Dublin Office Bubble, FG Landlord Nirvana, IREF QIAIFs REITs

Deserving of its own thread - Dublin’s massive growing Commercial Office (and Retail) Bubble.

  1. Wondering why Dublin Residential market is depressed - no big city centre apartment developments (which is the key to providing material supply in any market), despite the ongoing housing crisis (and why many of you must Rent, unless the Irish Central Bank goes psycho (again) and explodes Irish private credit by loosening mortgages limits)?

IRISH TIMES: Rents dwarf ‘Celtic Tiger’ era with disastrous efforts on Society

  1. Wondering why Ireland has a higher GDP per capita than Switzerland, but the Schools, Hospitals, and other public infrastructure (and infrastructure staffing) etc. of Poland? And this is despite having one of the highest marginal rates of PAYE tax in the World (i.e. it is not for lack of PAYE taxation that we don’t have the Fiscal Space).

CIA: World Factbook, GDP Per Capita

TAX INSTITUTE: Ireland vs. Global Tax Rates at Different Bands


IRISH INDEPENDENT: Dublin Commercial Property Bubble
independent.ie/business/comm … 89754.html

The four slides referred to in the above Sunday Independent article are reproduced fully here:

This is Fine Gael’s Landlord Nirvana (a.k.a. an ordinary Irish citizens growing nightmare).

Ireland now has some of the most expensive Office and Retail Property in Europe (despite Irish core build costs being in line with Euro averages). Since 2012, FG have been making it tax-free to all its foreign investors (who are exempt from the new IREF 20% tax and all other Irish taxes). Not only that, but FG have added an additional “cherry on top” for the Vulture Funds - 5 year CGT tax free (many bought 2-3 years ago), despite the fact that they are all sitting on billions of capital gains? You won’t hear any outcry from Irish print media, as Property is the biggest advertiser.

Dublin Bubble Commercial Prices (2nd highest in Eurozone, 6th highest in all of the EMEA)

= Bubble Dublin Land Prices (as Irish cost of build is in line with averages, all the effect flows into land prices)

= No Dublin Resi development (as core Dublin land is too expensive for bulk Resi - the kind that solves housing crises)

= Crazy Dublin Rents (made worse by no Rental Laws / Rent controls)

= Generations condemned to Rent in Dublin from foreign tax-free Landlords / Vulture Funds.

FG’s only solution to the above is to beg the Irish Central Bank (again and again) to return Irish private sector lending to the 2002-2007 madness (+6x salary +110% mortgage) to bring Dublin Residential prices to level of Dublin Commercial Bubble Prices. Thankfully, the Irish Central Bank (supported by the ECB) have declined to repeat the madness.

FG’s aim is to re-create a recovery for the 1%, per the US (and UK).

The recovery that produced the backlash of BREXIT and of Trump (and probably of Sinn Fein here).

Welcome back to the Roaring 1920’s Economy - the era of the 1% (i.e. The Great Gatsby) - the “billionaire”.

Below is the best primer on it we have seen (the Appendix alone is worth reading):

STEPHEN DONNELLY: Finance Bill Could Turn Commercial Property Bubble into next Crash



CBRE Marketview EMEA Office Rents and Yields Monitor, Q3 2015


Remember what you were doing when Morgan Kelly sounded the alarm in Christmas 2006.

IRISH TIMES: How the housing corner stones of our economy could gointo a rapid free fall

Prepare for an imminent retraction of the above story by the Irish Independent when its biggest advertisers read it.

Stephen Donnelly’s Cost of Build Charts addresses the Construction Industry spin of high build costs driving prices

One of the great “spins” of the Irish Construction Federation is that Irish build costs are really and justify the high Dublin Office prices. Those who have actually built Offices in Dublin know this is not true. Irish cost of Prime Commercial build is bang in line with all other Euro cities (not surprising as Irish wages are bang in line with other Euro cities and the rest is materials). In fact, because Ireland has very loose building regulations (vs. continent), there are many “dark arts” that Irish developers can use to bring “effective” build costs much lower. In addition, Dublin doesn’t have the additional levies and costs of building in Europe’s largest capitals (it is much more expensive to build on a tight London city site).

Stephen Donnelly’s charts on Dublin Core Cost of Build (ex. VAT and fees etc):

** The above pattern in “Core Cost of Build” is not by accident:**

  1. Building Grade A Office is very simple (hence why only the architect needs a leaving cert). The main structural items needed to build a modern Grade A Office have been mostly specified (floor to ceiling heights, glass standard, M&E systems etc.). You still find that in 2nd world locations (i.e. Warsaw), Grade A is of a deliberately lower standard than say Dublin. But for the main European cities (of which Dublin is one), Grade A is well understood and pretty well specified.

  2. The “Core Cost of Build” is just Labour and Materials:

2a. Materials costs are the same across the Eurozone (with some import - export variations from time to time). However because Turner & Townsend (one of the biggest Q/S firms in Europe, who have built many Grade A offices in Dublin) did the figures, they overstate Dublin “Core Cost of Build”. Because Irish building is effectively unregulated, most savy Dublin developers have learnt the “dark arts” of replacing one material, with a cheaper option (i.e. using less rebar in the concrete, plastic instead of copper pipes in sealed places, out of date window sealing / roof systems, pyrite etc. etc.). A savy Dublin developer knows how to knock the “Core Cost of Build” from the €200 per sq ft (per Turner & Townsend) to c €170 per sq ft (and pocket the difference without the bank or financier knowing). And that is not even getting into the M&E “dark arts” (another level again).

Every established Dublin developer can build a version of Grade A office for a “core build cost” of c €150 per sq ft if they have to. It may not pass a detailed regulatory check (but there are none of those in Ireland), and it won’t look great after 10 years (cracks appear, heating bill rise etc.), but they will be long sold on so won’t care. That is what happens.

2b. “Dark arts” Materials scams aside, the only other big driver of cost is Labour. Because of the stability in Materials costs, Labour tends to be responsible for most of the variation in “Core Cost of Build” in the above table (apart from the lower standard of Grade A definition which lowers Eastern European costs). Again, Ireland has very similar Labour costs as the main 1st world European cities. Some of the 2nd world European cities in Eastern Europe have much lower labour costs (up to 50% cheaper). Obviously, the big 1st world European capital cities have highest labour costs. Swiss labour costs are in another league (as well as some of the draconian regulations around how that labour must be employed).

  1. That is why the “Core Cost of Build” for Grade A Office is so stable around main European cities. We are going to get a litany of junk in the Irish media (especially from CIF and SCSI) claiming “apples and oranges” but unfortunately they will provide few facts or data, because they both know that Turner & Townsend understand this backwards. They also know that there are more detailed proprietary European build cost surveys which say same thing. They will try to mix “Core Cost of Build” with “Non Core Cost of Build” (i.e. they will be doing the “apples and oranges”.

Lets look at “Non Core Cost of Build”.

  1. “Non Core Cost of Build” are all the fees (but ex. Land). “Non Core Cost of Build” is not trivial and can add up to over 50% of the “Core Cost of Build”. It covers VAT, Architects / Professional Fees, Council Levies, Preliminaries, Agent Fees and Financing etc. Generally, ex. Finance and ex. Margin, a developer will have a “Core plus Non Core Cost of Build” of c €300 per sq ft.

  2. The most important thing to understand, for the purposes of understanding the bubble that Dublin office is in, is that Dublin “Non Core Cost of Build” is LOWER for almost every item than the other 1st world European cities. In particular building Grade A Office in the dense cities of London and Paris comes with major additional costs and levies around minimizing disruption, site access, site storage (very little room for anything) and contribution to local infrastructure. If these were added into London, Paris (as well as Stockholm, and Frankfurt), Dublin would look even cheaper on a relative basis.

  3. Financing is more expensive in Dublin on face value, however the 14m sq ft of new Office that is coming online in Dublin the next few years (7m being built + 7m more being planned), is being built and financed by foreign vulture funds (many of whom bought sites and derelict buildings at very low prices). Their Financing costs are tiny (smaller in cases then the other “vanilla” European builders. A pass through their vultures Section 110 SPV filed accounts will show 70% financing (against distressed loans - even weaker than property) at margins of 2% over LIBOR. British Land would struggle to get financing so cheap. Hence why you see so many cranes on the Dublin skyline. Even if they sold the office at €800 per sq ft (vs CBRE’s €1,300 per sq ft valuations), they will make a killing. And this is why the Dublin bubble is so dangerous.

  4. The mistake Agents (and CIF / SCSI) make is to add Land to the “Non Core Build Cost”. Land is the RESIDUAL between “Sales Price” (now €1,300 per sq ft) and “Core plus Non Core Cost of Build” (now €300 per sq ft). This was the “con” of the naughties and how the construction market fooled itself, Irish banks and the Central Bank, into believing that the huge multiples of “Sales Price” to “Core plus Non Core Cost of Build” were fine. They are not. What creates major collapses is when the “Sales Price” falls by 50% (to €750 per sq ft), but the fall in the “Core Build Costs” to c €170 per sq ft (in a recession this falls), means the gross multiple is still almost 4.4x (as high as currently is in most Europe), and building carries on. This further depresses “Sales Price”. As the main Euro buyers don’t buy Grade A Office for much over €700 per sq ft (and that is in the best and biggest European cities), they only venture in when the “Sales Price” gets sub €500 per sq ft. By then, the Land Cost has fallen over 80% in value (and taken many of the Irish banks with it). This is Commercial property in Ireland and why they get carried out in stretchers. This is why “Sales Price” vs. “Core Build Costs” is such a reliable guide to dangers in Dublin property.

Stephen Donnelly’s charts on Dublin prices vs Dublin cost of build (i.e. what a bubble looks like):

** As per our discussion re “Core and Non Core Cost of Build”:**

  1. This analysis understates the relative multiple in Dublin as it leaves out the major additional costs that you get when building in Paris and other major 1st world European cities. It also leaves out incredibly cheap cost of financing that the vulture funds (who are doing all the Dublin Office building) can access. This is what is so dangerous about the Dublin office bubble, even at 50% of CBRE’s valuation (currently €1,300 per sq ft), vultures are incentivised to keep building.

  2. Agents state that Dublin office demand is over 2m sq ft per annum. But they never give a list of the tenants (about 25 make up 90% of take-up). If they did, the vultures would see that most of the list are roll-overs / swaps. There is only about 1m sq ft per annum of genuine net new tenants to the Dublin Grade A market - and 75% are dot.com and aircraft leasing. With 7m sq ft in the ground and another 7m sq ft being planned, that is 14 years of demand coming by 2020.

KNIGHTFRANK RESEARCH: European Quarterly Commercial Property Outlook, Q2 2016

Where Stephen Donnelly sourced his data, the Turner & Townsend Surveys (one of largest global QS firms):


He does reference the Turner & Townsend European Cost Annex (got some extra Euro markets) which is a massive database.

He also references this report from the other major global surveyor, Arcadis.

ARCADIS: International Construction Costs 2016

Irish Independent showing where their bread is buttered (defending bubbles again)

This is Stephen Donnelly’s EUROZONE extract from the CBRE EMEA Survey (Appendix 2 above):

CBRE RESEARCH: CBRE Marketview EMEA Rents and Yields, Q3 2015


The Sunday Independent took Appendix 2, and put Ireland as 6th of the top 10 CBRE cities (i.e. left out CBRE’s other 47).

“Whose bread I eat, his song I sing”
(Old German Proverb)

Of course, the million dollar question given Build Costs, is why Dublin Office is selling for almost €1,300 per sq ft?

1.As mentioned earlier, of the “genuine” annual take up of 1m sq ft in new tenants to Dublin (not the “padded” 2m sq ft figure), almost all of it are dot.com firms. They are in Dublin to replicate a version of Apple’s IP scam (covered in detail here).

Apple, Ireland, EU, Tax Avoidance, Margrethe Vestager, CCCTB

2.The core of the Apple IP scam is that you need employees to justify that you “added value” to the IP that you bought at a depressed price off your US parent. Therefore, you need large office space. For many of these dot.com firms, this will be the largest (and only other) office deal that they will do outside of their US HQ. And that is the issue.

  1. The local agents tell them that its is €60 per sq ft to rent. The dot.com guys think wow, “isn’t that more than we are paying back in the US” (at lest outside of core San Francisco). The agents then show them London City figures and say that Ireland is benchmarked with London. They then tell them that another dot.com has just made an offer (familiar).

  2. The dot.com guys don’t really care about money. They are either making no money (most of them), or they are making so much money, the Irish tax avoidance will net them billions. So who cares. They sign up. And that is how it happens. But that is how flaky the Dublin office market it. All the big Irish domestic firms who are big office users (banks, insurers, professional firms etc.), are all in brand new offices (and have too much space from downturn). All the new take-up is flakier tenants.

  3. Irish developers are used to the game of higher up-front “headline” rents in return for break clauses (most of the dot.com firms with a covenant in Dublin have major break clauses - hence WAULTs of Irish REITs are so low). As with “Core Cost of Build” (above), there are other “dark arts” games developers play with agents to artificially inflate “headline” rents. This is why when the Trokia came in, they insisted on a lease register - they found the whole rental market was corrupted.

  4. For example, in 2005, developers used to run a scam of converting a lease of €45 per sq ft into a lease of €65 per sq ft (they would get 100% Anglo Debt against the €65 figure @ 2% margin), plus lump sum cash back to the tenant. Dublin law and accounting firms were very partial to this as the Senior Partners could get out a bonus and put the higher inflated rent on the backs of future partners. And of course, the developer could arrange for the money to be deposited offshore.

And that is why global downturns, when prime office in London (and major European cities) falls 25-30%, it falls up to 75% in Ireland (and prime Dublin land can fall over 90%). It is a “wild west” property market. Small, mostly unregulated, many “dark arts” tricks still at large, based on dot.com tenants (most of whom make no money) trying to run IP tax scams into Europe, and with a Central Bank filled with economists (not property people). It always ends the same way.

Irish Central Bank also sees risks in Commercial but not worried as its Foreign money


Great piece from RTE which demonstrates the naivety of our Central Bank (‘ICB’) in the area of Property risk.
(a.k.a why the ECB has enforced the 3.5x mortgage lending cap on the Irish system).

  1. The ICB feels that Dublin Commercial Office bubble is not a problem as it involves foreign money. For some reason, the ICB forgets that the bubble in dublin commercial is affecting the price of all Dublin land (now at 2005 pricing). Especially now that Stephen Donnelly has shown that Cost of Build in Dublin is same as other European Cities. Land is the core underlying asset that all Irish banks are fully hardwired to (who provide most of the bank debt for all Irish commercial, residential, leisure assets).

as we saw in 2007, when the foreign money (in 2007 it was the credit German banks gave to Irish banks) stops, Irish property prices fall. when the foreign money leaves (as the German banks did in 2010-2012) Irish property prices collapse.

  1. The ICB also demonstrates further naivety in assessing that Irish yields are the best guide in understanding a Property Bubble. We saw in 2010-12 how useful that analysis was. The much better metric is total price (i.e. Rent divided by Yield) vs cost of build. It is like confusing Interest Cover (poor metric) with Debt to EBITDA (excellent metric) in tracking corporate leverage risks. Again, more evidence that the ICB just doesn’t have the Real Estate experience in assessing the true underlying risks of the boom-bust Irish property market.

Property prices/rent are high in Ireland because of the government’s tax take.

You can buy good quality commercial land in the city centre for less than €10m per acre and similarly residential land in the betters suburbs is available for sub €2m.

Dublin land costs compare very favourable with other UK/European cities.

The difference being (on the residential side) si that here you get 2 blocks of 5-bed Semi-D’s on your 2 mill acre, whereas in European cities they build at least 25 5-bed apartments with balconies and common areas on the same plot.
And builders here want to make at least 20% despite pretty much no risk or (usually) much of their own money.
Don’t blame the tax man for this one.

Given the risks involved I wouldn’t commit to building a residential development for a 20% margin.


Property development in Ireland a riskless activity!

You really are new around here.

People need to stop overthinking the direct tax take. For example the VAT rate on construction is around the EU average, although development levies are high.

What really increases cost is indirect regulation. The planning system is slow to navigate, often capricious and is a friend of the NIMBY. Density is constrained with silly rules on minimum sizes, car parking spaces, height restrictions and aspect.

Apartments should be much cheaper to build per square metre than houses but they are not.

For Private housing the only risk is if you are an idiot and try to build in Leitrim or some other place nobody really wants to live.

  • Politics only coherent focus is on increasing property prices
  • no innovation in the building industry whatsoever, with technologies 20-30 years behind continental Europe.
  • corruption is still ripe enough - zoning anyone?
  • if things go south, the taxpayer picks up the bill and you go to the UK to be debt free within a year
  • if your building is shit, the taxpayer picks up the bill to fix it
  • the banks loan you the money to build the gaffs, and then loan the people the money to overpay for the gaffs - so you don’t need a single penny yourselves.
  • you sell houses off plan, and increase prices at will

That’s a summary of the building industry in Ireland in for the last 10 years.
Spare me the moaning about minimum apartment sizes, car park spots, and other stuff.

Maybe in a parallel universe (or Dolphins Barn)

The last prime Dublin office site that went for 10m an acre was 1 Ballsbrige (Cosgrave’s) in early 2013.

After that is was Johnny Ronan Allianz site for c 28m an acre.

Most prime Dublin office sites are now selling at over 30m per acre.

Most Dublin SoCoDu Resi land is selling at way over 2m per acre (even out to Killiney). If not closer to 4-5m an acre where the planning is favourable / attractive.

Core Dublin prime land is 2x the cost of land (minimum) of most core European cities (outside of Paris, London and Switzerland).

Even agri land is crazy in Ireland:


IRISH INDEPENDENT: Irish farm land most expensive in the world LONDON FINANCIAL TIMES, 2015

FINFACTS: Irish farmland prices fall but remain highest in Europe

SAVILLS: Global Farmland Index

Of course, we in Ireland all know why Irish farmland is the most expensive land in the world.

**It is because of its generous Irish tax rules that allow Irish farmers (and others to are wise to this) to shield hundreds of millions from the Irish Tax Revenue in tax avoidance (really tax evasion). Not only that, but it comes with the ultimate “tax evasion washing machine”, allowances that allow you to pass this “hot money” to your children and pay no CAT (no inheritance tax) who can then liquidate the proceeds, no questions asked (and they don’t need to hide the money any more). This is why the “turnover” of Irish land is so low. It is all TAX EVASION driven.

Same trick Fine Gael is doing with Vulture Funds and Institutional Landlords for Irish Commercial Property.**

GREEN REIT and HIBERNIA REIT are now falling hard.

Did Stephen Donnelly just pop the bubble in Irish Commercial Real Estate ?

Donnelly was tweeting / daill speaking about a Commercial Property Bubble on Oct 25th 26th


HIBERNIA REIT and GREEN REIT have gone straight down since that day.

More likely Trump’s proposed corp tax changes, surely?

They started falling hard before the US election when Donnelly mentioned the CBRE Surveys.
They have not stopped falling since?

That’d be the smell of napalm as REIT’s globally get whacked on back of global rates rising. It’s all interlinked. Little explosions going off everywhere.

These shares were being dumped before the very recent rise in rates.


HIBERNIA broke through its key €1.20 level earlier today.

GREEN is now already back to its mid 2013 levels and looking to break its €1.20 level.

Over 3 years of gains in Irish Commercial Real Estate gains … now gone.

Perhaps the US funds who bought them are no longer as excited about Irish Commercial Property as Marie Hunt in CBRE ? Perhaps she hasn’t has time to read her own analysis (as per 2007).

Presumably the fees still roll in regardless.

Yes, we need to discuss the fees.

Stephen Vernon looking for the next opportunity (now that Ireland is clearly over).


Raising money for London will be a hard sell for Vernon if 3 years into the Irish recovery, GREEN REIT share price has gone nowhere (and with a tiny dividend during that time as well)?

Dublin Commercial Office about to break 6.5 x Core Cost of Build … for the first time in its history (incl. 2007).

CBRE’s Q3 2016 Dublin Office MarketView Survey puts Dublin prime office rents at €60 per sq ft and yields at 4.65%

CBRE: Dublin Office MarketView Q3 2016

That would give a gross Dublin Prime Office capitalized value of €1,290 per sq ft (€60 per sq ft divided by 4.65%).

That would be almost 6.5x core cost of build (€1,290 per sq ft divided by core cost of build of €200 per sq ft).

This was where the multiple of Gross Dublin Office Valuations to Dublin Core Cost of Build stood at Q2 2016

Even in 2007, when Dublin Office “Headline” Rents peaked at c €65 per sq ft and yields peaked at c 4.5% (giving a peak gross capitalised value of €1,444 per sq ft) you had to adjust for the higher 9% Irish stamp duty back then. Adjusting for this, gives a 2007 adjusted peak gross capitalized value of €1,320 per sq ft. The current Dublin Office market is now just 2% off its 2007 Bubble peak, adjusting for stamp duty.

Not only that, but back in 2007, Dublin core build costs were higher (Chinese commodity bubble was in full swing (Steel and Copper was expensive), and Dublin construction workers were some of the highest paid in Europe) at c €240 per sq ft. This gave a peak 2007 Dublin Office Valuation to Core Cost of Build multiple of c. 5.5 x (€1,320 per sq ft divided by €240 per sq ft). 5.5x is still a bubble in comparison to any major Eurozone market (ex. Paris). However, we have never seen 6.5x before. Ever.

We have also never (ever) seen:

  1. The scale of supply of prime Dublin Office coming on line in the next 24 months before (ever).

  2. The Government push to make all Dublin Commercial tax-free to its main Institutional Investor base in Finance Bill (ever).

  3. A US President deliberately targeting the US MNCs operating (ahem, avoiding all US taxes) in Ireland before (ever).

This should be interesting …