by Hilton brand. Now Blackstone has put the hotel up for sale priced at €180m - a potential return of 114pc.

"One thing that most people in this industry, look for is who will they be selling to in, say, 2019 or 2020," said a director at a property-focused fund.

"Private equity funds are wary of buying any property or loan anywhere if they do not have confidence in who will then be looking to buy the assets when they are ready to sell.

"If we can't identify a cohort of potential buyers for the future before we take on an asset, then we are hesitant to move forward," he added.

Such talk may create unease for Nama chief executive Brendan McDonagh, seeing as his agency is currently in the process of selling two of its biggest remaining loan portfolios - Project Ruby and Project Emerald.

Project Emerald is made up of loans with a par value of €2.5bn from 16 borrowers. Those loans are secured against 236 properties.

While most of the loans in Project Emerald are related to commercial property, more than a fifth of the underlying properties are residential.

By value, just over a fifth of the properties are in Dublin, while about half are in the rest of Ireland. The remainder are located in Europe.

Project Ruby involves loans that have a face value of €2.2bn tied to 15 borrowers. The debts are secured against 253 properties. Just over 11pc of the portfolio is residential, with the vast majority of the portfolio being made up of commercial properties. More than 97pc of the properties are in Ireland.

The two portfolios are huge, with a combined par-value of €4.7bn. Both will sell at a huge discount though, given that many of the loans are in arrears. Market experts believe as little as €800m to €900m will secure the portfolios for a potential buyer.

Even the man retained by the agency to oversee the loan sales admits it is not so easy to sell Nama portfolios these days. Federico Montero is head of loan sales for Europe, Middle East and Africa at property broker Cushman & Wakefield, and is leading the effort to secure a buyer for Ruby and Emerald. Speaking at the PERE conference he admitted that the "opportunity" in Ireland was "getting tougher and tougher".

US private equity giants LoneStar Funds and Oaktree Capital are known to be among the bidders for the two portfolios.

The truth is though that the perception that the opportunity to make a lot of money out of Ireland has now gone because Nama has sold most of its inventory by now. What it has left are the lowest quality loans on its books.

The State's bad bank got its assets to market much quicker than other bad banks, such as Spain's Sareb. Sitting on a panel discussing the European non-performing loan market, Mr Montero outlined the advantages Nama has had over the likes of Sareb.

"When Nama took in its assets [from the banks] it took in all of the loans tied to a [debtor]. That meant that it took in both good and bad loans from a connection," he said.

That alone made Nama loan books more attractive than the much larger (and what should have been more desirable) Sareb loans. There were other elements too though. For one, Nama is much smaller, with loans tied to little more than 800 debtors, compared to the 19,000 debtors involved with Sareb.

"One portfolio contained 350 connections. That meant that with one portfolio sale, Nama got rid of nearly half its connections. You can't do that with Sareb," said Mr Montero.

"There is also the Irish legal system. It is like the UK legal system so it is easy for US investors to understand.

"Then there was timing. When Nama started selling in 2010, along with the UK banks it was virtually the only seller in the market - so it could service what was huge demand from private equity firms," he added.

Given those circumstances, it is perhaps not surprising that Nama this week reported a €1.8bn profit for 2015 - four times higher than in 2014.

Within the conference room last week the consensus was Nama has done a good job - but Ireland was very much in the past. The black-shoe wearing, belt-less men in the room had switched focus to Italy and other places where profits can be made relatively easily.

The so-called vultures have all moved on.

Sunday Indo Business

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