Thursday 19 July 2018

Richard Curran: International investors bet billions Government's housing plan won't work

The Six Hanover Quay development in Dublin’s docklands where the average price is €800,000
The Six Hanover Quay development in Dublin’s docklands where the average price is €800,000
Richard Curran

Richard Curran

International capital has driven the property recovery since 2012, leaving some to wonder what might happen when the foreign money dries up. So far there is no real sign of that happening. The recession narrative put forward by some went with international investors snapping up cheap properties and then flogging them at exorbitant prices to locals, who in turn would eventually get fleeced again.

Some vulture funds have flipped everything from office blocks to loan portfolios - and at big profits. But the latest developments in the residential market suggest international investors believe there aren't any shocks coming soon.

The most significant development in residential investment has been build-to-let.

Developers, investment funds and others realise there seems to be more money in renting out apartments and houses after you have built them, than in selling them on.

Kennedy Wilson fits the bill of an investment fund that might have been expected to have practically exited the Irish market by now, after bottom fishing on property during the recession.

Yet, it is buying up and building more housing units and apartments with a view to renting them out. During the week it finalised its joint venture arrangement with Axa Investment Managers which sees them share 50:50 in 1,173 apartments. Kennedy Wilson wants to bring its residential rental portfolio to 5,000 units in the next few years.

On the developer side, Cairn Homes has sold its 120-unit development at Six Hanover Quay in Dublin's Docklands for €101m. The development cost was estimated to be around €65m, which sees the company bagging close to €36m in profit.

The buyer is Carysfort Capital, an Irish investment fund which plans to rent out the properties. It has been buying up properties to rent. Carysfort bought 100 houses in St Edmunds Liffey Valley adjacent to 160 apartments it had already bought in December 2016 for €36m. Other purchases include 28 apartments in Dublin's North Docklands for €6.9m. Now it is moving into upmarket Hanover Quay, representing an average gross sales price of €800,000.

This would imply a gross yield of c. 4.5pc (assuming average rent of €3,000 per month), according to Goodbody Stockbrokers, thereby highlighting the interest that the Irish multifamily investment market continues to attract from professional and institutional investors.

This wall of cash is creating some very sizeable landlords especially around Dublin. The prices being paid are significant, but are underpinned by the huge rent increases and demand for housing in the capital.

But for how long? The demographics suggest the demand for housing in Dublin is going to keep going for some time to come. There are lots of major international investors who see no reason to worry that rents in Dublin are going to fall. The way houses are being marketed is completely different to the flash, short-termism of the boom years.

The front cover of Cairn Home's annual report, published last week, shows a woman sitting in her living room relaxing and reading a book. 'Designed for living - built for life', the caption says.

Inside there is a picture of a man hanging up a picture on the wall in his apartment, suggesting he plans to be there for quite a while as he makes it home.

It is a far cry from the "glamour" of the raunchy encounter on the kitchen counter between the young couple, with emptied champagne glasses in the background, made famous during the boom by the Belmayne development in North Dublin.

Cairn Homes has acquired a land bank capable of holding 14,100 units. As things stand, each one of them, when built, could carry an uncapped rent based on whatever the market will bear at the time.

A lot of money is being bet that rents are only going to go one way - and it isn't down. Good for investors, but not a ringing endorsement on the likely success of the government's housing strategy.

No 'mature recollection' from Fingleton at inquiry

Two statements from former Irish Nationwide Building Society managing director Michael Fingleton gave insight into how he may feel about his own culpability for the collapse of the building society.

"That's my holiday month," he told the registrar of the Central Bank inquiry during the week when she suggested there would be oral submissions in September.

And the board of the society should bear "ultimate responsibility" for the now-defunct lender's failings.

Fingleton showed little remorse for the €5bn the collapse of the society cost taxpayers in one statement and blamed the board in the other. Throughout his evidence there has been a recurring theme of mistakes or shortcomings being the fault of others.

This week, he laid that very bare when he refused to accept blame for the Society's provision of inaccurate information to the corporate watchdog back in 2007.

He said if he had been made "aware of some deficiency", he would have acted.

Yet it emerged he signed the letter which contained this misleading picture.

Fingleton went on to argue that he may not have read that particular piece of correspondence before he signed it.

As head of INBS he relied on his team of executives and senior management, who he described as "competent people", to provide him with accurate information, he said.

Inquiry senior counsel Brian O'Moore put it to Fingleton that it might have been "just a wee bit dysfunctional," to have personally signed a letter on May 12, 2007, undertaking that the credit committee would review all reports submitted to it, including the credit reviews.

"You walk into the meeting seven months later and you've forgotten about it. Isn't that an unacceptable form of practice?"

"It may be," said Fingleton. "It may reflect what was happening within the society and where my focus was. I didn't do it, and that's it. By 2007, my total focus was on the sale of the society."

The fact that Fingleton's total focus was on selling the society at that stage raises the obvious question about where his focus should have been.

Yet Fingleton is correct when he says the "ultimate responsibility" for the collapse rests with the board. No matter what a chief executive does, the board must ensure the mechanisms, checks, balances and personalities are in place to prevent disaster.

Fingleton has had lots of time to consider his responsibilities in the collapse of INBS. He isn't changing his mind.

What will electric car revolution mean for filling stations?

If electric vehicles really do take off in the next 10 to 15 years, as many believe they will, the Government will wonder how to replace the hundreds of millions of euro it receives from excise on convention fossil fuels.

Petrol station operators may also wonder about how many snacks, coffees, and fizzy drinks they will sell with fewer motorists fuelling up. With that in mind, oil giant BP is buying the UK's largest electric charging network, Chargemaster, for £130m. BP runs 1,200 petrol forecourts. It expects the number of electric vehicles in the UK to grow from 135,000 at present to 12 million by 2040. Last year by BP's rival Shell bought car charging company NewMotion.

Petrol station operators charge a very small margin on fuel but make their money by flogging us all the other stuff inside. Given how long it takes to charge an electric vehicle, it should leave even more time for punters to shop. But Chargemaster also sells electric charging equipment for motorists to use at home or at work.

Some Irish filling stations have begun to install charge points but perhaps a more fundamental rethink of their business model might be called for. If BP is paying £130m for an electric car-charging business, something really is afoot.

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