A FLOOD of international capital has been pouring into Irish commercial property for about a year now. Initially it was just a trickle, but as mainly US groups like Kennedy Wilson and Blackstone buy up more and more Irish assets, the figures are truly heading towards the billions.
With the flotation of two Irish real estate investment trusts (REITs), smaller Irish investors will have an opportunity to find some value in it too. This is good news for recovery in the sector, for jobs and for investment in Ireland. But what does it say about the future ownership of the property market in Dublin? I say Dublin, because it probably has no significant bearing on the market in Longford, Laois or Letterkenny.
The old order of a handful of flash, colourful, over-borrowed and out-of-their-depth property personalities dominating the sector has been swept away. The new order is taking shape. But it too will change from what we are seeing now.
The American buyers have taken a risk. They bought at the bottom and are continuing to buy at prices that are a little above the bottom. But how long do the Kennedy Wilsons, the Lone Stars or the Blackstones plan to own these assets? Probably not very long is the answer. They are unlikely to function like pension funds holding on to the properties for 20 years.
Assume that if things go well, they will own these properties for four to seven years. That is where the REITs come in. The Green REIT and the Hibernia REIT are already buying up assets at current levels, but after the gold rush is over, they are more likely to hold on to them, and even buy properties from the likes of Kennedy Wilson.
Getting in early is big part of it. Green REIT is in a big hurry. Reports suggest it may want to raise another €300m in fresh equity having invested all of its capital in just six months. The next phase, which would be to assemble another wall of money, might involve borrowing.
REITs have been cleverly set up so they are not allowed have borrowings of more than 50pc of the value of their assets. It is a way ensuring they don't become too leveraged and risky. So I don't think investors should be too worried about that – at least not for several years anyway.
Green REITs shares have rocketed by 31pc since it floated last summer. Hibernia REIT's shares are up over 13pc since November, even though it has yet to pounce a big target.
Investors are piling in for the chance of the upside in the property market, a dividend and a tax break on exiting when they sell their shares.
Green REIT is run by Stephen Vernon, and it is ironic that he took Green Property plc, the owner of the Blanchardstown Shopping Centre, private in 2002 because the stock market undervalued what the company owned. In other words, he did a management buyout because the market couldn't see the real value in the group's assets.
Vernon made a massive fortune on that deal, and now investors can't get enough of Vernon's second coming.
Such is the scramble for the right commercial property assets that groups like Kennedy Wilson are considering floating a €1bn property fund themselves. They are also teaming up with the likes of Green REIT to acquire more assets, such as the Central Park development in Dublin.
There is a window here, but it may not be open for long. Where there is such a scramble for a limited pool of quality assets, prices will rise. Once they do, shorter term investors will look to exit.
The early signs of this would be big investors actually flipping assets.
This is where assets come on the market for sale, that were bought at a knockdown price during the collapse. Tiny examples of this are starting to appear in the commercial property pages.
A mystery buyer bought a five-acre site in Booterstown, Co Dublin, two years ago for €400,000. It had been bought by former property mogul Bernard McNamara for €6m during the boom, when he used it as a helicopter landing pad. It is now back on the market for €1m. That is a very nice 150pc return in two years if he gets that price.
It was speculated last week that Hibernia REIT was close to doing its first big deal having raised €385m from investors. The target was reported to be properties bought by US investment group Lone Star.
If correct, Lone Star may have ended up acquiring assets as part of a bigger tranche, but that don't fit its target portfolio. Either way, it would be a property flip by the Americans.
Buying at the bottom is where the best value is. Buying from somebody else who bought at the bottom is not a bad thing either, and it does not mean you can't do a very good long term deal.
However, it seems that when the gold rush phase of this commercial property recovery ends, the motivations and strategies of the different players will become clearer.
That might not be as far away as people think. The wall of international, and now domestic money, pursuing a limited pot of suitable assets, could drive up prices quickly.
This is not a bubble or anything like it. They look more like greyhounds racing out of the traps to get a good position on the first bend.
We will see who wants to go the full distance and who wants to cash out early, sooner than many might think.