The choice of the Shelbourne Hotel for Ireland’s first major post-recession property auction last weekend could not have been better. The grande dame of Irish hotels in many ways presents in microcosm the boom and bust of the Irish property market over the past decade.
Bought by a consortium in 2004, the Shelbourne, on Dublin’s St Stephen’s Green, was expanded and renovated at huge cost. The revamped hotel enjoyed a run of success before the crash came, and a massive write-down followed. Its value plunged from €246.3m (£216.1m) in 2007 to just €90m the following year, according to company accounts.
Last Friday, more than 1,000 people packed the hotel and spilled onto the streets outside, hoping for a chance to bid for what they considered a bargain at Ireland’s largest ever property auction, run by auctioneer Allsop and Dublin-based agent Space. More than €15m was spent at the sale, with 81 of the 82 properties selling on the day.
Allsop auctioneer Gary Murphy described the atmosphere in the bidding room as “extremely tense”, with only cramped standing room for many prospective buyers. It was clear that many bidders were new to the process, with bids crawling up slowly in the beginning until they grew comfortable. The tempo rose significantly as time went on.
Outside, hundreds of bidders lined the street to shout their bids for the properties, with two purchases being made by people who could not get into the room itself. The overcrowding became so severe that a temporary halt had to be called as the human wall began to disrupt traffic.
Stephen McCarthy of Space said that the buyers had come from a mixture of owner-occupiers and investor interest. Demand was particularly acute for properties at the smaller end. McCarthy cited the sale of a pub in Arklow, south of Dublin, for €400,000-€140,000 above the guide price.
Cathal McMahon from Sligo was delighted with a flat he purchased in Galway for €69,000. “Many of the properties were actually quite expensive at the beginning,” he said, “but this was very well priced.” He bought with a view to renting to students.
Allsop says that the auction proceeds exceeded expectations by around €4m, and it hopes to hold another in July with a catalogue twice the size.
The auction’s success has been welcomed by the Irish property market for providing a sign that there are buyers willing to smash open the piggy bank for property at the right price.
However, the flats and houses sold at the Shelbourne auction mostly comprised distressed loans financed by the Bank of Scotland (Ireland), and represent only a tiny proportion of the country’s bank-held properties. In total, Lloyds Banking Group, which owns BoSI, has a provision of £7.8bn to cover the losses it expects to make on its Irish portfolio.
By contrast, the lion’s share of bank-held property in Ireland remains within the control of the Irish government’s National Asset Management Agency, which has €72.3bn of distressed loans on its books and last month agreed to take over another €4bn. Nama has bought property loans from the Irish banks at steep discounts, and is opting for a number of different routes to dispose of the properties on its books.
Following an €85bn EU bailout last November, and the election of a new Fine Gael-Labour coalition government in February, Ireland is putting together a plan to introduce REITs so that Nama can bundle residential properties together, particularly apartments, and get them off its books. It will also look at providing mortgage finance through AIB (Allied Irish Banks) and the Bank of Ireland to allow people to buy properties, where appropriate.
Ghost estates
Some of the country’s now-infamous ghost estates – housing developments that were started but never finished or occupied – will be sold by Nama to voluntary housing bodies for social housing. They will use funding from the Irish government’s Housing Finance Agency to complete the purchases, but it will be off-balance sheet so will not increase Ireland’s sovereign debt figures.
Hotels are to be bundled together and sold off in tranches, but solutions for land banks outside of Dublin remain a difficulty. Various government departments have signalled interest in acquiring some sites but others will be auctioned, raising little if anything beyond agricultural value in many areas.
For commercial property, there is a similar story. The agency is attempting to force sales of both commercial and residential property either by appointing a receiver or by putting pressure on developers to sell themselves. So far, in total, the agency has approved sales of €2.7bn-worth of property, although much of that has not yet hit the market.
Much of this new strategy has met with approval from the property industry. There is relief in the market that the new government has decided that the banks will not transfer smaller loans to Nama.
Guy Hollis, managing director of CBRE Ireland, believes that Nama’s decision to look at providing stapled debt is an encouraging sign. “It will get liquidity back into the market as we don’t have a properly functioning property market at present,” he says. He thinks they will sell more properties later this year.
Fintan Tierney of DTZ Ireland says that overseas investors are still looking at a number of options in readiness for the time when certainty is restored – whenever that may be. “They’re very strong financially and have experience of investing into countries like this,” he says, adding that they are already looking at injecting finance into deals, buying out portfolios of assets in their entirety and investing into Irish developers’ companies.
Yet commercial landlords and investors are furious that the Irish government is pushing ahead with plans to retrospectively abolish upwards-only rent reviews, which they say are effectively killing the country’s investment market.
Values continue to fall “in light of the uncertainty created by the existing and previous governments”, says Peter Stapleton, managing director of Dublin-based commercial property agent and consultant Lisney, although he stresses that he agrees that tenants should be assisted in some way.
John Moran, managing director of Jones Lang LaSalle (Ireland), says that the reaction from overseas investors to the idea has been to term Ireland “a banana republic”. His frustration is accentuated by the fact that legislation is being proposed before any independent analysis is carried out. Moran says that he has sympathy for struggling tenants, but argues that changing the legislation will effectively be a transfer of wealth from Irish taxpayers to multinational occupiers.
“It’s not about property developers and investment funds, it’s about taxpayers and pension schemes which have invested into property,” says Angus Potterton, managing director of Savills Commercial (Ireland). He says that Savills has had around four deals each worth €50m fall apart since the start of the year because of the issue.
Nama is worried about the implications of changing the UORR legislation. Chairman Frank Daly told Estates Gazette last week that no deals it was working on had fallen apart yet, but it made clear its opposition to the change in a letter sent last year to finance minister Brian Lenihan of the then-Fianna Fáil government.
The agency warns that any changes to the legislation would make the cost of capital higher, which would mean rents would have to be increased, and adds that interference in landlord-tenant arrangements has led to unforeseen results. It cites the UK’s rent freeze in the 1970s, which “led directly to the secondary banking crisis, which almost took down the UK financial system”.
Changing the law would “impact on Nama’s ability to repay the debt it has issued” as it would have overpaid for assets, it warns. It adds that the proposed changes would have negative consequences for overseas investor sentiment and that “international high street names” would benefit even though they could “bear the burden” of higher rents. It also says that landlords have, in many cases, dropped rents for retailers where appropriate.
Stapleton also warns of another problem coming down the track – attempts by the government to reduce the time over which investors can use capital allowances to reduce corporation or income tax payable on profits. “If they are guillotined early,” he says, “it will devastate private investors who are already struggling.”
The government hopes that the measure will save €400m over four years. However, the Department of Finance has told new minister Michael Noonan that a detailed assessment would be required to work out the potential effects on the wider economy, including individual short-term indebtedness, the risk of loan default, the downstream effects on the real economy, and the more general risk to tax yield. Arrangements for such an impact assessment have yet to be made.
In the end, though, the market will be dominated by Nama for the next decade. Knight Frank Ireland managing director Paul McDowell, who was appointed statutory receiver to some of property investor Derek Quinlan’s houses last week by Nama, said its decision to use such receiverships was a sign that it was swinging into action. The juggernaut is beginning to move and few Irish developers will be left standing by the time it stops.
After all, one of the first moves Nama made was to appoint a receiver to most of builder Bernard McNamara’s property empire – the same Bernard McNamara who remains one of the owners of the Shelbourne Hotel.
