Shawn Matthews Comments: Irish Bargain Hunters Follow Blackstone Sifting Over Debris

December 20, 2012, Bloomberg News

At the height of Ireland’s real- estate boom five years ago, Mervyn Chamney failed with an 8 million-euro ($11 million) bid for land 16 miles from Dublin. Last month, he bought the site for about 550,000 euros.

“I was lucky that I was an unsuccessful bidder,” the 40- year-old said in an interview two days ago. “If I’d been successful, I would be ruined today.”

Chamney, who stayed solvent because he only ended up losing money in the stock market rather than owing banks millions, expects to get a quick return from the 4.5 acres (1.8 hectares) and the unfinished homes in Blessington, Wicklow, after already taking deposits on five agreed sales.

Bargain hunters like Chamney are joining U.S. firms in sifting through the debris of western Europe’s worst banking crisis. In the last three months, Blackstone Group LP (BX), Apollo Global Management and Gordon Brothers Group LLC have bought property, while New York-based securities firm Cantor Fitzgerald LP acquired Dublin-based Dolmen Stockbrokers.

“At the beginning of the recession, there were no buyers,” said Kieran Wallace, a partner at KPMG, which is selling some foreclosed assets for Lloyds Banking Group Plc. (LLOY) “Some companies have come back into the market in the last 12 months and there are substantial assets changing hands.”

Irish home prices have halved since their peak in 2007, according to the country’s statistics office. With the exception of Greece, Irish house prices fell the most among 55 countries in the 12 months ending Sept. 30, according to Knight Frank LLP. Irish total commercial property returns are the worst in Europe in the five years through 2011, according to Investment Property Databank Ltd., a research company in London.

Investors also still face risks as the economy struggles to recover from the worst recession in its modern history.

The Finance Ministry last month cut its growth forecast for next year and 2014. The economy expanded 0.2 percent in the third quarter, down from 0.4 percent in the second, the statistics agency said two days ago.

The economy’s weakness has hurt Dublin’s office property market, where the vacancy rate is about 18 percent, according to property broker Jones Lang LaSalle. That compares with a rate of 23.7 percent at the market’s low point in the final quarter of 2010. In 1999, the rate was about 2 percent.

The government was forced to seek an international bailout in 2010, as its banks flirted with collapse. Last year, the central bank ordered the remaining banks to sell and run down about 70 billion euros of loans by the end of 2013.

Central bank Governor Patrick Honohan said in September that too many businesses haven’t yet recovered from the crash and need to be overhauled, warning banks of “procrastination” in “cleaning up the post-crisis mess.”

Ireland’s parliament passed new personal insolvency legislation yesterday aimed at helping borrowers find a way out of indebtedness. That includes potential write-offs for home owners facing difficulties repaying mortgages, Justice Minister Alan Shatter said in a statement.

“A lot of the time, there is a viable underlying business that is generating a profit, but there is a massive property- related debt, so it might make a profit for the next 30 years but still won’t be able to repay its debt,” said David Van Dessel, a partner at Kavanaghfennell, which specializes in insolvencies. “We are still in the zone of forbearance.”

Blackstone bought the 501-bedroom Burlington Hotel in Dublin for 67 million euros in November from Grant Thornton, which was acting on behalf of Lloyds. That’s less than a quarter of the 288 million euros an Irish real-estate developer paid in 2007. The New York-based firm will spend 16 million euros refurbishing the hotel and may do more deals in Ireland after commercial real estate prices dropped by more than 60 percent.

“We are hopeful to find additional investment opportunities here as well,” Ken Caplan, head of European real estate at Blackstone, said in a statement on Nov. 25 , the day the transaction was announced.

Apollo paid 149 million pounds ($242 million) last month for Irish commercial property loans from Lloyds with a face value of 1.47 billion pounds. The London-based bank, which has taken about 12 billion pounds of charges on Irish loans since 2007, based on data compiled by Bloomberg, moved in 2010 to close and run down its operation in Ireland.

While overseas buyers are targeting trophy properties or portfolios of loans, some domestic ones are aiming for cheaper assets, taking advantage of the slump in prices.

“Some people got out before the crash,” Brian O’Reilly, an investment strategist at Dublin-based Davy, Ireland’s largest securities firm, told reporters at a press briefing on Dec. 10. “We’ve seen farmers who sold their land at the height of the boom looking to buy their land back.”

Four weeks ago, Davy hosted a private dinner in Richard Corrigan’s Mayfair restaurant in London for investors interested in buying Irish real estate. About 30 wealthy individuals and representatives of family offices showed up, O’Reilly said.

The reason for the influx is simple: income. Overall, Irish offices yield about 7 percent, compared with 4 percent in the West End of London, according to CBRE Group Inc., a commercial real estate services firm.

Four office blocks at Allied Irish Banks Plc’s (ALBK) headquarters in south Dublin sold to a European syndicate of investors this year at a yield of 9.6 percent, CBRE said.

It’s not just real estate. In September, Gordon Brothers bought Clerys department store on Dublin’s main O’Connell Street from receivers appointed by Bank of Ireland Plc.

Cantor Fitzgerald bought Dolmen Stockbrokers, which caters to private clients and pension funds, for an undisclosed price. The company plans to make money from selling wwwucts based on bank debt through the brokerage, Cantor Chief Executive Officer Shawn Matthews said in an e-mail.

“We see an opportunity in the aftermath of the Irish housing bust through repackaging mortgages into securities to get them off troubled lenders’ books,” he said. “Ireland is turning the corner, but it still faces challenges. Part of the solution lies in getting money moving.”

About 25 percent of all residential loans by value, including buy-to-let, were at least three months in arrears or had been restructured at the end of June, according to Bloomberg News calculations based on central bank data. That’s up from 22.5 percent at the end of the second quarter.

Back in Blessington, Mervyn Chamney is undeterred. Even without advertising, houses on the estate are selling.

“We’ve done a lot of work to take the abandoned look of the site,” said Chamney. “People just need confidence that somebody has taken over. That’s all.”