Dublin: Still Sitting in London’s Shadow

Private equity real estate funds that entered Ireland early have already benefited from rising office rents thanks to economic recovery. Now there is talk of Brexit further helping as occupiers consider alternatives to London.

Private equity real estate funds are still investing in Ireland four years since they entered the market looking for distress.

Los Angeles-based Colony Capital, for example, recently acquired a face value €1.5B of loans from Ireland’s National Asset Management Agency. Sources say Colony paid close to €500M for the loans backed by Irish real estate assets that were packaged as a portfolio called Project Tolka.

Irish property managers say such firms are continuing to acquire assets, as well as monetizing existing Irish investments at a profit. Says Andrew Cunningham, head of Dublin office agency at Savills Ireland: “Many firms have done extremely well.”

Trading of assets comes at an encouraging time for Irish commercial property—especially in the case of Dublin office properties. Firms like The Blackstone Group, Cerberus Capital Management, and Colony have already enjoyed the benefits of office rents in Dublin doubling in four years. At the bottom of the market, top Dublin rents were €28 per square foot, but they reached €60 this year, according to Savills’ latest report, the “2016 Skyline Survey”.

Unusually for the city, there is a significant amount of pre-renting activity occurring. Savills’ Cunningham believes such tenant activity is unrelated to Brexit, but the supply/demand equation could force Brexiteer companies to take decisions in the first half of 2017 because available space is filling up.

Between 2010 and 2014, Dublin office construction came to a complete halt for the first time since records began, but as of December 2016, there were 136 new office buildings totalling more than 12 million square feet planned for Dublin over the next five years—enough for 100,000 office employees. Savills’ data suggests that, in Dublin, 3.8 million square feet of stock is under construction. Of that, 1.7 million—44 percent—is pre-committed. “If one examines stock available for mid-next year, around two-thirds is gone. Therefore, potential Brexiteer tenants would need to commit next year,” Cunningham concludes.

U.K. or London legal firms who typically foreshadow clients have been looking at leasing space in Dublin. In addition, Dublin has long been a significant center for the funds management industry and it is competing with the likes of Luxembourg for any increased demand for “on-shore” European fund domiciliation in the expectation that London will become less attractive.

“It has been a real yo-yo since the Brexit vote,” says Cunningham. “First there was shock, then we noticed a couple of occupier clients coming to Dublin that were simultaneously looking at London.”

Adds Cunningham: “It is still early days. Have we actually seen a definitive transaction occur by a Brexit company? No. But there is definitely increased activity since March 2019 was announced as a target date for the U.K. to exit.”

For private equity funds, he suggests the challenge is not whether there is occupier demand for office space, but whether they can finance speculative developments because conventional lenders remain scarce. While private equity funds have struggled to attract capital, other promoters of real estate projects have stepped in. Though 39 developments are under construction in Dublin, there is also large-scale postponement of projects that require pre-leasing because of constrained equity and debt funding. Private equity real estate investment trusts in Ireland have taken advantage of the situation, alongside other sources of capital such as Union Investment of Germany.

So while private equity real estate funds continue to invest in Dublin and Ireland more widely, they also hope financing options materialize for speculative developments they own.