Investors Are Prepared To 'Be Early' In Recovering Dublin Market

Be early, lean in and look for operational assets where income can be improved. Those are some of the ways for investors with dry powder to reenter real estate in the next phase of the cycle and then reap the rewards when interest rates begin to come down, according to a Bisnow panel in Dublin.

Speaking at Dublin's Property Pulse: State of the Market at the Radisson Blu Royal Hotel Dublin on Tuesday, Starwood Capital co-Head of Europe Lorcain Egan said that one of the most effective ways to make the most of repriced assets is to focus on those that offer positive cash flow and opportunities to actively improve operational efficiency now while offering longer-term valuation upside as the market improves.

“Looking at operational efficiency, hotels for example can offer good risk adjusted return opportunities particularly when we think about asset management efficiencies,” he said. “In certain scenarios it could be about taking some development risk and being on the front foot, so to achieve the best risk adjusted returns investors are going to have to be prepared to be early in the recovery cycle and lean in [when making investments]. If you can underwrite a robust asset cash flow, over time, with interest rates moderating, you can see a path to making opportunistic returns.” 

Egan pointed to more optimism globally, especially in the U.S., where he said investors are getting “more on the front foot” in their strategies.

Deloitte Ireland Head of Debt and Capital Advisory John Doddy said that for opportunistic investors, the current market environment means there are also opportunities to make equity returns from debt.

“You don't have to go all the way up the risk curve, which you used to have to do,” he said. “We’ve also seen the reemergence of family offices and high net worth individuals in the market.”

There has been the emergence of distressed assets in Dublin in the past few months, particularly in the office sector, and this could continue, Doddy said. But such assets could also offer an opportunity as the market improves. 

“We will also see some commercial properties going into receivership, and an asset like No. 2 Dublin Landings [previously occupied by WeWork and now in receivership], for example, is of interest,” he said. “Is there an opportunity to replay that asset? There is demand, so long as an investor likes the underlying asset.”

He added that there are opportunities to reduce the risk profile but still attract reasonable returns, although he said this largely remains available on an asset-by-asset basis.

“Many would love to be in the position we are with our economy. It is challenging, but not as challenging as last year,” Doddy said. “We’re not seeing margins being pushed by debt providers, so interest cover is probably improving and optimism about how that may develop continues to improve.

“That said, especially over the past three months, valuations coming in at lower levels are making it difficult for borrowers and lenders, so in terms of forbearance, it is very challenging and more capital is required. But overall levels of debt are at a much more sustainable level than 15 years ago.”

SitusAMC Managing Director Mairead O'Sullivan pointed to other international markets for indicators of how Dublin’s transactional volumes may fare in the coming months, noting that the U.S. had experienced asset declines of 20% to 40%, which she said also creates opportunities.

“At the moment, it’s about looking at those opportunities to repurpose or change an asset in order to de-risk. For 2024, the majority of repricing has happened, so there are reasons to be optimistic,” she said, adding that finding the right opportunities remains challenging.

“To guarantee returns, investors need to find an underpriced asset,” she said. “Loan-to-values were typically below 65% [for existing assets], so that has given owners room to manoeuvre. But given the extent of some revaluations, some breaches of LTVs are inevitable, which means some assets need capital injections. However, stabilisation means we don’t envisage the situation as before, and although it’s clear the zero-rate interest era is over, the position will improve. There may be distress in certain areas such as offices, but that also brings opportunity.”

Bank of Ireland Senior Director Nicholas Lyons said that investors would need “to be brave” to get into offices and would need to take a long-term view. But he added that those entering the market without any debt would be in a “good place.”

Lyons said the Irish story remained “easy to sell” given the underlying strength in the economy and high employment levels.

“We can achieve really good returns. Ireland remains the strongest and most resilient market compared with the UK and U.S., and barring a significant macro event, Ireland remains a good place to invest, especially as there are lower aggregate debt levels than in the previous cycle,” he said. “The refinance crunch is real, and we see that there is some distress in the office market, but that may turn out to be a little more benign than we thought.”

Egan said that Starwood sees data centres and industrial and logistics as among the sectors offering opportunities in 2024, with the former offering strong rates of return and yields but a difficult market to access and one that requires high levels of expertise and capital.

For industrial and logistics, Egan emphasized the strength of the fundamentals and occupation rates, adding that many companies were storing increased inventory because of ongoing problems with global supply chains. He added that retail has become a more active asset class again.

Doddy said that Deloitte sees robust demand for industrial and logistics, but he also noted an appetite for retail, “which would have been a no-go a few years ago,” with yields in double digits. He said high net worth individual and institutional money is circling potential opportunities across real estate types.

“Although investment in the private rented sector has vanished from the market, there is a big appetite for residential, including student accommodation,” he said. “Despite the costs associated with residential, the demand dynamics mean that the level of risk is very low. In terms of value, we’re trying to get further up the supply chain to acquire land without planning permission.”

The panelists said there was growing optimism for 2024. Doddy said more funds from mainland Europe are looking at Dublin, and Lyons said that given the challenges of the pandemic and higher interest rates, the lack of distress was far more positive than many may have anticipated.

“It has been challenging to get deals over line, but we are seeing that picture improving across the market,” Doddy said. “Some sectors will always be hotter than others, but there is more willingness to invest, and we expect a big uptick in 2024.”