Ireland Plots Its Return From Real-Estate Brink

Art Patnaude

Ireland

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reland's commercial property market, which plunged the country into financial chaos when prices collapsed in 2009, is on the rebound.

A rush of foreign investment into Ireland is gaining momentum and driving values of hotels, stores and office buildings higher, particularly in Dublin. Growing confidence among businesses that the economy is recovering is helping fill office and retail space.

Fota Island Resort sold in 2013 for about €20 million

This year kicked off with a flurry of big deals, including Google Inc.'s purchase of an office building for €65 million ($88 million) and Blackstone Group LP's €100 million acquisition of three office properties, all in the capital's burgeoning Docklands business district.

Last week the government agency disposing of property taken over during the financial crisis agreed to sell Central Park—an office and apartment complex south of Dublin—for over the €250 million asking price to Kennedy Wilson, a U.S. private-equity firm, and Green REIT, a real-estate investment trust, according to people familiar with the matter.

Ireland's property values rose last year for the first time since 2007, edging up 3.2%, according to global research firm IPD and the Society of Chartered Surveyors Ireland. When the Dublin market first started to bounce back in the third quarter last year, it halted an almost six-year decline that saw values fall by over 65%.

An expanding economy is fueling demand for property. Ireland's central bank last week raised its economic growth projection for this year to 2.1% from 2%, and forecast a rise of 3.2% in 2015.

The country exited its three-year-old European bailout in December, after enduring a recession for nine months until the second quarter of 2013. Although the economy expanded in 2011 and 2012, its performance had been weaker than expected.

Investor appetite also is growing because commercial property prices in major cities like Paris and London have soared to near-record levels. Many investors are looking to smaller cities like Dublin for higher returns.

With values rising in Ireland, the government's so-called bad bank, charged with liquidating properties and loans with a face value of more than €74 billion, is accelerating sales of Irish assets. Until last year, the National Asset Management Agency, known as NAMA, focused mostly on disposing distressed properties and loans in the U.K. and other parts of the world.

NAMA in 2014 is planning "a couple billion" euros in disposals, and a total of €5 billion over "the next two to three years," NAMA chairman Frank Daly said in an interview Monday.

The agency has disposed of less than 2 billion euros of Irish assets since it was established in 2009.

"We appear to have entered a new property cycle," Mr. Daly said. "I don't think we're any longer on the downward trend, either in residential or commercial."

While the recovery currently is mostly taking place in the capital, "it will percolate out from Dublin to Cork, Limerick and Galway, and other major cities, and then out from there," Mr. Daly predicted.

NAMA isn't the only owner capitalizing on the rebound. More than €1.7 billion of Irish properties were sold in 2013, topping the value of all deals in the four previous years combined, according to real-estate broker CBRE Group Inc. High-profile transactions included NAMA's sale of the Fota Island Resort, set to host the 2014 Irish Open golf tournament in June, for about €20 million.

Besides Blackstone and Kennedy Wilson, other big investors in Ireland include Dallas-based Lone Star Funds, Los Angeles-based Oaktree Capital Management and Northwood Investors. Also, Green REIT and Hibernia REIT both went public last year in response to new legislation in Ireland designed to pump capital into the market.

Many bargain-seeking foreign investors set up operations in Europe early in the downturn. But until recently, most have been frustrated by the trickle of sales by holders of distressed assets.

Investors now are looking forward to more activity. "There are simply a lot of assets that haven't changed hands yet. We're going to see a lot of activity in 2014 and 2015," says Mary Ricks, chief executive of Europe for Kennedy Wilson.

While values in Dublin have been rising, they are still far from the peak levels hit before the crash. At the peak, top-end Dublin offices were selling for as much as €1,500 per square foot, before bottoming near €450 per square foot.

Now, Dublin offices that have long-term tenants sell for about €800 per square foot, according to data from real-estate broker Savills.

Office property at the market's precrash peak was so expensive that, on average, investors initially would get returns of only 3.75% from a building's income, according to CBRE.

That yield—or capitalization rate as it is called in the real-estate business—rose to 7.5% in the fourth quarter of 2008 and stayed at that level until mid-2012 as prices fell. Since then, due to rising investor demand, cap rates have fallen to below 5.75% in December, CBRE says.

"The higher yields make it appealing," says Khaled Kudsi, senior managing director at Northwood Investors. "Having said that, the yields are declining with each sale."

Dublin hotels have been particularly sought-out by investors. Values also are rising for office, retail and industrial property, CBRE reports. Demand for office space has been especially strong from technology and media companies. The vacancy rate in central-Dublin offices is 6.7%, compared with 7.4% in London's financial district, and Paris' 4.6%, Savills said.

But the strength of the Irish recovery remains unclear. Rising interest rates could put a damper on investor demand for property. Office, store and warehouse rents are still well below peak levels.

When it raised growth forecasts last week, the Irish Central Bank also warned the government about relaxing its efforts to repair the financial system.

"Nobody wants to go back to the unsustainable level of prices that we had during the boom years," Mr. Daly said.

He added that for now there is no sign of a bubble because there isn't "unlimited bank lending."

NAMA was set up to manage soured assets of five broken Irish banks: Allied Irish Bank, Anglo Irish Bank Corp., Bank of Ireland, Irish Nationwide Building Society and EBS Building Society.

The rise in values so far has been a vindication of its strategy to hold assets rather than sell them faster during the earlier stages of the downturn. As recently as a year ago, before it was clear the market was rebounding, critics were calling on the agency to move faster.

In the years leading up to the crash, commercial real-estate investors put more debt on properties than their incomes would support, partly on the assumption that rents and net incomes would continue rising. When they didn't and values fell, billions of euros of debt backed by commercial property soured. Real estate—both commercial and residential—played "a pivotal role in the Irish crisis," according to an Irish Central Bank publication in 2012.

But now NAMA is "looking smart" for moving slowly because of the recent rise in asset values, says Ms. Ricks, of Kennedy Wilson.

"I think now it looks like they've done a good job," Ms. Ricks said.

Source: Wall Street Journal