How healthy are current inflows into Irish funds?
Capital inflows to Ireland remain robust. Approximately 60 percent of the €4.5 billion investment volume in 2016 came from cross-border investors, 80 percent of which went into the Dublin market. In total, €1.3 billion of Dublin investment was spent on office assets and €1.8 billion was spent on retail assets.
These were primarily made up of two large shopping centre transactions: Blanchardstown, which was acquired by Blackstone for €947 million, and Liffey Valley, which was acquired by BVK for €632 million. The largest office building in Dublin, One Spencer Dock, was also bought by an international investor from the Middle East, AGC Equity, for €240 million.
While volumes of €475 million in Q1 2017 were relatively modest compared to previous quarters, there were still notable transactions attributed to US and UK investors. The level of incoming inquiry is still very solid with investor demand remaining strong, particularly for core assets.
Did you see a slow start to the year?
The slow start to the year in terms of actual monetary turnover is really a function of a supply squeeze for larger ticket properties. In fact, on a like-for-like basis, the absolute number of transactions in Q1 2016 and 2017 are more or less identical.
Due to bank deleveraging programmes reaching a cyclical end in 2016, the supply of product has been naturally curtailed. Also, if you profile the recent buyers in the investment market, they tend to be ‘buy-to-hold’ investors attracted by income quality and as such are not internal rate of return-focused, seeking quick profit in a short-time frame. They have been flipped to Irish domestic pension funds, insurance companies and European property funds, which have a longer term view.
BNP Paribas Real Estate (RE) is forecasting overall investment volume to be €2 billion in 2017 which is approximately half the volume of 2016, but still above the 10-year average of €1.9 billion. Investor demand remains healthy and the pace of product coming to market has been gradually increasing throughout Q2, with some good investment properties currently for sale, including office space One Grand Parade and retail asset 100/101 Grafton Street.
What strategies are you pursuing?
We are utilising and leveraging our parent BNP Paribas, as one of the largest financial service providers in the world with a network of more than 180,000 staff. Our parent has strong corporate connections spanning the globe, a very prominent private wealth network and access to some of the very largest sovereign wealth funds.
Within BNP Paribas RE itself, Ireland also benefits greatly from the support of our international investment group (IIG) led by Etienne Prongue. IIG operate two international platforms designed to source and accompany global capital flows from Asia Pacific and Middle East to the European market and this initiative is certainly beginning to reap dividends for the Irish office.
What are the challenges that lie ahead for Irish funds?
The main challenge for Irish funds is the competition from foreign investors. Ireland is now very much an established investment market that attracts North American investors, and core European funds from France, Germany, Switzerland, as well as strong interest from further afield such as the Middle East and the Asia Pacific.
This will translate into competitive bidding for best-in-class assets that Irish funds traditionally target and which in turn will inevitably lead to a sharpening of prime yields. However, given their local knowledge, a domestic investor will always have the advantage of being able to take a harder view of the market as and when needed.
How will the UK’s exit from the EU affect Ireland?
The UK’s departure from the EU is incontestably not good for the Irish economy and will continue to be a drag on GDP into the foreseeable future, with particular turbulence likely to be felt by Irish exporters who have performed very strongly in recent years and are the backbone of the economic recovery. However, from a real estate perspective, one can certainly expect an uplift to the occupier market, evidenced by recent announcements from J.P. Morgan, Barclays and the Bank of America, which will have a positive impact on take-up as well as helping to sustain current rental levels and capital values.
Notwithstanding this, BNP Paribas RE believes the take up in Dublin City Centre attributable to Brexit-related activities might not be as pronounced as some as our competitors are championing. The addition of new jobs/arrival of new entities will come in a piecemeal fashion.
Early feedback suggests that there are obstacles to overcome. Of primary concern is that the Irish regulatory system is ironically proving onerous to some potential banks/insurers looking to relocate to Dublin in addition to the high rate of personal tax for top executives. There are also some secondary concerns around housing availability and infrastructure.
The reality is that Dublin faces stiff competition from other major European cities and the fact that English is the spoken language is not a good enough unique selling point for relocation, so the holistic package has to be compelling. Other provincial locations such as Cork and Galway with good infrastructure access may benefit as cost-effective alternatives for non-core activities.