Last Tuesday night, Dublin's property investment advisers gathered for drinks in the courtyard of O'Donoghue's of Baggot Street, and for the first time in nearly two years, it wasn't to cry into their pints. There's some optimism in the air, and while nobody is confident yet, there's a feeling that things could improve next year.
The Department of Finance's documentation on Nama has brought some certainty to the market but the real reason for the tepid improvement in sentiment is the arrival of overseas funds as buyers of Irish property. It's the first time in nearly a decade that there has been any real interest from abroad in buying property here – the abnormally high stamp duty on commercial property ensured the sector became an indigenous-only bubble – but the collapse in property values has some potential investors seeing value in the market here.
Among those that have shown definitive interest here is German open-ended fund Deka, which bought the Tommy Hilfiger shop at Grafton Street in Dublin for more than €24m, but there is some difference of opinion as to the true yield from the deal. (Yields are rents expressed as a proportion of the selling price.) In addition, the fund is said to be interested in acquiring the entire office block in Dublin's south docks that is let to solicitors Matheson Ormsby Prentice (MOP), allegedly offering to buy it at a yield of 7.5%.
Other funds have approached landlord Irish Life about buying the building, but a spokesman had told the Sunday Tribune two weeks ago that "nothing was imminent in relation to the building". Last week it put half the building on the market with an asking price of €50m, which would provide a net yield of 6.75%, which again highlights the difference between vendors' and buyers' expectations.
Investment sources believe the overseas funds will have far less interest in acquiring a 50% stake in any asset of that size than they would in the entire, as they prefer to own smaller properties outright.
Irish Life bought the building from Seán Dunne's Mountbrook in 2006 as part of a swap deal involving Hume House in Ballsbridge, where Dunne has other assets including the D4 hotels and part of AIB Bankcentre. It is generally accepted that the MOP office block is now over-rented when compared to current market rents, so there is unlikely to be an increase in income from the building when its rent is reviewed after five years.
Like most funds, Irish Life is facing redemption calls from investors and therefore has brought several properties to the market. In the past fortnight it has reduced its guide prices for three Dublin office investments by almost 50%; it is now seeking €40.8m for the office blocks, down from more than €81m when they came on the market in May of last year.
Elsewhere, Aviva is said to be considering the sale of half of the HMV building at Grafton Street, while other funds and trusts are reviewing their portfolios to look at possible disposals to fund the redemptions. So far there has been less evidence of private investors looking to sell on their investments but in part this is because they are using income from them to service other debts, particularly those on development land, while the British banks that lent money for investment and development purchases here have little reason to move on their customers given the British government's insurance scheme, which was designed to protect its banks against further losses.
So who's out there? We know about Deka, but it's not alone. GLL, a Munich-based property fund management group with more than €3bn of assets under management, is also showing interest, while Credit Suisse is sounding out property owners to gauge their disposal intentions. Credit Suisse set up an Irish-domiciled fund management business earlier this year whose memorandum of association specifically allows it to "develop and turn to account any land acquired by the company" and to advance money or enter into "contracts and arrangements of all kinds with builders, tenants and others".
The mooted Liffey Valley sale, which was never completed, showed that international firms Orion and London & Regional were interested in investing here. London & Regional already has some knowledge of the Dublin market as it owns the David Lloyd gym in Clonskeagh, which it acquired when it bought out the David Lloyd group in 2007. London & Regional's interest is limited to large scale "vanilla" investments, sources in Dublin and London said.
Elsewhere, a Middle Eastern investor was interested in acquiring four of the office blocks at AIB Bankcentre before a deal fell through. Sources say fund managers Henderson and HSBC have also shown some interest, though they say HSBC is unlikely to follow through on that interest, if it does at all, until next year at the earliest.
On the domestic front, the investment community is waiting to see if the Kenny family, which owns Clancourt, or the likes of Ken Rohan will re-emerge as buyers of property.
Despite all the positives, sources caution against optimism, pointing out that the amounts earmarked for investment are comparatively small, limited to prime offices and retail buildings with strong tenant covenants. There is almost no demand outside that, and this will be a significant factor in future as an already fractured market may split still further.
That will have serious implications for Nama, as the gap between vendor and purchaser expectations will be the next battleground for the soured-loans bank. Nama will have to pay particular attention to this because the banks seem to be valuing their assets themselves and therefore the danger is that rose-tinted glasses will be the order of the day, hobbling the taxpayer for years to come.
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