Interest in the Irish property market from leading domestic and international investors remains at a high level. In a recent PropertyEU ranking, five of the top 10 investors in Europe were noted as having invested in Ireland. The knock-on effect is that nine of the top 20 funds are still represented here, including global brands such as Credit Suisse, Aviva Investors, Deka Immobilien, Standard Life, M&G Real Estate and Allianz Real Estate.
And yet a number of property sales have staggered over the line in recent months or indeed have failed to sell. When final bids were called, only a couple of bidders stepped up to the plate. Is this a sign that world events are bringing the recent property bull market to an end? Possibly so, but another factor is that those who are selling need to get a better understanding of the new buyers and how they assess a real estate opportunity.
The early phases of the recent market cycle were entrepreneurial in outlook. There was a sense that early movers would gain an advantage, with the expectation of increasing demand and higher prices. Now, with the value growth that has taken place, this outlook has been replaced by a more tempered view on potential future growth and, as a result, a maturing market has become more discerning, transparent and risk-averse.
For the early entrants the main risk was a macroeconomic one, and this was also the upside. They took a view on Ireland Inc and assumed most boats would rise once the economy recovered. They wanted higher returns for this perceived risk, and they saw significant upside in value growth driven by an economic recovery.
The opposite was the case for the institutional investors. Ireland was not a country these risk-averse investors would take a punt on. Foreign institutional investors could not invest as their research departments deemed that there was too much risk associated with this country. They were prepared to wait and accept lower returns when the risk diminished.
While Irish institutional investors such as Iput, Irish Life and State Street, and indeed the real estate investment trusts, were early movers, the past year in particular has seen risk-averse foreign institutional investors begin to invest seriously in the Irish market. Figures at the end of 2015 showed that this institutional spend had almost doubled from €616 million in 2014 (14 per cent of total spend) to €1.156 billion in 2015 (31 per cent of total spend).
For example, Union Investment has acquired property in Grand Canal Square, Credit Suisse has bought One Grand Canal Plaza, Standard Life has acquired property in Custom House Plaza, Invesco has bought Frascati Shopping Centre, Friends First has acquired Kilkenny Retail Park and German fund Realis has bought Beaux Lane House. Hammerson and Allianz were the successful bidders for Nama’s Project Jewel portfolio.
Moreover, Middle Eastern investors, such as the Abu Dhabi Investment Authority have been bidding on assets. The increased number of private Irish investors looking for a home for their pension fund money has also been noticeable over the past year.
So why aren’t all of these investors lining up to bid ? While there continues to be a good demand for investments, the nature of the buyers has meant that they are thinking in a different way – globally, and not just about local matters.
They are comparing returns with other property markets and they need to understand easily how they can get their return. The requirements of the target buyers need to be understood to get pricing right and to get the right message across. Sellers need to be aware of this.
The fundamental real estate story must be felt to be sound. The pricing must be such that investors can see a return on their money, with modest assumptions on growth and exit pricing. The increase in prices has been swift, with IPD capital growth increasing by just under 20 per cent last year alone. While there is no evidence that prices will decrease, the pace of the increase is reducing. This will have an impact therefore on investors’ attitudes to their exit prices and therefore their entry prices. The Irish institutions bought early in the cycle and are also not under as much pressure to acquire.
Most of the overseas funds are pan-European funds and are comparing Irish opportunities with assets around Europe. They are not under pressure to acquire in Ireland and will only do so if it compares favourably with opportunities available in other markets.
Ireland has made it into the bundle of countries they will invest in, but it must compete for their attention. The fund managers seeking opportunities are short of time and, as a result, will initially review opportunities quickly. If the pricing does not look right or the fundamental rationale does not stack up, little time will be allocated to pursuing the opportunity.
Despite the interest in Irish real estate, we have seen a reduction in bidders for some on-market sales. Vendors have seen good interest following initial marketing, but have then seen buyers pull back when they feel that pricing or returns are not attractive enough.
From a sales perspective, therefore, it is critical to get the pitch right in terms of pricing, illustrating the upside and knowing the boxes that need to be ticked. Sellers need to look at the deal from the buyers’ perspective. The investment story must be appealing, and must be delivered quickly and easily. The method of sale should not be off-putting. Investors must feel that they have a chance to acquire and the time to assess an opportunity. Over the past year the debt market has been improving. This will change the buyer profile again. The market is constantly changing and it is critical for sellers to watch who is in the market and to know the audience.
Sean O’Neill is a director of specialist property investment adviser TWM