News analysis: Ireland’s dichotomy

Increased leasing of office space in Dublin underlines why some private equity real estate firms think Ireland is an opportunity despite its glaring problems.

Looking wide-eyed at the headlines about Ireland over the past few days, it feels strange to receive research about leasing of Dublin’s office space increasing.

Yet Savills, the property services firm, declared that lettings had doubled to 45,500 square metres in the first quarter compared to 2010, reflecting “healthy demand for prime office stock in the Irish capital”, with a corresponding fall in vacancies to 23.2 percent.

It is strange to hear at a time when Ireland is in such dire straits that a stress test on its banking system suggested the county needs to pump an extra €24 billion into its banks to get them through the financial crisis.

Anglo Irish Bank, which was at the forefront of aggressive property lending in the bubble years, is one of those. It just confirmed an unwanted Irish record: at €17.7 billion, no Irish company has ever had a bigger loss. The reason for that is the €14 billion of soured loans transferred to Ireland’s state-sponsored work-out group, the National Asset Management Agency (NAMA). Next week, it is rumoured there might be further bad news, this time to do with NAMA potentially foreclosing on one of the poster children of the Irish property diaspora.

To be sure, Ireland’s situation is grim, as its new government knows all too well. It has to grapple with an €85 billion rescue package, which was agreed last year with the European Union, in return for which The Emerald Isle introduced a fierce austerity package.

So, how does any of this translate into opportunity for opportunity funds? Well, some investors believe that the fundamentals of certain sectors of Ireland’s property market – as pointed to by Savills research – paint an interestingly positive picture. In short, the thesis goes like this: Given that Irish workers must expect lower wages and that rents have fallen,  international companies will view Ireland as a competitive place to base themselves.

Google is an example of a large company that has only very recently decided to do just that, having purchased the new 200,000-square-foot Montevetro office building in Dublin. In fact, that investment and occupation deal accounted for 42 percent of the space Savills recorded being taken up in the first quarter, but the firm points out that all the rest of the space taken up was down to pure lettings. Positively, it said leasing could reach 150,000 square metres by the end of the year, reflecting a “healthy” demand for prime office stock. 

Joan Henry, head of research at Savills Ireland, said in a statement: “Demand for office space in the first three months of the year has been strong.  The fall in vacancy rate reflects a combination of factors, in particular a consistent level of demand for space since the middle of 2010 and a halt in the amount of newly completed space coming to the market, especially Grade A space in prime locations.”

Roland O’Connell, director of office agency Savills Ireland, added: “We expect demand for space to remain consistent as existing occupiers look for opportunities to move to better locations on more favourable terms and conditions.  The continued interest and demand from multi-nationals, particularly in the IT and financial sectors, recognises Dublin’s competitiveness as an important business centre.”

These are the ingredients – namely competiveness, low stock availability and Ireland’s traditional strength in attracting multinationals in the IT and financial services sectors – that are making some opportunistic firms turn their heads. Opportunity funds might question the wisdom of buying a shopping centre with significant vacancies, but office property has different forces at play.

In a recent interview, Roger Barris, whose Peakside Capital just spun out of Bank of America Merrill Lynch in Europe, said he was looking hard at the country and felt it was an opportunity precisely for the reasons stated above. Meanwhile, TPG was close to a deal to buy a significant package of properties last year, but the private equity firm put that on hold at the time because the government was about to agree to the €85 billion bailout package.

There will no doubt be many who say the Irish macro risk is too great to put a ‘buy recommendation’ on property in the country, but for others the particular case for assets such as Dublin offices could prove compelling.