What are the challenges and where are the opportunities in Irish real estate at the moment?
Kelly O’Hara: Our clients appear to have a broadly positive outlook for the Irish real estate market and we see plenty of demand for exposure to Irish real estate–both direct and indirect (for example, real estate finance) with particular emphasis on growth sectors such as healthcare and the hotel industry.
Office rents are continuing to grow and are now at €60 per square foot in Dublin’s prime business locations, which is just below the Celtic Tiger peak of €70 per square foot. There may be challenges in some non-prime retail in the short term, with considerable activity on the asset management side where new lettings, surrenders, lease re-gears, unit relocations and alterations are taking place to add value to many assets acquired via non-performing loan (NPL) sales. However, there are also opportunities for many retail investors, as leases completed during the recession face their first rent reviews in five years.
How will the UK’s exit from the EU affect Ireland?
O’Hara: Brexit may arguably be having a positive effect, as international real estate investors may be deterred by uncertainty in the London market. The Dublin office market enjoyed a strong start to 2017, with one of the largest deals in the first half of the year being the pre-purchase by J.P. Morgan of a 130,000-square foot block in Capital Dock in Dublin’s south docks, giving J.P. Morgan the potential to double its Irish workforce in response to Brexit.
It is too early to say whether any other large-scale relocations will take place, but there is considerable development activity in the market, particularly in Dublin, to increase supply, with nearly 40 percent of this pre-let.
What trends are Dillon Eustace noticing in the real estate market?
Conor Houlihan: The demand for Irish real estate is also underpinned by strong fundamentals. The Irish economy continues to grow and requires additional residential and office and commercial real estate. We are seeing a relatively more conservative and considered approach to transaction underwriting and commercial terms (compared to pre-crisis), which might also be slowing the pace at which the gap between supply and demand is narrowing.
A major driver of transaction levels over the past few years has been the significant deleveraging of real estate debt by Irish banks. A very high proportion of Irish commercial property assets have changed hands (and least once) in the past three to five years—either directly or via loan sales. Those original acquirers have since been exiting their investments, which often results in the real estate ending up in the hands of longer-term investors. It can be anticipated that this may result in reduced transaction volumes in future years.
Development financing is an area in which we see continued growth with a significant pipeline at margins and transaction terms (for example, long-term contracts) that are attractive to our lender clients.
O’Hara: The market is also witnessing new entrants with a particular focus on the development of student accommodation and large-scale buy-to-rent or develop-to-rent residential schemes, as Ireland is facing a significant shortage of residential stock in prime-city locations.
What are the challenges facing Europe’s NPL market?
Houlihan: In terms of the NPL market, Ireland has been one of the more active markets in recent years. Some further deleveraging can be expected, however we expect that the number of transactions will continue to reduce (although some larger transactions are still likely).
In the wider European NPL market we still see plenty of activity and, with recent European Central Bank guidance, accounting changes and other pressures, we expect that activity to continue. As a jurisdiction with a strong reputation (since before the financial crisis) for international debt repackaging, and as a firm with a particular expertise in this area, we are interested in the solutions that European banks will use (in particular securitisation technology) to resolve their NPL problems. As such, this is an area on which we are particularly focused at the moment.