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Is the Irish commercial property feeding frenzy a good idea?

Investors are hungry for Irish assets, and they’re not short of cash. But are we underselling ourselves?

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NEARLY €2000 WORTH of Irish property loans has been sold for every person in the State so far this year.

That’s what this graph, presented by real estate broker Cushman & Wakefield at a conference in Dublin this week, is telling us.

We’re streets ahead of our closest rival, the UK, and leave the rest of Europe in our trail.

Outside of loan sales, the market for bricks and mortar real estate is also projected to return, albeit briefly, to transaction levels last seen in 2006.

After closing €1.9 billion worth of deals in 2013, there’s been €932 million already done in the first quarter of this year. That’s projected to hit €3 billion by the end of the year.

The reason for this is not hard to discern. A total of 95 per cent of Irish sales in the year so far have been from IBRC and NAMA. IBRC alone has sold €16.7 billion worth of European loans in 2014.

€10 billion worth of commercial real estate loans from Permanent TSB is also expected to come onto the market in the near future.

Neither is it by accident. Michael Noonan’s finance department has been pushing the sale of these loans. The logic is that NAMA and IBRC should take advantage of the positive sentiment towards Ireland at the moment – to strike while the iron is hot.

But is it a good idea?

However, one seasoned observer of the Irish property market believes that the rush to dispose of the loans and property amassed by NAMA and IBRC may be hasty.

Karl Deeter of  Irish Mortgage Brokers is concerned by just how aggressively investors are buying up Irish assets.

“There are a few aspects I wonder about. Are we definitely getting good value? If everyone is piling in to buy loans, there must be a reason.”

Federico Montero is a Partner in the corporate finance division of Cushman & Wakefield. He made the presentation from which the above slide is taken.

He agrees that the appetite for Irish property is unprecedented.

“Every time NAMA puts something in the market there’s a very long list of very important people looking at it.”

The size of the wall of money targeting European real estate investment is mind-boggling. An estimated €129 billion, spread across funds and asset managers, is available to invest in the disposals that are going on at the moment.

The UK & Ireland is meeting the majority of the demand at the moment. Loans relating to the two countries sold so far this year add up to €23.6 billion. The next two largest markets, Germany and Spain, come to €6 billion between them.

Logic

Unlike Deeter, Montero says that there’s strong logic behind offloading the loans and property portfolios in the short term.

While there is a risk that the properties will increase in value in the future, leaving NAMA looking foolish, he says that the State’s bad bank might not be the correct organisation to steward these assets in the coming years.

“To keep the properties for one or two years more isn’t that simple. There’s management, which takes cash, and NAMA needs to repay bonds.”

“You need money and expertise to create value, and sometimes NAMA isn’t the best to do that.”

Deeter, however, says that the Government could play a smarter hand by biding its time.

“You could wait. The idea of NAMA was to create a stagnation in the property market to let long term economic value be realised. Why not wait a couple more years?”

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Reading the tea leaves on the property market is never easy. A capricious market is all too quick to make confident predictions on the future seem foolish.

That’s what Duncan Lyster of Lisney real estate argues. Better to bid rid of the portfolio now than saddled with it if there’s another crash.

“There will be a shock. We don’t know what it’s going to be.”

“You know you have a market today and you mightn’t have one in three years time.”

Goodbody Stockbrokers chief economist Dermot O’Leary agrees.

“We’re in a sweet spot for commercial property assets in Dublin at the moment. 2015 is going to be the start of a more challenging period because the expectation is that interest rates will start to go up in the US in mid 2015.”

When the US interest rates go up, markets worldwide feel the cooling effects.

O’Leary says that the Government shouldn’t be managing property at all, and that while there is a risk that it could be left with egg on its face if the purchasers of the IBRC and NAMA loan and property portfolios flip them for a considerable profit, it’s a small one.

Giving up value?

But while the stars seem to have aligned for IBRC, NAMA and the Government at the moment, Deeter remains unconvinced about the tactics employed to take advantage of it.

The goal of dissolving NAMA and, at least notionally, drawing a line under the chapter of Irish history, is an attractive one.

“I just wonder whether NAMA is giving up some value to achieve its goal.”

Ultimately, only time will tell whether the trigger has been pulled too early on the disposal of loans and property relating to IBRC and NAMA. But for the time being, as Deeter puts it, “we are a country for sale. And we are selling”.

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About the author:

Jack Horgan-Jones

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