December  2010  VOL. 3

Irish Distress:
Investors see opportunity

Ireland may offer the distressed property opportunities that global investors hoped to see in the United States. Moreover, the recent EU-IMF bailout is a signal to many investors that it’s time to invest in Ireland.

However, some investors are still concerned about the country’s economy and fiscal health. And the size of the Irish property market is limiting to investors, both in terms of available inventory and exit strategy.

“We’ve recently introduced a number of investors to Irish investments,” says Barry Barovick, a senior managing director at FTI Schonbraun McCann Group, who leads the global real estate advisory services practice. He advises one of Ireland’s largest developers and serves as an advisor to the country’s National Asset Management Agency (NAMA), the government-run entity formed to reposition existing real estate.

“With the bailout, investors think maybe they should look at Ireland,” Barovick continues. “However, the recovery has been faster in places like London, where the economy is much more diverse, and the competitive opportunities don’t leave Ireland in the best position.”

Troubled banks

The outlook for the Irish economy is downbeat, even though it has the financial support of the EU-IMF.

The Irish government’s own growth forecast—for GDP to average 2.75% annual gains from 2011 to 2014—is optimistic, according to Moody’s Analytics. The firm says Ireland’s economy has shrunk by 15% since late 2007 and it expects average growth closer to 2%.

Much of the surge in the unemployment rate—which held at 14.1% in October, around 10 percentage points above its prerecession rate—has come from construction, suggesting Ireland will face high structural unemployment for years.

Ireland is the latest Euro Zone country to receive an EU-IMF bailout. Last month, as Irish government bond yields reached a record high, the country accepted an assistance package worth €85 billion, €35 billion of which will help refinance the country’s beleaguered banks.

Irish banks are almost fully reliant on European Central Bank funding and banking problems have been at the heart of Ireland’s fiscal woes. “The Irish economy doesn’t have the breadth and diversity of the U.S. economy, so the global financial crisis is much more acute there,” Barovick says. “Additionally, the banks there invested heavily in real estate and that compounded the pain.”

Unlike the United States, which moved swiftly to address bad real estate loans, Ireland has been somewhat handcuffed by the dual layers of regulation imposed on a country-wide level and the EU level. Although the country has formed NAMA to address the crisis, recovery? has been slower than expected.

“Banking problems will remain a downside risk to the near- and medium-term outlook,” according to Melanie Bowler, a London-based economist with economy.com. “It remains unclear whether the banks have fully realized losses suffered in the property bust and recession. The continuing correction in property markets suggests that while developer losses have largely been transferred to the country’s ‘bad bank’ (NAMA), bank balance sheets may continue to absorb losses as household defaults increase.”

Indeed, commercial property owners have seen their fortunes diminish significantly over the past three years. Income levels for properties in Jones Lang LaSalle’s Irish Property Index fell 4.4% in third quarter 2010, and 4.4% from September 2009 to September 2010.

Even worse, since the peak of the Irish Property Market in third quarter 2007, capital values have dropped by 59%, according to Jones Lang LaSalle. The current income yields on commercial property are in excess of 8.5%.

Increasing investment

During the first three quarters of 2010, Irish investment activity increased 95% compared to the same period in 2009, according to international real estate advisor, Savills. In its latest Irish investment report, the firm says volume is expected to total €243 million against €140 million the previous year.

“Investment activity so far in 2010 has been considerably stronger than 2009, with increased appetite from private, domestic investors dominating demand for smaller lot sizes,” says
Fergus O’Farrell, investment director at Savills. “International buyers have also been attracted by the potential high returns available at all price levels. The profile of investors interested in the Irish market includes institutional investors, property companies, opportunity funds and private investors from the United Kingdom, Germany, the United States and the Middle East.”.

When analyzing yields, Savills found that prime office and retail yields have stabilized since Q209, with retail yields in particular hardening to 6-6.25% following several transactions on Grafton Street in Dublin.

According to Savills research, there continues to be a supply/demand imbalance, with supply currently at its lowest level since 2005. The lack of new properties coming onto the open market fell by 23% in Q310, with €181 million currently available compared to €242 million in Q210.

“Virtually all of the current supply is comprised of non-prime assets for which there is very little demand,” says Joan Henry, Savills head of research in Ireland. “We do, however, expect to see an increase in supply before the end of the year as vendors start to position themselves for potential disposals, with likely sources including NAMA and the banking sector.”
In fact, the RICS Global Distressed Property Monitor found that investor interest in distressed properties is growing fastest for Irish property. Moreover, professionals expect the Republic of Ireland, the United States, the United Kingdom, Spain, Portugal and Hungary to show the biggest increases in distressed listings over the next quarter.

“We’re telling investors that there are opportunities with commercial property in Dublin and surrounding suburbs, assuming all the regulatory issues are worked through and investors can get in touch with banks,” Barovick says. “You’ve got to be patient and understand the Irish economy and understand the scale; judging by the phone calls we are getting, though, we see there is interest in Ireland. The stabilization in the Euro and the bailout went a long way to rebuilding confidence.”