Welcome to all my new subscribers and thanks to all my existing ones. I chose to share some local market information in this article, that you may be able to relate to wherever you are from. Commercial Real Estate has taken a beating in the last 12 months, the world over but perhaps the markets are only realizing it now.
Samuel Beckett
Like the great Irish playwright Samuel Beckett wrote in his dark existential play, Waiting for Godot, this article has a similar theme, if not the quality prose. It, like Beckett’s play, is a quest for meaning or understanding of sorts. So much like the play’s two characters Vladimir and Estragon who wait for the man that shall not come (Godot), we too are asked to wait for the Commercial Real Estate Buyers to arrive, and are left with great uncertainty and doubt in the mean time.
Beckett the writer, gave inspiration to the name of the 190,000 sq ft Office Building in the North Dublin Docklands (East Wall) known as The Beckett Building. This property was bought for as little as €5.0m (€26 per square foot) in 2013 by the Comer Brothers from a distressed loan book derived from the original, now departed, builder Liam Carroll of Zoe Developments.
Asset Management
By all accounts the Comers invested an additional €30m into the project to complete the building to a high spec in order to attract International Tenants seeking space in Dublin’s heartland (for tax purposes). They were successful and snagged Facebook (now Meta Platforms) on a 15 year lease at an annual rent of €4.5m or €23.50 per square foot. So they had spent c. €35m and had a strong covenant in 2018 yielding 12.8% gross yield to their reported baseline cost.
Realized Gains
What’s left to do now, other than place the €4.5m FAANG Stock rent roll on the open market and crystalize the return on investment and move onto the next project. So the Comers tested the market in 2018 and found, in hindsight aggressive, the Korean Investors who acquired the property for c. €100m, representing c.4.5% gross yield. Remember when interest rates were zero and 4.5% was a lot??? The Comers washed their hands of the property, pocketing approx. €65m tax free, if the CGT allowance for retained ownership of 6 years was applied. A job well done.
New Market - New Reality
Roll forward 5 years, and we have a very different landscape indeed. Firstly, there is significantly more Grade A Office Space available in better locations than East Wall Road. With no disrespect to the area, as far as Dublin goes, it is not as attractive to staff as say Ballsbridge or the Grand Canal Docklands. Let’s not forget that 0.0% ECB Rate are now 4.50% and we are looking more like a Picasso than a Rembrandt painting, there is some structure but its hard to see.
The increased cost of capital likely led to this particular loan generating high interest shortfall accounts, the Korean owners had “run into some difficulty”. In Feb 2023, with their banking partner, they chose to place the Beckett Building on the open market with a hair cut already a certainty given the list price was €80.0m, some 20% below the purchase price.
Much to the owners chagrin the Beckett Building did not catch a bid, but there was interest around the €50.0m which was dismissed at the time. More recently, the German Debt providers, Helaba, have lost faith in the Korean Investors, who were also being forced to sell 6 other properties in London. Helaba decided to appoint Grant Thornton Ireland as Asset Receivers and the property will very likely go on the market and in all truth a price of €50.0m - €55.0m is more likely to be achieved, representing 8.2% - 9.0% gross yield.
Nobody, except the Estate Agents and Buyers, know who the future Buyer of this Office Building will be, but this is an important transaction. This is an extremely high profile example of the Dublin Office Market and Banks (pillar and alternative lenders alike) will be keenly watching the outcome and marking their loan books accordingly, at least by 20% if not 40-45%. I’d imagine DRS (Debt Repayment Serviceability) Covenants will have already been softened on the back of Covid. What are these levels at and when is the pinch point for Irish Bank NIM (Net Interest Margins)? You can’t imagine there is much more wiggle room.
A Game of Hangman
Drawing the analogy from the play again, when between Vladimir and Estragon, they decide to bring some rope to hang themselves from the tree, we will play a game of hangman to uncover who is actually behind this debt / capital stack.
The pillar banks have been closed for commercial or residential investment property loans for at least 2-3 years if not more. As a result, there have emerged a number of Alternative Lenders who have an interesting capital stack. Aside from the US Private Equity or LP world, there are some Alternative Lenders that actually have pillar banks behind them, AIB, Bank of Ireland, Credit Suisse, UBS, Goldman Sachs etc.
These debt providers were happy to provide a Senior Debt line to an Alternative Lender at 50% and say 1.8 times Interest Cover, the Alternative Lender would then provide the gap 10-20% depending on their LTV Covenants to the Borrower.
The above example does not make for great reading for the Borrower, what was once a 70% LTV with sufficient Interest Cover, now runs a Current Account deficit, while the rent roll remains stagnant.
The comparable prices in/on the market suggest that Dublin Office is closer to a 9.0% Gross Yields (if not a Net Yield) and this would lead to a potential 50% haircut in the above example. The upshot of all of this is that the Borrower will be asked to pony up an additional €3.0m of equity to reduce Bank Debt. By doing this, the Banks are back to their acceptable levels of LTC Cover as well as the Interest Bill reducing and creating a Surplus where a Shortfall was. Failure to reduce the debt could well lead to a Bank deciding to sell the asset to recover their capital, BEFORE THE MUSIC STOPS.
This example can be found across the Irish market from Alternative Lenders that I best not name individually for obvious reasons. The Beckett Building deal has been the shot across the bow for many Lenders in town.
It reminds me of a moment back in summer 2007, when as a Lender myself, I sought a review valuation for a Dublin Site with Full Planning Permission for apartments that was acquired for €14.0m 12 months prior. The Estate Agent basically said that it was worth about €7.0m now. My next call was to be my Divisional Director to explain that Houston we have a problem.
Right now its difficult for me to see who exactly arrives to acquire future distressed assets in Ireland and how they funded. There will of course be many Funds prepared for a collapse in Commercial Property Asset Valuations. However, these Funds will be focused on better primary locations, ranking above Dublin, e.g. London, Paris etc. The answer may well be staring us in the face, with the likes of the Comer Brothers and Green Property waiting in the wings. The problem is that without Debt Providers in the market it will be driven by Equity Cheques, i.e. the rich get rich.
Great article thanks