Ireland special report: Rebuilding site
24 June 2013 | By Joanne Harris
The spectacular collapse of the Irish property market dragged the whole economy down with it, but real estate is now back, spearheading a revival
The Irish property market was one of the big successes of the early 2000s, driving the country’s economy to soaring heights. But it was also the cause of the country’s collapse when in 2008 property prices suddenly plummeted.
The resulting turmoil forced Ireland to seek a bailout from the EU, and also prompted the creation of the National Asset Management Agency (Nama), Ireland’s ‘bad bank’, which took from the banks control of 12,000 property loan portfolios valued at €74bn.
The crash in the market had an impact on law firms as well as every-one else, with property teams suddenly finding their core work had vanished. Little changed for the next few years but last year the tide seemed to turn and once again property departments are busy.
The change, according to lawyers, happened quickly and with little warning.
“In September last year someone flicked a switch and we started to see a stream of individual assets being brought to the market,” says A&L Goodbody partner Stephen O’Riordan. “With that came an interest in these assets, both domestic and international, because they were essentially trading at values that were below historic averages.”
Arthur Cox property head Mark Barr agrees that things changed in the autumn of 2012.
“Frankly there’s been a lot of carnage in the market over the past five years,” he says. “There hasn’t been a lot of transactional activity of any merit although there’s been a lot of diligence work for the banks. Happily since the autumn of last year we’ve seen an uptick in transactional activity and it’s been pretty busy. There’s still a long way to go before it gets back to normality.”
Mason Hayes & Curran’s property head Kevin Hoy adds: “We’re seeing a lot of interest from foreign investors but also Irish investors who made money in the boom times and managed to keep some of it.”
Lawyers are hoping this pick-up will not prove to be a false start. Byrne Wallace real estate head Michael Walsh says in the past year or so there were periods when things seemed to be busier, but the 2012 Budget – which added to spending cuts – had a “severe impact” on the market.
“January and February of last year were quiet. Things were very topsy-turvy in Europe and business stood still. From September it picked up and we were waiting for things to quieten down but it hasn’t yet happened,” Walsh reports.
Private equity moves in
The major change seems to have been driven by overseas money, notably from private equity funds.
“They’ve been coming in and buying distressed real estate loan portfolios. That was probably the secret of the resurgence,” believes William Fry commercial property head at Andrew Muckian.
One of the big sellers of Irish loan portfolios is Lloyds, which began the process in March last year. The bank picked up loans when it took over HBOS in 2009 and also had some of its own.
Lloyds sold the first book of loans, known as Project Prince, in June 2012. Kennedy Wilson Europe and Deutsche Bank paid €61m for the portfolio, nominally worth €360m. The bank went on to dispose of two further portfolios to CarVal Investors and Apollo Global Management.
According to lawyers, these types of private equity houses are typical of current investors in the market, although the reason for investment varies.
“There are those that buy loan portfolios for the purpose of running them off and others that are more focused on a loan-to-own basis and are comfortable to acquire a loan to get a property. It’s fantastic as far as we’re concerned, as it means that we can bring to bear the full range of our expertise,” says A&L Goodbody’s O’Riordan.
He says the nature of the sales means firms have to deploy a team including banking, insolvency and property lawyers, making the work both challenging and exciting.
Shift to real assets
However, an intriguing trend in the past few months is a shift from loan portfolio work to transactions involving real assets.
“Any decent assets that have come on the market have been very fiercely chased. Office investments are still regarded as the prime assets in the market and the ones creating the most interest,” Arthur Cox’s Barr says.
Once again, the buyers of such assets are predominantly foreign.
“Stuff that’s been stagnant for the last several years has been put on the market,” says LK Shields’ banking partner David Williams, who specialises in property finance. “There’s a lot of foreign money being attracted to Ireland. They’ve been watching the prices deflate and are back on the market as they can see there’s value.”
William Fry’s Muckian says the main areas of attraction for investors are prime office space and hotels, attracting private equity funds from the US as well as some Irish pension funds, which are prepared to put money into this type of asset.
LK Shields has seen work for clients that were renting premises but can now, due to low prices, afford to buy instead.
“That shows some confidence in the market that prices have come to a level where they’re not going to go down further. It’s cheaper to buy than to rent in the current market,” Williams notes.
In the past few months a series of high-profile buildings have gone on sale and been snapped up by those looking for a bargain. Offices that have been sold include State Street’s headquarters in the prime Docklands area – close, in fact, to many of the law firm offices. The building was sold to Kennedy Wilson, which as well as taking part of the Lloyds loan portfolio has bought a number of other buildings.
Meanwhile the Central Bank has bought the shell of a building which was once planned as the headquarters of the Anglo-Irish Bank. Only half-complete when the crash hit, the building was left unfinished when Anglo-Irish went into liquidation. It has remained ever since a visible symbol of the crisis on the banks of the River Liffey, right opposite the offices of law firm Matheson.
Last year the Central Bank purchased the building from Nama for a reported figure of €7m, a fraction of the original €250m value of the premises.
“It’ll be an interesting postscript to what’s happened here, the Central Bank buying what was an iconic symbol of the crash,” notes Barr.
Hotels’ high profile
The other prime asset popular at the moment is hotels.
“The hotel market in Dublin has been resilient during the downturn and occupancy rates have held up quite well,” says Barr, noting that this has helped the attractiveness of the market.
Private equity house Blackstone paid €67m for Burlington Hotel in Dublin last November, and a US-Swiss consortium bought a building, also in Docklands, which was opened as a five-star hotel at the start of April.
Outside Dublin, Brehon Capital Partners has recently acquired the Ritz-Carlton in County Wicklow, south of the city, for an undisclosed amount – the firm disputed the figure of €1m reported by the Irish Independenton 2 June. And in Galway, a boutique hotel chain has just bought Ashford Castle hotel from receivers Ernst & Young, 18 months after it went into receivership.
Much of the activity in the hotel space has come from receivers offloading assets which they have been safeguarding for months or even years.
“Receivers have been running hotels because they couldn’t sell. The banks were pulling the strings of the receivers and saying now is the time to sell,” explains Williams.
O’Riordan says receivership of hotels is often forced by the situation the banks are finding themselves in.
“In reality the only person with skin in the game is the bank. The only options for the bank are to appoint receivers or in some instances they’re selling the loan and allowing the purchaser of the loan to determine how best to get into the asset below,” he says.
Another reason for hotels to be sold is that many were set up as a tax break in the early 2000s and the tax life of those deals is now coming to an end.
The bad bank
Although Nama is a big name in the Irish property market because of the amount of loan portfolios it holds, to date most of its activity has been outside the country. This, lawyers believe, was a sensible strategy.
“Nama has obviously and logically gone for lower-hanging fruit. It will have proven to be the correct strategy if by the time they start selling in Ireland values will have recovered somewhat,” says Byrne Wallace’s Walsh.
Much of the Nama-related work – which has generated around €40m in legal fees to date for the myriad of firms on its panel – has been due diligence. That accounts for international firms Hogan Lovells and Allen & Overy being among the biggest earners from Nama work, although Arthur Cox, A&L Goodbody, McCann Fitzgerald and Matheson have all picked up fees of €2m or more since 2010.
“There was a huge amount of restructuring going on in terms of assets being taken off banks’ balance sheets and being transferred to Nama,” explains O’Riordan.
However, Nama is beginning to shift its focus to Ireland. A massively popular sale earlier this year saw US real estate investment house Starwood Capital win the bidding for an €800m loan portfolio known as Project Aspen. Starwood led the consortium that took control of 80 per cent of the portfolio, with Nama retaining the remaining 20 per cent.
Nama is likely to begin selling more of its assets in the coming months, and property lawyers say non-Nama banks have also been involved in asset disposals.
Other distressed work with a property connection includes the liquidation of the Irish Bank Resolution Corporation. IBRC went into special liquidation in February and is in the process of transferring property assets to Nama.
“We suspect it’ll mean there’ll be a lot of refinancing and asset acquisition activity in the second and third quarters,” says Barr.
Slow return to building
The other angle of real estate is construction but for the time being there has not been the same resurgence in developing new property as there has been in selling existing buildings.
“Construction has really taken a hammering in Ireland. Government spending on roads and infrastructure has really fallen off a cliff,” says Barr.
But the construction market is also showing signs of renewed health.
“Interestingly in the past month or so we’re seeing prime development assets, not necessarily with income streams but with very significant development potential,” says O’Riordan.
Barr agrees: “Unfinished schemes that make commercial sense are now getting finished and we’ve got developers bidding for that work.”
And Hoy points out: “As we continue to be successful in attracting companies to establish in Ireland, we do need space. There are some construction projects starting and I see that continuing.”
That said, the construction sector was hit hard during the downturn and there is a limited pool of resource available to work on the projects which are live.
“A lot of Irish developers went out of business or moved their business to other jurisdictions,” Barr adds.
This has hit prices.
“We’re seeing some return to public infrastructure and some of our clients are back building in residential,” says Walsh. “That’s proving challenging because the cost of labour and materials hasn’t decreased materially, if at all, in the past few years while the cost of [housing] resources has declined very significantly. It means that they can’t build anything for the price that it’ll command in the market presently.”
Nevertheless, there do seem to be positive signs that the development market, like the debt and asset market, is on the up at last.
For lawyers, the bounce-back is good news and firms are once again recruiting for their property practices as well as promoting – McCann Fitzgerald made up property lawyer Richard Leonard amid its five promotions this year.
The challenge now is finding the people.
“There’s a lot of demand for good junior solicitors with relevant experience,” says William Fry’s Muckian.
A&L Goodbody banking partner Ciaran Rogers says shortage of supply at the junior end is beginning to manifest itself.
“We’re seeing an issue in the market where a lot of law firms would have reduced their numbers of NQs in ’08, ’09, ’10, and that’s beginning to come through in terms of a shortage of capacity in the market at about four years qualified,” he observes.
LK Shields managing partner Hugh Garvey says many younger lawyers in property moved in-house or into different sectors when the crash happened. He is optimistic that some will now decide to return to private practice.
Muckian is not surprised that good young property lawyers are in short supply.
“It happens after every property downturn. There will usually be a two to three-year period when not many people have been qualifying into property. As soon as an upsurge happens in these concentrated sectors firms find it difficult to recruit,” he says.
The big question is whether the pick-up in property in Ireland will be more gradual than in the past, or whether there is a risk of another bubble in the future.
Lawyers are hopeful that the lessons of the past have been learned, but warn that there may yet be a bumpy road ahead.
“You’re going to find that the market’s going to be made up much more of traditional property investors and private equity investors as opposed to what was a feature of the market here during the boom years – investors in the market who had no experience of property investment. That’s going to lead to a very mature and stable market,” Muckian thinks.
He is confident that restrictions on bank lending could help control the market in the future.
“Once property heats up you tend to get a much wider class of investor into property than other asset classes because it’s something that everybody feels they’re able to do.
“The avoidance of future bubbles and crashes will really be dependent on how loan finance is going to be made available. Everything points to banks being much more prudent about property lending than they were during the Noughties,” he adds.
Rogers says foreign investors will keep the property market moving for the foreseeable future, with the lack of liquidity keeping many domestic investors out.
Nevertheless, there remains concern that in a few years’ time troubles could return.
“Does anybody ever learn the lessons of the past?” asks Mason Hayes & Curran’s Hoy. “We’ve been pretty battered and shell-shocked by the experience. The danger for us is that we all become too conservative because we forget the basics of property management.”
A&L Goodbody’s O’Riordan echoes his thoughts.
“It’s going to be a case of it was ever thus,” he says. “You’d think that because of the fact that we had this major boom followed by this very significant bust that the market should learn its lessons from that, but the reality is that if you look back over the past 30 years, history has had two previous major booms and busts.
“I’d like to think that we would have learned lessons from that but it doesn’t seem that many do learn lessons from the past. As people start to get returns from their investments now, they’ll continue to pile in.”
Key figures: Ireland
GDP (current US$, 2011): 217.3bn
Annual inflation (April 2013): 0.5 per cent
Population (April 2012): 4,590,000
Life expectancy at birth: 80
Unemployment rate (May 2013): 13.7 per cent
Source: World Bank, Central Statistics Office Ireland