FEATURE: Rebooting Ireland

It is lunchtime at the Grand Canal Hotel in central Dublin, and all is quiet except for Sky News on a TV and what appears to be a modest-sized Chinese wedding party. As the one-year anniversary of Ireland’s €85 billion bailout by the European Union and the International Monetary Fund (IMF) approached, businesses like this privately-owned hotel are finding ways to survive in the face of big structural problems in the economy. Those problems include Ireland’s 14.4 percent jobless rate – the third highest in the Eurozone behind Spain and Estonia – and its €144 billion debt burden, which augers significant domestic spending cuts.  

Of course, there are plenty more scary statistics to be found about Ireland if you want to find them, plus the odd tale about accounting mishaps when it comes to calculating the national debt. For example, on 4 November, John Whelan, chief executive at the Irish Exporters Association, reported an “unexpected turn of events” for the Irish export sector, which accounts for 96 percent of the country’s gross domestic product. Exports had experienced only 1.7 percent growth in the third quarter due to problems in the Eurozone. “If this continues, it could derail the Irish economic recovery, which has placed a high dependence on being export-led,” he said.  

Out of fairness, a number of positive steps have been taken over the past 12 months as well. For one, Ireland changed its government. Second, the National Asset Management Agency (NAMA) has managed to sell between €4 billion and €5 billion in loans. It recently put out a tender for a bench of loan sale advisers to speed the disposals of €30.6 billion worth of Irish, UK, European and US assets that remain. Third, Ireland’s banks have now been recapitalised and, with the help of BlackRock, the country completed its own ‘stress tests.’

In addition, further signs of stabilisation arrived last month when it was revealed that gross domestic product grew 1.6 percent in the second quarter of 2011 (although a blot exists with domestic demand having declined 2.2 percent). Helping that figure was the announcement by Twitter of its intention to set up a European headquarters in Dublin, joining such technology companies as Google, Facebook and LinkedIn. Meanwhile, hotels in the city may be seeing business pick up, with a nearly 12 percent increase in visitor numbers through the first seven months of the year, prompting accounting firm PwC to predict that growth in room occupancy for 2011 could be 6.1 percent above last year. 

So, what is private equity real estate’s role in all of this? Does it even have one? The answer is ‘yes’, but not in the obvious ways so well documented to date, such as being buyers of loans attached to assets outside Ireland. 

Embracing a NewERA

One of those less obvious ways has to do with the Ireland’s National Pensions Reserve Fund (NPRF) and the general partners of the property funds in which it invests. NPRF is located just five minutes from the Grand Canal Hotel in the angular Treasury Building it shares with NAMA and the National Treasury Management Agency, which manages the assets and liabilities of the Irish government and NAMA itself. The pension plan is of particular interest to readers of PERE because it is a limited partner in a number of European, Asian and US real estate funds, totalling around €510 million in commitments. 

Originally set up in 2001 to meet as much as possible of the costs of Ireland’s social welfare and public service pensions from 2025 onwards, the NPRF more recently has played an important part in Ireland’s plans to rectify itself. During Ireland’s boom years, it acted like a piggy bank to meet any shortfalls in the ability to meet pension liabilities should ‘pay-as-you-go’ payments falter. In the wake of the 2008 property crash and ensuing financial crisis, its reason for being has shifted to one of helping Ireland more directly. After all, NPRF was a rainy day fund, and it began pouring in Ireland. 

In 2009, NPRF was directed to help stabilise certain banks, such as Bank of Ireland, by making financial investments in them. Earlier this year, it was busy selling assets to play its part in Ireland’s promise to contribute €17.5 billion to the EU-IMF bailout. Between January and the end of June, the pension fund sold €10 billion worth of assets, and the mission continued beyond that. In July, it invested €1.2 billion in Bank of Ireland, mainly comprised of underwriting a rights issue, and subsequently, in August, it sold shares in Bank of Ireland worth around €1 billion to foreign investors led by private equity firm WL Ross & Co, reducing its stake to 15 percent of ordinary shares in the bank. One month earlier, the Minister of Finance directed it to invest €8.8 billion in Allied Irish Banks.  

Now, with residual assets of €5.3 billion, NPRF recently has been asked to perform a new function. On 29 September, the Irish government announced the creation of NewERA and the Strategic Investment Fund under the auspices of the National Treasury Management Agency – an endeavor partly funded by the NPRF. 

NewERA will be established in the first instance much like a shareholder executive model akin to those established in many other countries, including the UK. It will seek to consolidate the national interests in commercial entities such as power, water, gas and forests under its umbrella organization, from which asset sales may result. The most likely first state asset to be monetised is Ireland’s Electricity Supply Board (ESB), in which it intends to sell a minority stake. Minister of State for NewERA, Fergus O’Dowd, said: “This announcement of NewERA is another example of this government doing everything it can to create jobs and improve Irish infrastructure. Working with the National Pensions Reserve Fund, which will be investing on a commercial basis, NewERA will help deliver investment in energy, water and broadband and examine other commercial investments.” 

For its part, the Strategic Investment Fund is all about investment in Ireland. Details are yet to be fully announced as the idea goes through Parliament, but it could operate similar to a private equity or venture capital organisation by making strategic investments in domestic vehicles. Indeed, a clue as to how this might work arrived on 10 November, when the NPRF made a commitment of €250 million to a new €1 billion Irish infrastructure fund established by Irish Life Investment Managers and managed by Australia’s AMP Capital as the general partner. NPRF chairman, Paul Carty, said: “This commitment by the NPRF is a significant building block in the establishment of a strategic investment portfolio that is focused on investments in Ireland.”

The role of private real estate firms

It is clear from Irish ministers that the Strategic Investment Fund is to be funded in part by diverting capital from the NPRF, which has 10 percent of its assets – €510 million – in property. This is where private equity real estate has its role. 

Brendan O’Regan, head of property at the NPRF, says there will be no fire sale of these interests, but the property fund positions will be redeemed in an orderly fashion over time. The timing depends on net asset values reaching a certain point. 

When asked if there will be sales, O’Regan answers, “Yes, if there is a compelling offer, but otherwise we will manage an orderly wind-down of each respective real estate fund.” These will go towards funding the Strategic Investment Fund. In this way, there is a direct link between the Irish government’s hopes to stimulate growth and jobs via the Strategic Investment Fund and the performance of private equity real estate funds in the NPRF property portfolio. The value of the investments will be at the mercy of the forces of international real estate, but they also will depend on the success of the general partners in maximising performance. The more that can be realised over time, the more funds the Strategic Investment Fund will have to help boost Ireland’s economy and jobs. 

The property portfolio of the NPRF consists entirely of unlisted real estate funds. Last year, the pension fund did invest quite heavily into listed property, putting around €450 million to work in REITs, but those investments were sold in the spring. Currently, it has commitments to about 33 real estate partnerships in Europe, the US and Asia, many of which are opportunity funds. 

NPRF began making investments in 2005, when it committed around €320 million to nine funds, including CBRE Global Investors’ Strategic Partners UK Fund II, Morgan Stanley Real Estate Investing’s Fund V International, Silverpeak Real Estate Partners II (the new name for Lehman Brothers’ former real estate platform), AXA Real Estate’s French Development Venture II, Tishman Speyer’s US Fund VI and Pramerica Real Estate Investors’ Asia Retail Mall Fund II. The next year, in 2006, it selected 13 funds, most of which the NPRF considers value-added or opportunistic in nature. Managers include more of some of the best known in the industry such as Rockspring Property Investment Managers, Forum Partners, MGPA, Broadway Partners, Grosvenor Fund Management and Composition Capital.

Between 2007 and 2008, the rate of commitments slowed considerably with commitments to AREA Property Partners’ Apollo Domestic Emerging Markets fund, MSREF VI International, CBRE’s Strategic Partners UK Fund III and Grosvenor French Retail fund.  In 2009, NPRF focused more on Irish property-related funds.

New investments, however, are not on the agenda. “In light of the evolving situation, we won’t be investing internationally for the foreseeable future,” says O’Regan. Instead, the pension fund is targeting Ireland itself.

Jockeying for position

That GPs in Asia, the US and other parts of Europe might somehow have a bearing on Ireland’s predicament might seem surprising. Perhaps equally surprising is that some GPs are positioning themselves to participate more directly in Ireland.

Indeed, it was just March of this year that Houston-based Hines, which is a big manager of property funds, decided to open an office in Dublin to target real estate and development opportunities in the country. In an announcement at the time, Hines said it was confident that its global platform, existing funds and access to capital sources could play a “constructive role bringing stability to the market.”

For Brian Moran, a Dublin native, Hines’ new office represented a second coming, as he had worked for the firm in the 1990s. Now, as managing director of Hines Ireland, he is on the frontlines of Ireland’s turnaround.

That turnaround, however, has been slow to materialize so far. Through September this year, Moran notes that there have been very few commercial real estate deals. Experts agree, citing just €150 million to €200 million worth of transactions in Ireland for the whole of the year. In fact, the largest transaction was made by Google, which bought the building it occupies for around €100 million. 

One reason for the low volume so far is that hardly anything has been put on the market, Moran explains. The prime reason for that has been the government’s threat of retrospectively banning upwards-only rent reviews, which has meant no one felt comfortable putting a value on real estate. Secondly, bank financing is thin, with tough terms being applied by those prepared to extend loans. The expensive debt probably means that buyers will fail to meet vendors’ expectations, he notes.

At a tipping point

However, a “tipping point” – when the momentum of sales would build liquidity in the market – had to be reached at some point. Indeed, at press time, there were at least a handful of quality properties being marketed to investors. 

Lloyds Banking Group was marketing Riverside II at Sir John Rogerson’s Quay in the South Docks area at a yield of around 8.42 percent. The office space is shared by the Bank of New York Mellon and law firm Beauchamps. More recently, Savills announced the sale of one of Dublin’s most famous luxury residential developments, The Alliance, on behalf of receivers Grant Thornton. The luxury multi-storey apartment building was brought to the market at a guide price of €43 million, reflecting a gross initial yield of 7.25 percent.

Meanwhile, NAMA is selling One Warrington, with a reputed sale price of €28 million and a yield of more than 7 percent. That asset is extra noteworthy because it is believed to be the first asset sale by NAMA involving “stapled finance,” meaning NAMA is offering to help finance a potential buyer. There also is the ongoing sale of the abandoned site of what was to be Anglo Irish Bank’s new headquarters. 

“There is going to be no shortage of product over the next few years,” Moran says. “We get the impression that an awful lot of people have come here and gone through the so-called ‘NAMA’ revolving door. They have come to Ireland intrigued by the opportunity but gone home empty handed. NAMA has had a very hard task warehousing assets but, at the end of the day, there has got to be a release of the assets to the market.”

Moran recalls how Hines already was starting to get traction on Ireland-related assets in its existing markets, but the firm asked him whether there was an opportunity in Ireland as well. “Now we are looking for top-class real estate and looking for opportunities both here in Dublin or perhaps ‘banked’ in Dublin but with assets in other key markets for Hines,” he says.

As for the market’s fundamentals, there are some sign of improvement on that front as well. “The take-up of office space in Dublin has been about 60 percent US foreign direct investment,” Moran notes. “That is interesting from our perspective because we would be a credible landlord to US occupiers in Dublin, given that many developers here are distressed.”

Citibank, State Street and Bank of New York Mellon are three large US institutions in Dublin’s central business district that have either taken or are looking for real estate space, and Moran argues that Ireland is a country that is good for operating a business in terms of global competitiveness, but also one with a “big balance sheet problem.” 

“The service sector in Dublin is doing very well. Unfortunately, domestic demand is suffering very badly as the government takes out some of the excess from the economy that grew up into a bubble,” Moran says. “That will continue for a year or two. It is interesting to watch because you have a deflationary domestic economy but growth in the export sector, leading to a net breakeven in GDP growth or maybe a one percent growth rate. So it is twin-speed economy.”

Indeed, it seems private equity real estate firm will have a role to play in making Ireland solid again.