The stock-market flotation of three Irish real-estate investment trusts in 2013 and 2014 lured some of the biggest names in international finance – and some of the most nimble.
US hedge fund king and all-round Donald Trump fan John Paulson, who made billions betting against the US housing and subprime-mortgage markets before the bubble burst in 2008, snapped up a 13 per cent stake in Green Reit as it floated in July 2013, through his firm, Paulson & Co.
Hungarian-American financier George Soros, who earned $1.5 billion and a reputation as the man who broke the Bank of England when he wagered against sterling in 1992, and a collection of hedge funds, including Moore Capital Management and Marshall Wace, piled into Hibernia Reit's initial public offering (IPO) five months later.
And Irish Residential Property Reit's (Ires) flotation almost three years' ago saw two hedge funds, New York hedge fund Fir Tree Partners and Starwood Real Estate Securities of Connecticut, acquire more than 22 per cent of the stock between them.
Cash shells
The three Reits initially raised €1.56 billion of debt and equity to buy up property on the cheap in a market where commercial property prices had slumped by more than two-thirds from their 2008 peak. They were basically cash shells, enabled by 2013 legislation, which stipulated that Reits must hold at least 75 per cent of their assets in rental property, distribute at least 85 per cent of their income (excluding capital gains) to shareholders and limit borrowings to 50 per cent of the value of their assets.
They would help professionalise the property sector in Ireland, giving investors direct access to the recovering commercial and residential property markets by investing in stocks in tax-efficient trusts.
Green Reit’s shares soared as much as 68 per cent in their first two years on the market, while Hibernia Reit advanced up to 43 per cent and Ires jumped 23 per cent.
Fast forward to February 2017. Paulson’s Green Reit stake has been slashed to 1.75 per cent, Soros, Moore Capital and Marshall Wace have cut their stakes below the 3 per cent level that they are required to disclose to the stock market, and Fir Tree and Starwood have reduced their holdings to zero. Green Reit’s stock has declined by about 6 per cent since Paulson exited last year, while Hibernia Reit has dipped by 4 per cent since Soros’s departure.
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Evolution
"There's been a natural evolution in the investor base for Irish Reits," according to Kevin Nowlan, chief executive of Hibernia Reit, whose €1 billion portfolio includes the Garda Dublin headquarters on Harcourt Street and office blocks rented out and being developed in the city's docklands.
“Some of the early investors, who perhaps saw the investment as a bet on the Irish recovery story, have been proven right and made decent returns. As some of them move on, there is increasing interest from more traditional property investors who are only going to invest once a sizeable portfolio of assets has been acquired.”
The weak performance of Green Reit and Hibernia Reit shares in the past six months has, in part, been down to the fact that European bond yields have been rising again, making dividend-yielding property companies relatively less attractive, according to analysts including Dylan Simmonds at Merrion Capital.
In addition, the rate of rapid upward revaluations of Irish property has eased. Total returns from Irish commercial property, which includes income and capital growth, slowed to 12.8 per cent in 2016 from 25 per cent a year earlier and 40 per cent in 2014, according to figures from the Society of Chartered Surveyors of Ireland and Investment Property Databank.
Green Reit said last week that its €1.3 billion property portfolio, which includes the landmark George's Quay Plaza high-rise office complex behind the former Ulster Bank headquarters and a seven-story building on Albert Quay in Cork, had benefited from only a €25 million revaluation uplift during the last six months of 2016. In the same period in 2015 it received a €43 million boost.
"In terms of the real-estate market, returns are slowing from the record levels," said Green Reit chairman Stephen Vernon. "Rental growth is still there, but it's slowing."
Further clouds are on the horizon. California-based property group Kennedy Wilson, which was among the first overseas investors to dip toes into the Irish market following the crash, warned on Friday that a move by the Government in the Finance Act 2016 to tax Irish property assets held in special-purpose vehicles and funds, following political pressure, "may affect the general investment appetite for Irish real estate and create negative investor sentiment".
Still, some observers, such as William Fogarty, a partner in law firm Maples and Calder, believe that some of the previously ultra-tax-friendly fund structures will convert into Reits and ultimately join the stock market. (An Irish Reit must secure a public quotation within three years of being formed.) Kennedy Wilson's European unit is listed on the London Stock Exchange and counts among its assets Stillorgan Shopping Centre, Portmarnock Hotel and Golf Links, Baggot Plaza office building in Dublin 4 and numerous multi-unit residential rental developments in the capital. Kennedy Wilson Europe was forced to reduce the value of its UK investments last year as the market there was impacted by Brexit.
Meanwhile, the Government's recent move to cap residential rent increases in Dublin and parts of neighbouring counties, Cork and Galway to 4 per cent a year over the next three years "will limit income growth prospects, and in turn capital valuations" for Ires, according to Colm Lauder, an analyst with Goodbody Stockbrokers. Dublin rents rose nearly 15 per cent last year before limits were introduced.
Acquisitions
Ires’s “future growth will, primarily, be driven by new acquisitions and developments,” Lauder said. “Ires has significant capacity to do this,” he said, noting that debt, at just 31 per cent of the value of its portfolio, is below its 45 per cent target, giving it €150 million of additional financial headroom.
“We are moving to a stage in the cycle where having quality asset-management and development opportunities will be key to delivering performance,” said Nowlan at Hibernia. “Standing still and owning dry assets is unlikely to be a way to outperform the market.”
The company is currently developing 11,300sq m (122,000sq ft) of offices, 650sq m (7,000sq ft) of retail and 14 residential units on Windmill Lane in Dublin, which is due to be completed by the middle of this year. The company is currently in talks with “a number of parties regarding potential lettings”. A neighbouring project on Sir John Rogerson’s Quay is also being advanced.
Green Reit completed the letting in November of its first office development at 32 Molesworth Street in central Dublin, with financial firm Maples Fund Services agreeing to rent the entire 3,000sq m (32,000sq ft) property for €1.65 million a year. The trust said that three other office schemes it was working on were progressing well.
The new developments play into the Brexit theme, with the State targeting 10,000 additional jobs in the international financial services industry by 2020 alone. Green Reit’s Vernon said last week that he expected the first Brexit-related leases to be signed by the end of the year. Meanwhile, there is plenty of tyre kicking.
“At the moment, there is a decent level of what we believe are Brexit-related enquiries but it may take some time to see how much of this turns into firm requirements,” said Nowlan.
But what if the hoped-for influx of activity from the City of London doesn't emerge?
“There is robust demand from occupiers in the market, even if you discount Brexit-related activity, which makes me confident that market dynamics will remain favourable,” said Nowlan. “Limited access to financing for speculative development makes it very hard to envisage a repeat of the ‘build it and they will come’ approach that stoked the previous property crash.”
