Friday 15 November 2019

The right moves: Big ticket sales to end year

Nama's headquarters in the Treasury Building in Dublin
Nama's headquarters in the Treasury Building in Dublin

Paul McNeive

The investment market is where the "big ticket" deals happen and Nama, vendors, buyers and agents will be looking to maximise the potential of the last quarter of the year, when most of the deals take place.

But what are the issues driving the sector this year and what is the outlook for that crucial last quarter? To assess the market I met Corkman Sean O'Brien, who was head of property at Irish Life before joining CBRE in 2001 as an executive director.

Turnover last year hit record levels with €4.5bn of property investment sales and a further €20bn of loan sales. Whilst property turnover in the first half of this year was lower at €1.7bn, Sean O'Brien believes that the year end outcome will be at a strong level approaching €4bn. Mr O'Brien expects that there is another €1bn of property sales in the system and that the overall totals will be boosted by the "Project Jewel" loan sale which includes Dundrum Town Centre and which has been speculated will fetch over €1.5bn.

Sean O'Brien confirmed that in his experience the investment market has always been "backloaded", with a disproportionate number of deals done in the last quarter. He attributes much of the lower turnover to date to a lack of supply. "Several portfolios that were due to come on the market were delayed" he told me. "Either the title needed tidying up or more asset management was needed." Interestingly, Sean O'Brien believes that the reduced supply is also down to the capacity of the industry to handle the volume of work, with agents and lawyers all short of staff. Another reason for the "backloading" of the market is that "lots of the funds and private equity buyers have an annual allocation for acquisitions and they tend to become more pragmatic in assessing properties in Q4".

Nama remain the dominant source of supply and Mr O'Brien feels that, on balance, the agency has been a success.

"They prevented a wholesale fire sale, reignited the market in a measured way and showed a willingness to trade," he claims.

He points out that there has been a big change in the nature of the client base, for both vendors and purchasers. "Investors in general are more professional and the UK, US and German equity funds and the REIT's are very process driven. These buyers rightly put heavy demands on agents in due diligence for research, reports and advice."

Almost two thirds of the property buyers in 2015 have been from overseas and the weak euro is boosting interest from U.S. funds. There has been a considerable amount of reselling of properties and loanbooks in 2015 and Mr O'Brien sees that increasing with some private funds choosing to sell "off-market."

As regards values, the outlook is for more growth although not continuing at the pace which produced approximately 30pc total returns for offices in the first half of the year. "What happens is you get yield compression in advance of rental growth and much of that has already happened" he told me. For example the yield for prime offices has fallen from 7.5% three years ago to 4.75pc." Office rents rose rapidly due to lack of supply and because the market is mainly driven by overseas companies who are largely independent of the Irish economy."

Conversely retail rents have only recently begun increasing because retailers are directly affected by the Irish economy and Sean O'Brien believes we will see further yield compression as rents rise. There has been a big increase in the sales of retail parks this year with prime yields in to 5.5pc from around 8pc in three years. Prime industrial investments have seen a similar rebound in values.

Mr O'Brien feels that whilst buyers were buying two to three years ago, "because we looked cheap", the market is being supported now by purchasers seeking rental growth and because alternative investments such as bonds and equities look "fully valued."

Sean O'Brien concludes by saying that the investment market now is much healthier and has dramatically lower levels of debt. He points out that at the last peak in 2006, €3bn of properties were traded but that most of that total was debt. In today's market, with Funds not borrowing, perhaps 50pc of the total sales comprise debt. Nonetheless he adds that "we still don't have a fully functioning debt market and this is a constraint on liquidity and on values, especially for smaller lot sizes.

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