Friday 19 October 2018

Squire Dunne's precarious €510m

RONALD QUINLAN

SQUIRE, Baron, Lord - three titles unofficially bestowed on Sean Dunne by the media two years ago when he annexed eight precious acres of Ballsbridge, at the heart of Dublin's embassy belt. That it cost the Carlow-born developer €380m to secure the sites of the Jury's and Berkeley Court hotels, and a further €130m to clinch nearby Hume House, only added to the shock and awe with which his gambit was greeted at the peak of the property boom.

Two years later, those who paid tribute to the 'Dunner' in the media and beyond are still watching, and waiting to see what he will do to realise his stated ambition of bringing Knightsbridge to Dublin 4. A 32-storey Trump Tower-style building with its own penthouse and 24-7 concierge service was to have been the centrepiece amidst a ribbon of luxurious 20-storey apartment blocks housing the newly-moneyed classes.

But Dunne's dream of reproducing London's Sloane Square or New York's Central Park West in Dublin was knocked back last week by the harsh realities of local government and local opposition.

With Dublin City councillors roundly rejecting high-rise development for Ballsbridge, Dunne has been forced back to the proverbial drawing board in an effort to appease officialdom, while still trying to turn a profit.

It will be a masterful feat if he can manage it. Simple arithmetic appears to be against him. Lower building heights will mean fewer apartment units. With fewer apartments to put on the market, Dunne will be forced to set the prices higher to maximise his return, and offset the cost of buying the site in the first place.

The law of supply and demand would suggest that with fewer apartments on offer, affluent buyers would be willing to pay more for a slice of a more exclusive pie. But this premise cannot be applied - for now at least - given the current jitters in the residential property market.

With prospective buyers looking for, and increasingly achieving, better value, it doesn't take a high-flying economist, or even a developer flying by the seat of his pants to suggest that the 'For Sale' signs could become more than a temporary fixture on Dunne's dream homes.

Compounding his difficulties in Dublin 4 is the restrictive covenant he entered into with the Doyle family when he bought out the two jewels in the hotel empire built by their late father, PV Doyle. As part of the deal to secure the Jury's and Berkeley Court sites, Dunne agreed that he would not develop another hotel there at any time in the future.

While the covenant might have made sense in 2005, it no longer does. Had Dunne the option of hotel development, he could have looked to replicate the model of the nearby Four Seasons Hotel, which has its own permanent penthouse residences.

While such a model might sound unusual, it has already proved attractive to at least one well-known Ballsbridge resident. Former Taoiseach Albert Reynolds is in the process of selling his palatial house on Ailesbury Road, worth €15m, with a view to taking up residence in one of the Four Seasons penthouse apartments, which cost €5m. From his new vantage point in his five-star eyrie, Mr Reynolds will soon have a bird's-eye view of another millstone around Sean Dunne's neck.

In another bold move, last July, Dunne entered into a €378m deal with Hibernian Life & Pensions to buy four blocks of AIB headquarters in Ballsbridge, as well as an adjoining four acres.

Dunne's contribution to the sale and leaseback transaction, which came to an incredible €200m, was not without difficulties, coming as it did six weeks after the initial deadline for payment.

Having first paid a deposit of €20m in April for the land, Dunne was served with a completion notice by AIB when the deal was not concluded by the end of May. A further deadline passed at the end of June with no sign of the remaining €180m being paid.

Dunne held his nerve, delivering the cash a week after he closed another deal, to sell his 50 per cent stake in the Whitewater Shopping Centre in Newbridge to Warren Private Clients for just under €200m.

The deal with Warren came with its own problems, and only proceeded after an eight-day battle in the High Court. Dunne had wanted to back out of the transaction, and took Warren to court claiming that an earlier agreement to sell the Whitewater site for €37.5m had been conditional on another development agreement that had never been signed.

Ultimately, the court case was settled, with Warren agreeing to pay €197m for the Newbridge site and development works, with a further €20m in 18 months depending on rental increases.

Dunne might be keen to extract that €20m now, given the estimated annual interest bill of €11m being speculated upon by financial analysts in relation to his estimated €170m borrowings on the Jury's and Berkeley Court sites.

At the very least, he must be wondering if it was wise to set his bid for the Jury's site tender at €275m, based solely on the whimsy of his glamorous socialite wife, former journalist Gayle Killilea.

The story of how Dunne asked his wife - a one-time Sunday Independent columnist - to pick a number between €253m and €275m when deciding on his finaloffer for the Dublin 4 land could well go down in history as the defining image of a Celtic Tiger oblivious to its own mortality.

To be fair to Gayle, she was said to be unaware that her choice of '75 (the year of her birth) related in any way to the Jury's deal, and opted for the higher number, believing it to be lucky.

When her husband secured the glittering prize, he must have believed his luck was in too. Among the bidders he beat were Joe O'Reilly's Castlethorn Construction; Galway-based Frank O'Malley of O'Malley Construction; Glencairn Development Company; Neville Brothers; Treasury Holdings; McNamara Development Company and Park Developments. Dunne's neighbour on Shrewsbury Road, millionaire hotel operator Paddy Kelly also submitted an unsuccessful bid of €273m - just €2m shy of the winning figure.

But Dunne's prize wasn't achieved through good fortune alone. To have his bid accepted by the Jury's Doyle Group, Dunne was forced to engage in an aggressive purchase of their shares.

When the Precinct Consortium, comprising businessman Bryan Cullen, David Coleman and JJ Murphy, entered the fray with the backing of the billionaire Reuben brothers, Dunne immediately sensed the danger of a potential takeover of the Jury's Doyle Group, which could have scuppered his purchase of the Jury's site altogether.

The Precinct Consortium put together a due diligence report on the company and looked set to offer €1.1bn for it, or €17.50 per share.

To counter this, Dunne was forced to buy up a substantial 29 per cent of the Jury's Doyle shares in four separate tranches to block any takeover of the company in advance of an extraordinary general meeting (EGM) called to approve the land sale.

However, with the deal approved, Dunne's appetite for the company's shares didn't recede. Within weeks, speculation was rife that he would seek to take over the Jury's Doyle group himself, with a view to freeing up its wider hotel property portfolio for residential development.

But the Carlow developer's heart was always set on transforming the select Ballsbridge land belt centred on Jury's. Confirmation of this came when it emerged that he had paid €130m for the nine-storey office block Hume House, beside Jury's Hotel and opposite the US embassy. His unshakeable belief in Dublin 4 was confirmed in no small measure by the prices achieved on lands adjoining the Jury's and Hume House sites shortly afterwards.

Just three weeks after Dunne had paid a whopping €52m per acre for the 4.8-acre Jury's site, Ray Grehan of Glenkerrin Homes splashed out an unprecedented €171m on the former UCD Veterinary College building on nearby Shelbourne Road. The price paid by Grehan equated to an eye-watering €84m an acre.

The two-acre site was expected to sell for just over €120m, but this was easily outstripped by all five of the tenders ultimately submitted. Two offers of just over €170m were received, with the remaining three bids coming in between €155m and €160m. Commenting at the time on his securing of the Veterinary College site, a jubilant Ray Grehan described it as an opportunity that came around "only once a century".

While Dunne might have been disappointed not to get his own hands on the building, he must have taken some comfort from the knowledge that he had secured the Jury's land for a knockdown price - relatively speaking.

The arrival of yet another revered property mogul on the scene buoyed up Dunne's convictions on Dublin 4.

Bernard McNamara turned up the heat considerably when he bought the Burlington Hotel from the Jury's Doyle Group for €288m. McNamara followed up the hotel purchase shortly after when he acquired the Allianz building next door, paying €100m for the 1.5-acre plot.

Adding to all three men's confidence in the value of their embassy belt investments was the data from respected professional bodies. As late as April of last year, the UK-based Investment Property Databank and the Society of Chartered Surveyors produced a report which showed Irish commercial property returns outperforming those of the UK in 2005.

The IPD's monthly index showed Ireland giving total returns of 24.3 per cent compared to the UK's still-strong 18.8 per cent. The Irish performance in 2005 was its strongest since 2000, and more than double what had been achieved in 2004. An 18.1 per cent increase in Irish property values between 2004 and 2005 was the main contributing factor to this. The UK experienced a 12.2 per cent increase in capital values.

Those statistics mean little now, however. In the intervening period, the Irish property market has suffered a series of significant body blows. Eight interest rate increases by the European Central Bank (ECB) have added to the costs of developers' financing, while making it more expensive for prospective property buyers seeking mortgages.

More significant, though, is the bigger economic picture, where the fundamental threats to the health of the property market - particularly at its upper reaches - cannot be ignored. Escalating labour costs here and the threat posed by the emerging economies of the EU accession states have combined to undermine seriously Ireland's competitiveness.

And for men like Sean Dunne, concerns for the country's continuing competitiveness are far more than bootless cries from economists and other prophets of doom on drivetime radio shows.

Sean Dunne understands consequences, and knows full well that if foreign direct investment - first lured here by low corporation tax rates - takes flight for the fledgeling EU states now mimicking our Celtic Tiger economic model, there will be little enough demand for his luxurious 4,000 sq ft apartments in Dublin 4. Nor will there be any demand for apartment living on the grounds of the AIB bank campus, which Dunne bought in conjunction with Hibernian Life & Pensions.

And there will be little need for the Carlow developer to proceed with any further development at Charlesland in Greystones, Co Wicklow, either, where he has already constructed some 1,800 apartments and houses in partnership with Sean Mulryan of Ballymore Homes. Which could explain why the Taoiseach, Bertie Ahern, chose to invite Dunne and his wife to attend his historic address to the Houses of Parliament at Westminster during the recent general election campaign.

The Taoiseach understands better than anybody just how crucial men like Sean Dunne are to the country's economic - and his political - fortunes. Writing in this newspaper only two weeks ago on the issue of stamp duty reform, Mr Ahern was clear on just how critical the construction industry is to the country's economic well-being.

"A strong construction sector is vital to a strong economy," said Mr Ahern. "It directly employs 282,000 people across the country and many tens of thousands more in related industries. It is a major contributor to the health of our public finances. It is in everyone's best interest that it be allowed to thrive and continue generating good job opportunities and good earnings for thousands of families throughout Ireland."

Whatever about the Taoiseach's aspirations for the future of the construction industry, his sentiments will do little to help the plans of Sean Dunne to bring Knightsbridge to Dublin 4. As he examines the latest obstacle to his vision thrown up by Dublin City councillors and the concerned members of 14 local residents' associations, Dunne may well be thinking of the warnings from his developer rivals in 2005.

Back then, their suggestions that Dunne was paying over the odds for the Jury's site could have been dismissed as covetous. Now, however, those words appear prescient. Asked by the Sunday Independent then what they thought of Dunne's €260m offer for the Jury's site (reduced from €275m, due to extra tax liabilities), both Joe Moran of Manor Park Homes and Cork businessman Owen O'Callaghan described it as "madness".

It later transpired that Mr O'Callaghan had bid on the site himself, offering €160m for it, or €100m less than Sean Dunne. Commenting in 2005 on Sean Dunne's offer for the site, Mr O'Callaghan said: "I firmly believe that the proposed Jury's deal is madness. In most people's opinion the site is worth €160m to €180m. That's where the bulk of the bids were. I bid €160m. I do not think he [Sean Dunne] can make money on it."

Jim Mansfield, multimillionaire property developer and owner of Citywest leisure and golf complex, also had a clear view that Sean Dunne was making a costly mistake in paying €260m for the Jury's site. Mr Mansfield identified rising oil prices and the prospect of interest rate rises as potentially "very serious" for Mr Dunne.

He said: "The uncertainties caused by the latest oil price ripple could mean that anything could happen to interest rates at the moment. And the effect of higher interest rates on a deal like this one could be very serious."

Mr Mansfield also foresaw the planning problems now being faced by Sean Dunne, and their consequences. He said: "Remember the purchase can be subject to unexpected delays. If you were to get a project like that through the planning system and then through appeal, two years is not such a long time," he said. "And during that sort of period, the servicing of the €260m site costs alone could increase by upwards of 11 per cent. That's another €28m or so. Then there is the social and affordable housing costs that have to be added in.

"Of course it's also possible that the developer could make money out of it, especially if he were to persuade the planners to allow high-rise on the site. But without that certainty . . . all I can say is he is a brave man," Mr Mansfield added.

Sean Dunne will certainly need to steel himself in the light of last Monday's decision by Dublin City Council to withdraw the Local Area Plan (LAP) for Ballsbridge, which would have allowed for high-rise development.

Opting for a previous plan limiting tall buildings to just eight storeys as opposed to the 32 storeys Dunne was seeking, the councillors bowed to pressure from a coalition of 14 local residents' associations. The eight-storey limit also put paid to Dunne's plans for four 11-storey buildings.

And it's unlikely that Sean Dunne will have an opportunity to advance whatever Plan B he has for Ballsbridge for at least another year. Dublin City Council now intends to focus its attentions on drawing up Local Area Plans for Rathmines and Phibsborough, before returning to deal with the future of the Jury's site, and its environs.

But only a fool would write Sean Dunne off just yet. His decision, as a 50 per cent stakeholder in Berland Homes nearly 20 years ago, to purchase 70 acres in Bray for residential development raised more than a few eyebrows at a time when the housing market was less than buoyant.

And in 1996, before the property boom had taken hold, he founded Mountbrook Homes to build the upmarket St Helen's Wood in Booterstown. This bold development provided Dunne with the funds to embark on a series of housing schemes including St Raphael's Manor in Celbridge and later the exclusive Hollybrook apartment scheme on Brighton Road in Foxrock.

As property prices were propelled from year to year, Sean Dunne rode the crest of the developers' wave, while it lasted. Acutely aware of the cyclical nature of the economy, and by extension the health of the property market, Dunne knows that his dream of bringing Knightsbridge to Ballsbridge might not come just yet.

So, few will be surprised if he follows the money and goes in search of development opportunities in the emerging economies, using the profits there to service the interest on his Dublin 4 portfolio.

Dunne is nothing if not confident in the abiding value of Dublin's embassy belt land, which according to the statistics has doubled in value every seven years for the last century without fail. If such a pattern is repeated in 2012, the €510m gamble Sean Dunne took in 2005 will have paid off handsomely.

He just has to bide his time, if he can afford to.

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