SPECIAL REPORT: End of an Eire

For years, Irish entrepreneurs invested their hard-won economic gains in property all over the world via the private banking channels of Irish banks. Now, those Irish powerhouses – Bank of Ireland, Allied Irish Bank and Anglo Irish Bank – have crumbled under huge losses related to property loans. Moody’s Investors Service has downgraded its rating of Irish banks to junk status, and it seems the bank’s real estate investment management businesses are becoming casualties of the situation. 

On 1 June, the largest of all the Irish banks, Bank of Ireland, announced it was ‘outsourcing’ Bank of Ireland Real Estate Investment Management (BoI REIM), a team that invested in real estate on behalf of syndicates of wealthy Irish clients in an effort to satisfy their love affair with property.

Not wishing to be seen as deserting its long-standing clients, the bank said the “new partnership” with US real estate investment and services firm Kennedy Wilson would see BoI REIM continue in its current role of investment advisor on €1.6 billion of property located mainly in Western Europe. “Customers of private banking will see no change in the management of their investments,” the bank said. That said, the investment team now will come under the Kennedy Wilson name and become the Los Angeles-based firm’s new European arm based in Dublin.

The ‘outsourcing’ is clearly part of the dramatic restructuring of Bank of Ireland, which is 36 percent owned by the Irish government and faces a monumental task of raising €4.2 billion in capital by a 31 July deadline imposed by the state. Trying to stave off full ownership by the government, the bank is doing what it can, although many bondholders and shareholders are disgruntled. One shareholder threw an egg at executives during the annual general meeting in June, with another calling the bank “lower than bottom-pond insects.” Member of Parliament Shane Ross called the bank “a complete and utter shipwreck.”

According to a spokeswoman, the outsourcing of BoI REIM will give Bank of Ireland some cost savings, but the wider significance is that, in general, the asset management platforms of Irish banks are consolidating. Niall Gaffney, chief executive of the Irish Property Unit Trust, which is the largest property trust in Ireland, said: “This is in line with everything going on. The investment management arms of the Irish banks are being sold, and they will be left as just high street banks.”

From that perspective, the move is similar to what has been happening in other parts of the world. One example is ING Groep of the Netherlands, which sold ING Real Estate Investment Management to Richard Ellis in Los Angeles.

So far, Bank of Ireland has sold Bank of Ireland Asset Management, an arm that manages around $36 billion in assets, including some real estate, to State Street Global Advisors for €57 million. It also has announced some property loan sales. Indeed, shortly after announcing the sale of BoI REIM, the bank said it was offloading a $1.5 billion portfolio of performing loans backed by commercial properties in New York, Washington DC and Boston.

A player in the making

The sale of BoI REIM is just a drop in the ocean in terms of the savings that are needed, but the sale is nevertheless noteworthy for real estate professionals. After all, it was not so long ago that BoI REIM was strutting its stuff on the international property stage.

Arguably, BoI REIM is better known outside of Ireland because most of its assets are oversees, said experts. During the property bull-run, when the Irish property diaspora was at its peak, the business was known as Bank of Ireland Private Banking. It changed its name to BoI REIM when it moved to the bank’s capital markets division in 2009, a spokeswoman noted.

Depending upon how you look at it, 2006 certainly was an apex – or a nadir. That year, Bank of Ireland Private Banking arguably made its most biggest global property splash by announcing to the world an investment in South Korea’s mega mixed-use scheme, the International Finance Centre in Seoul. The bank made a €50 million investment on behalf of clients in the €1.6 billion development, which was being built by AIG Global Real Estate.

The 5.4 million-square-foot project – which is on the cusp of completing its first phase – was hailed as being on a scale never before seen in Seoul. Yet, it was clear that it suited Bank of Ireland Private Banking’s aspiration. At the time, property director Peter Collins – who remains in charge of BoI REIM – said: “For clients seeking higher returns, we have been advocates of an increased exposure to Asia for some time now.”

By the end of 2007, BoI REIM had amassed a portfolio valued at €2.6 billion. Along the way, it chalked up some impressive returns. For example, investors received a 40 percent return in just two years when the bank sold its 50 percent stake in the UK’s Gallions Reach Shopping Park for £96 million in 2006. Indeed, the business achieved an average annualised return of 26.1 percent through property deals for clients.

Even in late 2007, BoI REIM was busy raising new vehicles for private clients. In October of that year, for example, it launched the €150 million European Retail Property Portfolio vehicle. The fund said it was seeking individuals “willing to accept an element of risk” by investing a minimum of €50,000. At the time, the vehicle showed plenty of confidence and maybe a little bravado.

Now, of course, any bravado has vaporised, and BoI REIM has been transferred to California’s Kennedy Wilson, giving the latter a new platform from which it can expand in Europe. William McMorrow, chairman and chief executive officer of Kennedy Wilson, said he is hampered in what he can say about BoI REIM, given that finalised terms for all aspects of the transaction have not been fully completed. However, he noted that he made his first trip to Ireland in December 2010 as part of a voyage of discovery about the European banking market and the Irish banking industry.

“When we studied the banking systems, it was obvious there was a need for external capital,” McMorrow said. “So I went to Ireland for the first time and held meetings with many senior bankers, government officials, lawyers, accountants and so on, and I came to the conclusion there was an opportunity to set up a platform in Ireland to encompass the whole of Europe.”

Kennedy Wilson is no stranger to such a foray, having done the same in Japan in 1990. “Our goal here is to build a business that will last for 50 years,” McMorrow said. “In order to do that, you need to have a great team, and that is what we have ended up getting by buying this asset management company from the Bank of Ireland.”

Kennedy Wilson’s new platform will source assets and use capital from its investment business to acquire real estate in Europe. The firm wants to replicate its success in the US and Japan, where it has acquired $2.5 billion of property in less than 18 months. To do that, it uses co-investment from the firm and its external partners, which include Toronto-based property and casualty insurer Fairfax Financial and the LeFrak real estate family of New York.

“The platform we have now bought in Ireland will be the beginning of investments we will be making in Europe,” said McMorrow. “We are talking about this team finding value-added assets in Ireland, the UK and the rest of Europe.”

Ireland’s outlook

Though clearly wider than just Ireland, now is an interesting time to be discussing property deals in the country given its banking sector issues. Indeed, the Irish property investment market is hardly seeing any transactions. One big reason for that is the new government’s proposal to introduce retrospective legislation that would tear up upward-only rent reviews in an effort to help retailers survive. In effect, rents would become free floating. The previous government looked at this under pressure from retailers but, after involvement by the Attorney General, it was decided the move would be unconstitutional. The new government has since said it would look at the issue again.

The predictable effect on the property investment community has been grave uncertainty. At the recent PERE Forum: Europe in London, at which Ireland was discussed, the question was asked: “What does one do as an investor, offer two prices?” The write-down in values, it was said, could be anywhere between 20 and 40 percent.

The other scary part to the situation in Ireland is that property owners might need to be compensated to the tune of many billions of euros. Furthermore, big property write-downs could impact Ireland’s National Asset Management Agency (NAMA) as it looks to recover as much value as possible from loans transferred to it at a discount from Irish banks and borrowers.

Setting aside that issue and the banking problems, Kennedy Wilson’s McMorrow believes Ireland’s economy should remain vibrant in the macroeconomic sense. “If you ignore what has happened in the banking industry, the underlying economy is actually very healthy with a strong labour force and export business. We are working with a number of big technology companies that want to relocate or locate their European operations in Dublin.”

Looking forward, McMorrow added: “We think that it may take another three to five years to fix the problems, but over the long term we think Ireland is going to be a very vibrant and healthy economy.” Bank of Ireland may have lost its real estate investment management business, but right now it is hoping to just be around in the future.