Vulture Investors Frustrated in Dublin Weigh Irish Exit

Dublin, where commercial property values dropped 65 percent during Western Europe’s worst real estate crash, should be a feasting ground for distressed investors. Instead, frustrated buyers are competing for a dearth of properties that’s inflating prices and discouraging other funds from entering the market.

When Kennedy-Wilson Holdings Inc. and Vaerde Partners Europe Ltd. offered 306 million euros ($399 million) for 16 Irish properties in May, the bid was 22 percent higher than an October valuation and beat out five competitors. Even so, bondholders attempted to veto the deal to hold out for more.

U.S. firms including Kennedy-Wilson and Northwood Investors LLC, started by former Blackstone Group LP executive John Kukral, came to Ireland expecting to pick up cheap real estate or loans that went sour when the country’s property market collapsed in 2007. While they’ve had some success, investments are being limited as Royal Bank of Scotland Group Plc, the National Asset Management Agency and other large owners of buildings and loans hold onto assets amid a recovery in central Dublin, restricting supply and causing investors to consider European alternatives.

“If investors are finding they’re consistently failing to secure investments, they will reach a stage where they’re not prepared to spend any more time or money on this market and move elsewhere,” said John Bruder, chief executive officer of Burlington Real Estate Ltd., which manages Irish real estate valued at more than 1 billion euros. The buyers “are very footloose and would think nothing of shifting from Ireland to the Mediterranean countries, Eastern Europe or further afield.”

‘Feeding Frenzy’

Prime Dublin office buildings valued at more than 10 million euros regularly have as many as 15 bidders and up to three bidding rounds before a sale is completed, said Rod Nowlan, investment director at broker Bannon Commercial.

“There’s a very real concern that bidder fatigue is becoming a serious issue,” he said. “The assembly of a significant portfolio for the larger investors is looking increasingly unrealistic.”

Russell Jewell, head of private equity at AEW Europe, said at a real estate conference in March that he doesn’t see Dublin as a place to “focus on doing business.”

“There is a bit of a feeding frenzy over a few assets when they come to the market,” said Jewell, whose firm is an asset-management unit of France’s Natixis SA and has bought office buildings in Berlin and the EDF Tower in Paris.

About 170 million euros of Irish investment properties was offered for sale in the second quarter, Lisney Ltd. said in a report yesterday. Investors have at least 6 billion euros to spend on real estate in the country, the broker estimates.

Income Returns

Other potential investors are being attracted by income returns from Dublin office buildings of more than 10.5 percent a year, the highest among the cities covered by research firm Investment Property Databank Ltd. That compares with a yield of 5 percent for office buildings in the City of London financial district and about 4 percent for Irish 10-year government bonds.

Less than six years after the collapse of Ireland’s property market, technology companies including Facebook Inc. and Google Inc., along with financial firms Deutsche Bank AG and Susquehanna International Group LLP, have expanded in Dublin or plan to lease additional space. That’s causing a shortage of modern office space in the downtown and docklands areas, which in turn is leading to higher rents.

That’s helping to boost the value of income-producing office buildings in central Dublin, which rose for the first time in six years in the three months through March. Downtown office values increased 0.3 percent in value from the previous three months, IPD said in April. The average value of properties in the docklands rose 2.2 percent, the London-based firm said.

Overseas Buyers

Overseas buyers have been crucial to the Irish market after the country’s real estate crash left most of its property developers insolvent. International investors bought about 70 percent of the 545 million euros of income-producing property sold in Ireland last year, compared with little or nothing in 2007, said Natalie Brennan, a director at the Irish unit of CBRE Group Inc. Buyers paid 603 million euros for income-producing real estate in the first half of 2013, the broker said.

With limited supply, properties are frequently selling for more than the asking price.

A site in Dublin’s Ballsbridge suburb with planning consent for 15,600 square meters (168,000 square feet) of offices, as well as apartments, sold for more than 20 million euros last month, according to a person with knowledge of the matter. That was about a third more than the asking price, said the person, who asked not to be named because the information is private.

CMBS Holders

The 16 properties, including office buildings, bid on by Kennedy-Wilson and Vaerde were valued by CBRE at 251 million euros in October, a few months before the borrower defaulted on a 368.4 million-euro loan tied to the buildings. By April, CBRE valued the portfolio at 275.2 million euros. Even though the two investors jointly offered more than 300 million euros, some holders of commercial mortgage-backed securities linked to the real estate refused to back the proposal, stock exchange filings show.

Northwood, which has about $3.7 billion of real estate assets, offered 311 million euros. Other bondholders said they would block the offer. The special servicer tasked with overseeing the bond said this week the sale will go ahead with Kennedy-Wilson and Vaerde.

Christina Cha, a Kennedy-Wilson spokeswoman, declined to comment. Vaerde partner Rick Noel and Vivian Tongalson of Northwood didn’t respond to e-mails and telephone calls.

Toxic Mortgages

A loan portfolio was bought by a joint venture controlled by Starwood Capital Group LLC from Ireland’s National Asset Management Agency for 195 million euros in May, about 20 million euros more than investors expected to pay, according to two people with knowledge of the matter, who asked not to be named because details of the deal were private. NAMA, set up in 2009 to take on and sell toxic mortgages purged from Ireland’s lenders, retained a stake in the venture with Starwood.

NAMA owns loans linked to 5.25 billion euros of investment property in Dublin, according to a May 2012 presentation on its website. Lloyds Banking Group Plc has 7.4 billion pounds ($11.2 billion) of commercial real estate loans in Ireland, where 90.7 percent of its portfolio is now impaired, according to its 2012 annual report. RBS has 5.64 billion pounds of investment property loans across the island of Ireland, according to its 2012 annual report.

‘International Demand’

“Now is the time to get assets of size and scale on the market, while there is strong international demand,” said John Moran, Jones Lang LaSalle Inc.’s managing director for Ireland.

A spokesman for NAMA said it’s “not credible” to say there are insufficient assets available. NAMA has 1.5 billion euros of Irish assets on the market and the Irish Bank Resolution Corp. is about to offer “a very large portfolio,” a spokesman said in an e-mail.

At the same time, “we have to be guided by what we believe will maximize the return to the Irish taxpayer, rather than simply following the strategies which private-equity houses may wish us to pursue. We are very happy that our strategy is the correct one,” he wrote.

Lloyds spokesman Emile Abu-Shakra said in an e-mailed statement the bank’s strategy “is to deleverage our non-core assets and we are making significant progress. We sell assets where we believe we have the right price, but equally we will hold assets if there is value to be gained by waiting. RBS spokesman David Gaffney declined to comment.

Empty Properties

Not all of Dublin is proving attractive to office-property buyers or occupiers. The equivalent of about one in five of such properties in the Irish capital was empty at the end of March, compared with a 5.3 percent vacancy rate for the best buildings in the downtown Dublin 2 area, according to data compiled by Jones Lang.

Buyers face a struggle to secure financing, with demand limited by the “complete lack of new debt available” for non-prime assets in Dublin, CR Investment Research, which manages 300 million euros of Irish real estate, said in a June report.

Ireland’s economy also remains fragile, with gross domestic product shrinking 0.6 percent in the first quarter, the country’s statistics office said on June 27. Finance Minister Michael Noonan forecast in April that the economy will expand 1.3 percent this year and 2.4 percent in 2014.

Raised Outlook

Standard and Poor’s raised its outlook on Ireland’s sovereign rating today to positive from stable. Net general government debt could fall faster than expected if NAMA sells its loans more rapidly, “resulting in either repayment of its obligations or further accumulation of cash,” the ratings company said in the report.

More income-producing real estate will be sold in the second half of this year, according to Jones Lang’s Moran. “The red-hot competition that exists at the moment will tend to dissipate as more properties come onto the market,” he said.

Rents for the best office space in Dublin peaked at about 60 euros a square foot in 2007, according to Jones Lang. They are now about 32.50 euros a square foot and will increase by about 20 percent through 2017, Jones Lang and Oxford Economics Ltd. forecast in June.

“The repricing that we’ve seen in Ireland is phenomenal,” Hans Vrensen, DTZ’s global head of research, said in an interview. “It’s a very attractive opportunity.”

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