Property investors position for Irish upturn
02-11-2014
Sarah Krouse
An increasingly diverse pool of investors has been flooding into the Dublin office market, boosting the volume of property deals and intensifying competition for assets. Office investment volumes in Dublin more than doubled to €752.3 million from €368.3 million in 2012, according to consultancy Jones Lang LaSalle.
Growth potential: private equity firm Kennedy Wilson is betting on the revival of the Dublin Docklands area
The increased interest in investing in commercial real estate in the Irish capital comes in part because properties are being sold at significant discounts to their prices before the crash.
Last month, private equity firm Blackstone Group bought Hume House and two other properties in Dublin for a total of €100 million, according to a person familiar with the matter. The sale underlined how far prices have fallen in the city. In 2006, Hume House on its own was bought for €130 million.
Blackstone acquired the properties from Ireland’s National Asset Management Agency, or Nama, the so-called “bad bank” that manages the country’s distressed real estate assets. Since being set up in 2009, Nama has overseen the sale of €10.6 billion in real estate assets, according to its 2013 report, and is expected to sell billions more in the coming years.
Blackstone is not alone in believing that prices will rise as demand for office space ticks up. It is one of an increasingly large and diverse pool of buyers – which includes foreign asset managers such as Pimco and domestic real estate investment trusts – betting that the luck of the Irish has returned to the office market.
According to property consultants, private equity buyers are seeking double-digit returns from their investments – and typically plan to hold them for three to five years.
The most active office buyer in Dublin over the past year has been Kennedy Wilson, according to data provider Real Capital Analytics. The US private equity firm, which has an office of 25 people working on deals in Ireland, has completed €182.3 million in deals in the past 12 months. Other active buyers include King Street Capital Management, CBRE Global Investors and Green Reit, according to Real Capital Analytics.
Kennedy Wilson is part of a consortium with Pimco and Green Reit that was last month selected as the preferred bidder for another Nama portfolio known as Central Park, according to a person familiar with the deal.
Kennedy Wilson is also plotting a turnaround of its own in the Dublin Docklands area. The private equity firm took control of a 175,000 sq ft office building let to State Street and an adjacent 3.4-acre site last year, after paying €106 million for a loan with an unpaid principal balance of €120 million in 2012.
Kennedy Wilson has since restructured the lease with State Street – extending the clause to break the lease by eight and a half years to January 2028. It is also working on a joint venture to develop the adjacent site.
Rising rents
Besides believing that Dublin office property prices have reached a bottom, investors are also betting that office rents will continue to rise as demand for space increases. Last year, rents for top quality space in Dublin increased to €35 per sq ft, up from €30 per sq ft in 2012, but still far from the €60 per sq ft hit in 2007, according to Jones Lang LaSalle.
Tenant demand has come from several sectors as businesses have become more optimistic about Europe’s economic outlook. Tenants leased 1.9 million sq ft of space last year, up from 1.5 million sq ft in 2012, Jones Lang LaSalle said, and the most activity since 2007.
Technology, media and telecommunications firms have led the way. Yahoo, which has had an office in Dublin since 2003, has agreed to lease an additional 70,000 sq ft at Point Village in the Docklands area, according to two people familiar with the deal. Facebook too is expanding, leasing more than 100,000 sq ft in the Docklands area late last year in a facility that will eventually house up to 1,000 employees.
Some of the new demand for office space is coming from the finance sector. Deutsche Bank leased about 110,000 sq ft in Dublin’s Docklands area in November, saying it planned to create 700 jobs in the next few years.
Other deals include Fidelity Investments’ lease of about 55,000 sq ft at 1 Waterside in West Dublin last spring.
However, the market is still far from full health. Dublin’s overall office vacancy rate is 18%, according to Jones Lang LaSalle. This is an improvement on the 23.4% rate hit in 2010, but is still far from the 11.1% rate in 2007.
Weakness in other parts of Europe could impede a continued recovery, experts said. Barry O’Leary, chief executive of IDA Ireland, which promotes foreign investment in the country, said: “The big users of office space are the multinational companies and they are in Ireland to supply the European market. One needs to have growth in the European market for that to work.”
However, demand for office space has increased to the point that developers are dusting off plans. For example, a venture between Oaktree Capital Management and Bennett Group, an Irish construction group, is considering developing office property without a tenant lined up on a site it acquired last summer.
Mary Ricks, chief executive of Kennedy Wilson’s operations in Europe, said: “You’ve had no new construction, so you see market fundamentals actually really getting better.”
-- Additional reporting by Craig Karmin. A version of this article appeared in The Wall Street Journal