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Overseas investment firms become active in flipping Irish commercial property

Some overseas investment funds are already cashing in their chips by selling on Irish properties purchased over the last two years. As well as generating profits for the vendor funds, the sales may also spell good news for some hard pressed Irish property owners as well as for smaller Irish investors who are seeking to get in on the Irish property recovery. Such smaller investors are expected to buy more flipped properties in the next 11 months as they seek to avail of the capital gains tax waiver for properties bought before the end of this year.

Already the increase has been reflected in a doubling for next month’s Allsop Space auction in the numbers of investment properties submitted where the mortgage is held by equity funds.

In addition, this week the Kennedy Wilson (KW) fund is seeking to flip a Dublin office block for which the agent Savills is asking €1.65 million. It’s not known what KW paid for the four-storey building known as Crescent Hall on Mount Street Crescent, as the fund acquired it is part of a portfolio of Treasury Holdings properties.

To date the most notable flip was seen with the sale for €50m of Riverside II, a modern office building at Sir John Rogerson’s Quay, Dublin 2. German fund AM-Alpha had bought it in 2012 for €35.6 million and sold it within less than 18 months for €50m – suggesting a gross profit of €14.4 million, or 36 per cent. It is now owned by the Irish property pension fund IPUT.

That deal is one of the few where it is possible to get a clear idea of the profit being attained because most of the flipping activity relates to properties which were bought in portfolios and the sale price for the portfolio does not include an itemised value for each property.

One of the most active funds is Lone Star, which has sold on a number of the properties it attained through the purchase of a portfolio of non-performing Allied Irish Bank loans. Known as Project Kildare, this portfolio had a nominal value of around €650 million and Lone Star is reported to have purchased it for around €250 million or a near 60 per cent discount. Involving 70 loans, it was secured by more than 400 properties, including hotels, nightclubs, shopping centres and offices in Dublin, and to a lesser extent in the Irish regions and Britain.

One of its larger flips was Fleming Court, a 2,768 square metre office block at Mespil Road, Dublin 4 which Lone Star sold for €9.75 million to Ardstone Capital, the Dublin-based private investment manager, and CBRE Global Multi Manager. With the tenants paying over €700,000 in annual rents, the yield of 7 per cent suggests a fair price now that prime office yields are heading for 6 per cent or less.

Some Dublin market sources say that Lone Star was also the key beneficiary from the sale of the EBS headquarters on Burlington Road, Dublin 4 for €46.5 million. However, a spokesperson for the purchaser, Green REIT, says the vendor was Hardwicke. Lone Star did not respond to our request for information before we went to press. Lone Star was also involved in the sale of a property at 7 Upper Baggot Street, for a sum believed to be around €900,000.

Other investors are also flipping. A mixed use premises at 62 and 63a Dame Street, Dublin 2 which was bought as part of a portfolio in Q2 2012 was offered for private treaty sale soon afterwards for around €420,000 but failed to sell. Then in December 2012 the vendor included it in the Allsop Space auction with a reserve price of €380,000 and sold it for €730,000 under the hammer – or a premium of €310,000 on what it could have been bought for just a few weeks previously.

Agents are expecting other portfolio managers will become active this year including Apollo Global Management, the New York asset management firm which bought a €1.8 billion portfolio of Irish commercial real estate from Bank of Scotland last year.

But much of the flipping activity is occurring under the radar for two reasons. Some deals are being done off market while others are not being executed by the portfolio buyers themselves. Instead they are being sold by their receivers or, in some cases, the properties are being sold by the mortgagee as part of a debt forgiveness deal with the funds which acquired their mortgage. Say for instance a fund may have purchased a portfolio of mortgages for 30 per cent of their combined face value. Then they encourage the mortgagee to sell the property in a deal where they may settle for a price at 40 per cent of the value of the mortgage. This would effectively generate a return of 30 per cent within months while the mortgagee would have the debt forgiven. However the scale of the debt forgiveness may vary depending on a range of factors.

Traditionally, most property investors take a medium term exit strategy and prefer to add value as they wait for the market to improve and thus enhance their profits. In contrast, the equity funds see little point in holding on to less valuable properties and are availing of current demand in order to sell these thus allowing them to concentrate their resources on the larger more valuable prime properties.

As one agent explained: ”The funds buy wholesale and then sell retail. In some cases they may include the properties in auctions with reserves which may be close to the cost including price and transaction costs. Such is the strength of the market that they will still attain a profit on the sale as auction selling prices are averaging premiums of 30 per cent to the reserves.”

The flipping activity also creates the opportunity for those Irish investors who don’t have the massive financial resources required for whole portfolios to still get in on the action at prices which are well below market peaks.

Sunday Business Post 16.01.2014

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