The considered view

Business | Wed 21 Jan | Author – Business & Finance
property

Eugene Gibney discusses the ongoing recovery in the Irish property market.

The best rated sovereign bonds have been in a bull run since the credit crisis – with no sign of a slowdown. The Irish sovereign has joined the party with eye watering returns for investors who piled in as the taxpayer bailed out the banks. Equity markets have continued to soar, with only a slight pull back this month. Interest rates are low and ‘lower for longer’. So can we expect that Irish commercial prime office yields are heading to sub 5%?  Probably not. Can they go lower? Probably.

The ‘non-fearful’ first movers in the market back in late 2010 and 2011 were the US funds. These mega equity houses allocated huge sums to an Irish property market decimated by overleverage and illiquidity.

Property revival

These funds are chasing double digit IRRs (internal rate of returns) or double your money investments, where you get in when no one else can buy and get out when the rest catch up. This is what is happening now and will be a key feature of the Irish property market for the coming years.

Also playing a part in the revival of the property market has been the Capital Gains Tax exemption rule, which as a measure of its success, is being discontinued at the end of the year.

Dublin has recorded the seventh highest volume of investment activity in the EMEA region for the first half of 2014. Over €3bn of transactions are recorded as at the end of September and the likelihood is the volume of transactions for the full year will be in excess €4bn. One positive aspect this time around is the variety of the source of this capital, with buyers from the Middle East, Canada and mainland Europe.

The Irish sovereign was recently upgraded to A- by S&P and Fitch in June and August, respectively. Moody’s are one notch below and expected to follow suit – when, not if this happens, the Irish market will be investable to the next wave of investor types. With a positive spread between sovereign yields and property assets, investors will continue to seek out this yield.

Dublin has recorded the seventh highest volume of investment activity in the EMEA region for the first half of 2014.”

Investment activity

The challenge with this surge of investment activity is discerning the winners from the losers. Can the expected €4bn of transactions in 2014 all be double digit IRR deals? What is the exit plan for these new owners, as a properly functioning domestic capital market will need to be in place to facilitate the next big switch in ownership as these new purchasers seek to extract their return.

Coupled with the hunt for yield, are some pretty exciting fundamentals within the Dublin property market. There has been zero development of new office space in Dublin over the past number of years. Yet, the ICT sector is leading a transformation in the economy, expanding rapidly and more sales, means more people, means more offices.

Capitalising on growth

Rents are appreciating rapidly and if you own a decent property within the Dublin 2/4 belt, the race is on to ‘tart and turn’ the property to capitalise on this growth.

Since 2013, rents have increased by 15% and are now firmly established at €45 per sq. ft. There has already been a letting at €50 per sq. ft. and this is expected to be the established headline prime rent by the end of the year.

It has been suggested that €60 per sq. ft. will be achieved before any new meaningful supply is delivered to the market. Bearing in mind it takes around two years to deliver a new property – and that’s not counting the arduous planning process that has to endured – this Celtic-era rental milestone looks like it will be surpassed.

Retail too is on the cusp of a similar growth trajectory. As the domestic economy recovers, the market for consumer orientated properties is heating up. Hotel transaction volumes could only increase from previous years and the price now being paid will allow the operators turn a profit with no onerous banking covenants to be tested every quarter.

Friends First’s recent acquisition of the Blackrock Shopping Centre falls into this category. Tempting as it is to reference the purchase price – being substantially less than when the centre previously traded – would belie the compelling reasons for its acquisition. With a catchment area of over 50,000 within five minutes of its door, the challenge is to return the centre to a destination that customers want to experience, with a retail offering best in class.

Comparisons

Indeed, the obsession of comparing prices today with the prices of 2005 and 2006 is meaningless. Yes, there have been some startling reductions in prices of certain properties, and this will continue. However, when the 2005 asset was bought with the banks’ money at sub 1% lending margins, why weren’t record prices set?

Similarly, coverage of some very recent ‘quick flips’ where a 2013 property was re-sold in 2014 for a triple digit IRR paid little heed to the repositioning achieved by the vendor of the property’s lease structure. This all points towards each acquisition being assessed on its own merits within the context of the property’s market, the asset plan and the hold period for the investment. Get these three criteria correct and the capital deployed will earn a positive return.

The Dublin property market, and hopefully the Irish market, is maturing. The aim should be to have a deep and liquid market where transacting is efficient and transparent. The ability of a few individuals to control swathes of property and land, backed by a couple of local banks has resulted in terrible consequences. However, as the market takes off, recall Buffett’s thesis that price is what you pay; value is what you get.

Eugene Gibney is head of Investments at Friends First. The views expressed in this article are personal opinion and not those of the organisation or Business & Finance.