Real Estate News
News analysis: The sweet green smell of distress
17 Aug 2012
A deal announced this week suggests banks could start shedding Irish loans in earnest, says Shayla Walmsley.
Wisdom has it that you know the market has bottomed out when private equity firms begin scouting for prey. If that were the case for Ireland, the green shoots should have appeared well over a year ago. But a deal announced this week that has Kennedy Wilson and Deutsche Bank pairing up to acquire what is believed to be a Lloyds portfolio adds to recent momentum indicating that the Irish property market is re-pricing at last.
No one involved in the €361m deal was talking about it this week. But the Irish market is the linchpin in a co-investment "framework" set up by Kennedy Wilson last month to acquire European property loans. (Incidentally, the firm is one of five new investors in Bank of Ireland, acquiring part of what had been the government's shareholding.)
Lloyds declined to confirm it was the seller in the deal. Either way, it still has a way to go. Its Irish loan book currently totals £22.85bn (€29bn): £9.96bn commercial, £6.19bn corporate and £6.70bn retail.
You might expect to see the usual suspects - Blackstone, Lone Star, and the private equity posse - to be interested. But there are a couple of new - or in fact, nearly new - entrants. PIMCO was reportedly among the early bidders for Project Pivot, a portfolio owned by Allied Irish Bank.
Repricing is key. Bank of Ireland has offloaded assets worth €10bn ahead of schedule - after re-pricing its loan book. Goldman Sachs and Lone Star, understood to be competing against Kennedy Wilson for a €650m Allied Irish Bank portfolio, have reportedly offered to buy the assets at a 50% discount.
Significantly, these loans are not coming from NAMA, which has struggled to offload Irish assets. To date, NAMA has approved sales of assets worth €9.2bn, 81% of them in the UK.
To be fair, there is not much the agency has not tried. First, last autumn, came the offer of 70% vendor finance to institutional investors willing to buy bundled secondary Irish assets. In December, NAMA floated the idea of converting part of its loan book into a mortgage REIT. Then in February it announced a proposal to set up institutional funds targeting overseas investors. Finally - or not - a few weeks back, the agency said it would offer a further €2bn to finance the completion of stalled development projects.
NAMA's problem has been lack of appetite for secondary assets, at least at the price it was willing to sell for. Last month it ended up with NAMA chief executive Brenda McDonagh forced to justify to the parliamentary public accounts committee a discount of 57% when it paid €32bn for distressed loans nominally worth €74bn.
Now NAMA is moving into the social housing business, with a plan to make available 2,000 units by the end of 2013 via Nama Asset Residential Property Services, a subsidiary.
Bank of Ireland chief executive Richie Boucher this month claimed the Irish commercial real estate market was "stabilising". Not that the end is in sight for the market's travails just yet. Stabilisation is not growth. Residential prices, currently at 50% of their peak value, will remain dismal. Bank of Ireland CFO Andrew Keating reckons that, despite price stabilisation, the peak-to-trough decline will eventually average 55%. Second-quarter data from Ireland's Central Statistics Office show a 15% drop in overall property prices over the year ending May, with the exception of CBD assets, which fell 10%. The consensus view is set prices will continue to fall until at least the end of 2012.
It is no surprise that investor appetite remains inversely proportionate to a combination of the quality of assets and the length of time investors are willing to hold them. Notably, the portfolio in the Kennedy Wilson deal announced this week, resplendent with workout agreements, mainly comprises assets in the capital.
Author: Shayla Walmsley