Is Green REIT calling the top of the Irish property market?

Green REIT has put itself up for sale at a rosy time for the Dublin office market, with demand driven primarily by US tech expansions and Brexit relocations. But on the ground, local experts do not think the sale indicates the top of the market quite yet. The greater interest lies in how the sale will proceed, which could shed more light on just how healthy Irish real estate is. Green has a €1.5bn (£1.3bn) portfolio, with offices in the Dublin area making up 83%. The sale process, which launched this week, is aimed at generating more value for the company’s shareholders. Its share price has been heavily discounted to the firm’s net asset value for over three years. Green’s half-year results to 31 December show its share price trading at a 20% discount to its net asset value. Circling players Already, Hibernia REIT has emerged as one interested party and is mulling over whether to make an offer for Green, while the portfolio is also likely to attract some of the international players currently already invested in or circling the Dublin property market. There are large American funds on the ground already in Dublin including Hines and Blackstone, as well as several large European investors such as Germany’s BVK and Patrizia and UK fund Meyer Bergman. Philip O’Sullivan, chief economist for Ireland at Investec, says: “For something of that scale an international buyer is more likely. They would have the firepower to take this out. It is not a particularly messy portfolio and there are big development plays with this one.” Green has around 400,000 sq ft of offices to build in Sandyford, in Dublin’s southern suburbs, and 262 acres at its Horizon Logistics Park, close to the city’s airport. All eyes will be on how the sale progresses and whether it leads to a break-up of the portfolio. A source at Hibernia says: “I don’t think its valuations are wrong but it’s a €1.5bn portfolio so it will be interesting to see what prices they achieve. It will be an interesting test case as to the value of the assets.” Good demand The timing of the sale is notable as it comes following a record year for Dublin office investment and lettings. In 2018, the lettings market reached 3.7m sq ft, the highest level on record, according to Savills data. Technology firms accounted for more than half of this figure, with Facebook quadrupling its floor space in Dublin to 870,000 sq ft during the year. Meanwhile, almost €1.48bn was invested in the sector during 2018. This represents a 73% increase on 2017. But property experts do not think Dublin’s office market is about to slow down anytime soon. The Hibernia source says: “Does it call the top of the cycle? It is fair to say rents are close to their all-time historic highs, while yields are not quite at historic lows and those factors may have had some bearing on the decision by Green to proceed on this basis. But there is still good demand on the office side and I don’t think we have reached a definite peak.” Strong outlook John McCartney, director of research for Savills Ireland, says: “I worry about lots of things but one aspect of real estate I don’t have any real concern about is the Dublin office market. I see a benign picture with elastic supply and a lot of developers with ambitions. “We are not in a situation where the economy wants to expand but is constrained from doing so by a lack of office space. I also don’t see a prospect where there will be an avalanche of more risky speculative space that’s going to come up.” At the same time, there is some caution over the exposure in the Dublin office market to US technology firms, with IDA Ireland understood to be encouraging more foreign direct investment from emerging markets such as Israel, China, India and Japan. But most expect the strong demand to continue due to the current perfect storm of low corporate tax rates, a growing domestic economy and greater political security. O’Sullivan says: “With conditions this strong it is a good time for Green REIT to exit but I wouldn’t view this as signifying the top of the market. “The outlook remains very strong for the domestic economy.” CBRE is advising on the sale of the assets. JP Morgan Cazenove is lead financial adviser.