Oh what the hell, LuckyMe1’s elevator pitch needs a response
IRISH ‘GREEN JERSEY’ REGULATION WARNING:
Prospective investors who have read LuckyMe1’s prospectus on the Irish ‘no brainer’ REIT opportunity should be aware of the following (which no doubt LuckyMe1 will include in the tiny print of the final prospectus which you will get after the float and never read):
- Irish Debt Sovereign Debt = Greece
The effect of accounting transactions by US multi-nationals shielding EU revenues from EU, US and (ironically) Irish tax authorities inflates Ireland’s GDP by c. 20%. Adjusted, Ireland’s Debt to GDP is c. 155% (vs. Greece 156.9) and Deficit is c. 9% (vs. Greece 9%)
(discussed at more length here thepropertypin.com/viewtopic.php?p=736232#p736232)
- Irish Personal Debt = Worlds Highest
Unfortunately, unlike Greece, Ireland’s personal indebtedness is the highest in the OECD (you can google it yourself). In the early 1990s Ireland reduced Gov. Debt from 100% of GDP to 30%. This was at a time when personal indebtedness was tiny and Irish banks were vastly underleveraged (to 2nd world status). Do not rely on this happening again.
- Ireland Survives on Draghi
The ECB has +100bn of debt in the Irish system (banks+sovereign+NAMA+central bank+others) which is shorter dated and charged at 0%. Trichet believed Ireland should pay 3% on this money and should downsize its economy until it could afford it. Draghi removed this charge in 2012 to give Ireland more support. Since then, Irish government has stopped / slowed most austerity.
This has created unusual situations. In housing for example, Ireland has zero foreclosures as its banks do not have the balance sheet (55% of mortgages are from 2006-08). Most of mortgages are ‘trackers’ linked to the ECB rate. Thus most Irish in negative equity are paying almost nothing on their mortgage, and the ECB is providing their bank with 0% financing to back this.
Changes in this approach, or any rise in ECB rates, will trip Ireland into a recession or worse.
- Irish Commercial Yields = US / UK + 100bp
Irish commercial property is trading at US and UK yields plus 1%. Most Dublin good commercial (i.e. with some liquidity) is trading at 5-6% on current rents (7-8% on over rents). Prime retail is trading at sub 5%. NAMA (who controls most real estate directly or indirectly), has an official discount rate of 4.5% on its assets. You should also be aware that Irish commercial leases have now been changed to the German-style with up and down reviews every five years (i.e. more like an equity than a bond). It will take time for the Irish market to adjust to this however we are starting to see the smarter international real estate funds leave Ireland in favour of Germany where the yields are similar (or higher) than Ireland but items 1. to 3. above are not in place.
- Decoding Irish Commercial Rents
Because of the significant tightening of Irish commercial yields, Irish agents changed their presentations to why Irish rents will double in the next 5 years. Irish retail rents, which are hardwired to Irelands economy (without the Google GDP lift) are still falling today - even on the best streets. Outside of Finland, Ireland has the highest retail density per cap in the EU).
Irish office rents were never at 60 sq ft - agents / banks did this to increase the value of collateral in Ireland. True Irish office rents were closer to mid / late 40’s. The Irish IDA is insisting that US multi-nationals in Ireland to avoid EU / US and Irish (ironic) tax, pay artificially higher rents (these firms need to have 1 Irish 70k job for every 5-10m of revenues shielded to satisfy transfer pricing rules and are therefore heavy users of Dublin office). This may give the sector a lift, however, there is a lot of office space in Dublin that can be renovated quickly and if you can’t find a US multi-national to take it (which will all be on new up and down leases anyway), you are in trouble. Google has been unusual in that it HQ’ed itself in the centre. All the others (Microsoft, HP etc.) are on the outskirts. Given that the jobs these multi-nationals use are lower / average grade (software localisation etc.) there is no need to be in prime locations.
- High Competition for Small Assets
‘Smart’ real estate investors looking for good double digit returns (Blackstone, Apollo, Loanstar etc.) have stopped bidding for normal Irish assets (still trying to do large deals with Government but not getting their calls returned due to Draghi’s 0% money). Note recent pulling of Board Gais sale to Blackstone despite fact the world (and Irish) stock market valuations are really high.
There are a lot of International REITS / quasi-REITS who have a much lower return expectations. These REITs have been in Ireland for years and have full buying teams and have still not managed to buy a material amount of property given the quantum that - in theory - is for sale. They are also in competition with a surprisingly large amount of local buyers (i.e. Larry Goodman etc.) - for every cheque a bank lost, there was an Irishman on the other side. As rich locals, they are well connected and still manage off-market deals.
These reason why so little asset has traded is because the Irish Government, backed by the ECB 0% money, who directly or indirectly controls most real estate, is reluctant to sell anything over a discount rate of 4.5% (full prime UK / US yield) given the carry they get.
The papers recently reported that the Green REIT has paid premiums of about 20% (despite being at a 30% premium to NAV) to secure even 100m of assets (ARC portfolio), which were heavily bid on by International and local buyers (names were disclosed by mistake).
- Premium to NAV
Buyers of Irish REITs at premium to NAV should be aware that despite the limited free float in these REITS (anchor investors are locked in), there is ABSOLUTELY no evidence whatsoever of any kind of Irish government sponsored share support scheme to keep these 100m cap REITs at 30% premiums to NAV so that they can justify valuations of +100bn of assets to Draghi etc. The premium to NAV is purely reflective of the wider market sense that Irish commercial yields are too high and should be at c. 3-3.5% given the amazing rental growth opportunities ahead, in a heavily indebted county, on life support from Draghi, with up and down leases.
- Effect of the Departure of the Trokia
It was under the Trokia that foreign regulators such as Matthew Elderfield were appointed (not by us) who investigated the long insolvent and unregulated multi-billion Quinn Group (no Irish regulator would ever / or will ever do this), and who forced the Irish banks to produce data on arrears etc. While Draghi will control Ireland from afar, the ‘exit’ of the bailout programme has seen a clean-out of all foreign officials in Ireland (central bank etc.). From now on, Ireland’s national accounts plus its bank accounts will go back to using the tools Italy and Spain employ to make things look better (including the return of the phantom 25-30bn that Irish banks used to pass amongst each other for their staggered year end accounts with the support of the Irish Gov.). We call this putting on the ‘green jersey’. It could be a good thing in the short term, but as with too early investors into Greece at start 2010 (when its Debt to GDP looked much better), if things turn down again and Ireland comes back under the microscope, it could be tricky.
NOTE: While the above risk items may concern you, the Hibernia REIT has assembled a ‘world class’ team of hardened Irish property investors who made and protected their money in the collapse and know how to beat the locals, REITs, many others active in Irish property. Terrence O’Rourke and Danny Kitchen’s involvement and support of deeply insolvent Irish banks and their CEOs was out of their control (wasn’t the property crash global), the Nowlans have nothing to do with the Nowlan sisters and have worked and lived in Irish properties all their lives, the fact that Frank Kenny seems to have bought little / no Irish real estate in the collapse (personally or for his fund) is irrelevant and the fact that the 3m he is stumping up as ‘management’ gets largely re-funded in share of fees etc. in no reflection of his future views on Irish real estate or the Nowlan’s skill level. Goodbody’s involvement and promotion of Irish real estate funds to Irish investors right up to and past the crash is no reflection on their potential performance going forward. In any event, Colm Barrington may not be involved in property but as Chairman of Aer Lingus, he will fire Goodbody as their stockbroker if this goes bad (as least you get that satisfaction.)