Monday 18 December 2017

Bidders' fatigue here could force investors abroad

Yields for office buildings in central Dublin are 10.5pc a year.
Yields for office buildings in central Dublin are 10.5pc a year.

Neil Callanan

Ireland risks losing investment because frustrated international property bidders may pull out of the market here rather than be forced to compete with each other for the small number of properties being sold by National Asset Management Agency (Nama) and the banks.

Commercial property values have dropped 65pc and so the market here should be a feasting ground for distressed investors. Instead, frustrated buyers are competing for a dearth of properties that's inflating prices and discouraging other funds from entering the market.

When Kennedy-Wilson and Vaerde Partners Europe offered €306m for 16 Irish properties in May, their bid was 22pc higher than an October valuation and beat five competitors. Even so, bondholders attempted to veto the deal to hold out for more.

US firms including Kennedy-Wilson and Northwood Investors, started by former Blackstone Group executive John Kukral, came to Ireland expecting to pick up cheap real estate or loans that went sour when the country's property market collapsed in 2007. While they've had some success, investments are being limited as Royal Bank of Scotland Group, Nama and other large owners of buildings and loans hold on to assets amid a recovery in central Dublin, restricting supply and causing investors to consider European alternatives.

"If investors are finding they're consistently failing to secure investments, they will reach a stage where they're not prepared to spend any more time or money on this market and move elsewhere," said John Bruder, chief executive officer of Burlington Real Estate, which manages Irish real estate valued at more than €1bn.

The buyers "are very footloose and would think nothing of shifting from Ireland to the Mediterranean countries, Eastern Europe or further afield."

Prime Dublin office buildings valued at more than €10m regularly have as many as 15 bidders before a sale is completed, said Rod Nowlan, investment director at broker Bannon Commercial.

"There's a very real concern that bidder fatigue is becoming a serious issue. The assembly of a significant portfolio for the larger investors is looking increasingly unrealistic," he said.

Russell Jewell, head of private equity at AEW Europe, said at a real estate conference in March that he didn't see Dublin as a place to "focus on doing business".

"There is a bit of a feeding frenzy over a few assets when they come to the market," said Jewell, whose firm is an asset- management unit of France's Natixis SA.

About €170m of Irish investment properties was offered for sale in the second quarter, Lisney said in a report yesterday. Investors have at least €6bn to spend on real estate in the country, the broker estimates.

Other potential investors are being attracted by income returns from Dublin office buildings of more than 10.5pc a year, the highest among the cities covered by research firm Investment Property Databank. That compares with a yield of 5pc for office buildings in the City of London and about 4pc for Irish 10-year government bonds.

Less than six years after the collapse of Ireland's property market, technology companies including Facebook and Google, along with financial firms Deutsche Bank and Susquehanna International Group, have expanded in Dublin or plan to lease additional space.

That's causing a shortage of modern office space in the downtown and docklands areas, which in turn is leading to higher rents, helping boost the value of income-producing office buildings in central Dublin, which rose for the first time in six years in the three months to March.

CRASH

Downtown office values increased 0.3pc in value from the previous three months, IPD said in April. The average value of properties in the docklands rose 2.2pc, the London-based firm said.

Overseas buyers have been crucial to the Irish market after the real estate crash left most of its property developers insolvent. International investors bought about 70pc of the €545m of income-producing property sold in Ireland last year, compared with little or nothing in 2007, said Natalie Brennan, a director at the Irish unit of CBRE Group.

Buyers paid €603m for income-producing real estate in the first half of 2013, the broker said. (Bloomberg)

Irish Independent

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