The recovery in the commercial property sector is undoubtedly in full flight – at least in Dublin – with values on the way up and transaction levels rebounding. But if deals are being done, where is the money coming from to do them?

Investment

In the investment market, activity – particularly in the sub-€5 million category – was heightened in the the run-up to the abolition of the capital gains tax (CGT) exemption last December.

“There was a little bit of a frenzy and extra activity because of that, with some people piling in to try and buy although the more experienced investor didn’t get caught up in it,” notes Sean O’Neill of TWM Property Solutions, adding that the majority of buyers were Irish individuals who bought with cash.

Indeed cash-rich individuals are still going it alone, with syndicated groups of individual investors yet to return to the commercial property market. While Sean O’Brien, executive director of CBRE, has heard talk of “clubs” of people coming together to buy, he hasn’t seen any syndicates yet.

“There is still a fair bit of legacy damage around; it will take time before we see syndicates coming back into the market,” he says.

For larger investment deals, debt financing is available, with domestic banks Bank of Ireland, AIB and to a lesser extent Ulster Bank, all cited as being active in the market, along with foreign banks Deka Bank, Deustche Bank, Merrill Lynch and Wells Fargo.

Indeed, real estate investment trusts (REITS) have been busy gearing up. Barclays Ireland has facilitated a €130 million two-year credit facility for iRes REIT, and a four-year debt facility of up to €290 million for Green REIT for example, while Hibernia has secured €100 million in debt financing from Bank of Ireland.

On top of this is private equity and mezzanine finance, which acts as a bridge between senior debt and equity.

A key player in this segment is the €350 million WLR Cardinal Mezzanine Fund, a joint venture between international investor WL Ross and Cardinal Capital Group, which offers finance for both development and investment deals.

And the National Asset Management Agency is another option, although while it has been active in the past, advancing close to €400 million in vendor finance, market sources do not expect it to provide much finance in the future, given that funding can now be found elsewhere.

However, while property funds, institutional investors and REITs may be availing of debt finance to transact deals, it’s not always done in the early days.

Cash is still king

“A lot of sellers are still nervous about selling to purchasers who are financed – it’s an extra layer of complexity that they don’t really want,” notes O’Neill.

O’Brien agrees.

“It’s the nature of vendors in Ireland; they’re mainly Nama, banks or receivers and they have a huge aversion to execution risk,” notes O’Brien.

“Once they market a property they want to make sure that the purchaser can complete – if you make an acquisition subject to debt finance it increases the risk.”

According to John Moran, managing director of JLL, the result is that most buyers are still buying with cash only – and then refinancing "virtually immediately afterwards".

Indeed, US fund Lone Star for example, was reported to be looking for up to €400 million to refinance its Dublin office portfolio, which includes the Iveagh Court Complex, earlier this year.

But the focus on cash is not slowing activity, given the types of buyers that are in the market.

“They are all pretty much funded before they come into the country,” says Moran.

Development

But if financing an investment is unlikely to be a problem, financing a speculative development is still that bit trickier.

“Development is a particularly problematic one,” says O’Brien, noting that unless the property is pre-let, “you don’t know when a tenant will turn up, what the level of rent will be and what the term of the lease will be”.

“It’s a much more riskier form of debt,” he says. However, the tide is starting to turn.

“I think banks will lend on pretty secure developments, such as city centre office developments. There is a shortage of office supply and big demand for space, so even if it’s not pre-let there’s a good chance of it being let,” says O’Neill.

Indeed, a report from the Department of Finance last year revealed that banks are willing to finance between 60 to 65 per cent of the total development cost for viable, "shovel-ready" projects, while Moran suggests that mezzanine finance can bring the debt portion of the deal up by another 10-15 per cent.

This still leaves an equity gap but in a follow-on report published in March, the department said that there is “a sufficient supply of equity financing to complement senior debt finance available for development”. Already, activity from real estate funds and REITs is looking to step up a notch and move into development gear.

Last summer Green REIT acquired the Sun Alliance building on Dawson Street in Dublin’s city centre for €23 million, with a plan to knock it down and replace it with a new modern building twice the size. It has since submitted a planning application for the redevelopment.

Meanwhile in south Dublin, US fund Kennedy Wilson has plans to redevelop Stilorgan Shopping Centre. However, developers who need to seek out the equity themselves have been slow to do.

The Department of Finance suggests that this is for reasons such as the higher cost of equity funding and a reluctance to share control over decision-making – as well as returns – as it warned that developers who don’t accept this new reality will be “left behind”.