Ardstone Capital has avoided its domestic property market since 2002, but the pan-European real estate manager is now targeting core-plus and value-added opportunities in Ireland, particularly the undersupplied Dublin office market. Ardstone acquired an office building in April as its first foray into the market and is currently assessing other opportunities.

Having fallen 65% from peak to trough, the property market stabilised during 2012 and is itself now returning to growth. After three to four tough years, the worst has passed for the Irish economy. Ireland is punching above its weight and is leading the peripheral countries out of recession.

A recent UNCTAD report shows that in the first half of 2012 Ireland attracted more foreign direct investment than Germany: $14.7bn versus $10bn. Ireland’s GDP growth-rate forecasts for 2013 and 2014 are looking better than most at 1.6% and 2.8%, and the underlying budget deficit is set to reduce to 7.4% by the end of 2013. A possible exit of the EU/IMF Assistance programme by the end of 2013 now looks more likely, given the new terms recently agreed on the Anglo/IBRC promissory note.

Government bond yields are down significantly from 12 months ago, with strong take up of multiple issuances during 2012 continuing through into 2013.  

How is this feeding into the property market? Transaction volumes and frequency have increased significantly in all sectors. Ardstone estimates that €1.35bn of transactions have occurred since Q4 2011, including four non-performing loans (NPLs), representing €540m of underlying value.

Investor preference is currently for prime offices in Dublin and high quality hotels nationwide. Gradually, investors will move into other sectors, locations and up the risk curve. A big surprise to the upside was the strength of demand from cash buyers, both domestic and foreign. Well-let assets traded relatively quickly, at or slightly above asking.
On a rack-rented basis, prime office yields compressed from 7.25% to 6.75%. However, a significant level of over-renting still exists, leading to high initial yields. Investors will have to carefully look behind these headline numbers.  

Encouragingly, letting activity across all sectors is generally up, reflecting tenants trading up to better quality space, and/or moving to more central locations from peripheral positionss at no extra cost. Demand for high-grade office space is strong, especially in the 500-1000sqm range, but the market is struggling to meet the demands in quality as a high proportion of the existing stock is substandard or obsolete. Speculative development ceased in 2008, giving rise to the impending grade-A office supply shortage. Prime office rents have now stabilised, incentives are coming in and rental growth in the office sector is imminent.  

The already-slimmed-down banking sector continues its deleveraging process with the “foreign” banks (RBS, Lloyd’s) leading the charge. We have already seen Projects Prince, Pittsburgh, Lane and Kildare trade last year to Kennedy Wilson, CarVal Investors, Apollo Global Management and Lone Star, respectively. This year started with the National Asset Management Agency (NAMA) bringing out two large NPLs to the market that have attracted significant interest: Project Aspen and Project Club. The recent news of the liquidation of Irish Bank Resolution Corporation (IBRC) means KPMG will be bringing more NPLs to the market soon, starting with a €2bn portfolio called Project Delta. IBRC’s liquidation could see an additional €15bn of loans traded in 2013-14, but these are extraordinary events.

The number and strength of international investors currently active in Ireland is far greater than was envisaged two years ago. The list of international investment houses that have actually transacted has an opportunistic feel to it: London & Regional, Blackstone, Northwood Investors, Lone Star, Apollo Global Management, CarVal Investors. Kennedy Wilson continues to make its presence felt, following the all-encompassing strategy it used in Japan in the 1990s. The company has bought a multi-asset backed NPL, a multi-let office asset, a core multi-family asset and the debt secured by the State Street HQ.

In addition, quite a few well-known core and value-add players have been second placed recently and will be keen to secure a deal or two soon.

Ardstone estimates that current firepower targeting Ireland is close to €5bn, split between €2bn domestic and €3bn foreign. Interestingly, the domestic capital has more of a core feel to it, and the foreign capital is more skewed towards the opportunistic risk spectrum. This bodes well for a healthier Irish real estate market.

Ardstone predicts this heightened level of activity will continue in 2013 and that €2.5bn-3bn of assets and NPLs will trade this year, excluding the one-off IBRC liquidation. Market activity will not reach frenzy levels, but will certainly be well in excess of the previous four years. There will not be an oversupply of high quality assets, however, investors should be wary of secondary.

Encouragingly for the future stability of the market, some domestic institutions are starting to recapitalise themselves by raising capital for long-term core funds. In addition, the Irish government has taken substantive steps towards introducing REIT legislation for the first time. This could further enhance liquidity in the market and attract foreign capital, but it will take time and scale – and liquidity issues need to be addressed first.

Donal O’Neill is co-founder and head of investments at Ardstone Capital