The REIT direction: Green REIT interview

Green REIT’s chief executive Pat Gunne talks about the firm’s development plans and how it is restructuring its portfolio.

Green REIT was Ireland’s first real estate investment trust when it launched in 2013 and has since built a Dublin-focused portfolio worth €1.31bn (£1.19bn). By purchasing commercial property at a low point in the cycle and at a time when financial institutions continued to deleverage, it aimed to capture the recovery of the Irish economy and commercial property market.

Property Week spoke to Green REIT’s chief executive, Pat Gunne, about how Ireland is holding up against geopolitical headwinds, the company’s development pipeline and how it is restructuring its portfolio to capitalise on the opportunities.

Recovery is well and truly under way in Ireland. Now the dust has settled, how is the Republic and Dublin’s office market performing?

We went through the biggest decline in GDP in the developed world, a bailout, an unemployment rate of 15% and a prolonged period of sustained difficulty. Now, Ireland is in a good place. Our domestic economy is the fastest growing in Europe and is projected to be for the next 12 months, GDP is expected to grow by 4% this year, unemployment is down to 6% and foreign direct investment from the States remains strong.

As for the Dublin office market, historically, the market has been a volatile one. Rents in 2001 were €55/sq ft. After the crash they hit €35/sq ft and now they’re at €60/sq ft, similar to what they were in 2007, so we’ve been through a bit of a rock-and-roll rollercoaster ride.

The curve has flattened and rental appreciation is low, in single digits, but we do need more space. During the recession, the central Dublin office market hit a vacancy rate of 6%. Now, the vacancy rate of grade-A space in Dublin’s core is 2%, so it’s very, very low.

It’s anyone’s guess as to where we are in the cycle but I think there is still growth on the horizon.

You’re capitalising on that need for space and have a lot in the pipeline at the moment. How are your developments progressing?

At One Molesworth Street [a 90,000 sq ft office building Green REIT is developing in Dublin 2], very good progress is being made.

Barclays is taking a chunk (55%) of it. It’s not clear whether that’s a result of Brexit, but it’s highly coincidental that there’s been a lot of action since the referendum on 23 June 2016.

We’re anticipating top rents due to the location, quality and the timing of delivery. Very little was developed - in fact almost nothing was developed - between 2007 and 2014, and we were keen to be among the early starters when it came to speculative development. In 2014-15, we embarked on a number of projects with an end value of €250m. One of those was at Central Park, which is our big-win asset. We completed a new 158,244 sq ft office for which AIB took a single lease in May, generating a rent of €4.8m, and we’ve got another 100,000 sq ft office in the pipeline. At Horizon Logistics Park we bought more land before Christmas for which we’re considering our options.

You mentioned Brexit. What impact will that have on Ireland?

Brexit brings in new dynamics. It’s becoming a reality now and less of a talking shop and there’s a bit of clarity now around the negotiations led by David Davis.

Brexit will be a setback. The UK is our second-biggest trade partner both in terms of imports and exports so it’s a difficult turning point and the currency differential is a problem that could result in pullback from the UK.

We are going to get a lot of volatility because [the Brexit negotiators] are running a very transparent process. The UK needs to make the adjustment as painless as possible. I hope sense will prevail and it’s resolved with minimum disruption and I hope they do it in a gradual manner that won’t scare or excite the markets.

And on the Dublin office market?

It’s slowly playing out. Since the Brexit vote, JP Morgan has taken 130,000 sq ft and is rumoured to be expanding further. Then there’s Barclays, Merrill Lynch and a number of fund managers and insurance companies [that are considering relocating to Dublin].

You’ve got to remember though that what has a relatively small impact on a market like London could have a relatively big impact on a city like Dublin because of our size. For now though, things are well balanced.

Ireland has close ties with the US. What were the concerns when Donald Trump was elected and have they become a reality?

We have a small and open economy. On an international front, the UK and the US are our two biggest impactors and events there will affect Ireland.

When Trump was elected in November 2016, there were negative vibes and a particular worry about protectionism and the foreign direct investment policies coming from the States when the new administration took office. However, they’ve continued to invest. It hasn’t been the threat it was purported to be and it looks like the growth trajectory we’ve seen in the past will continue for the foreseeable future.

American TMT [technology, media and telecommunications] brands were the big drivers in the last quarter - Google and Facebook were the two biggest tenants to have opened offices in Dublin last year so the impact hasn’t been as bad as feared. It helps that American companies operating in Ireland are servicing their EU client bases.

What are your current priorities?

We’re focusing on our development programme, paying dividends to stakeholders and maintaining a close eye on risk. At this point in the cycle, we don’t want to ramp up our debt and make the same mistakes others have made in the past.

We’ve been recycling capital from existing assets into our new developments while at the same time extending our lease terms and de-risking on investment assets.

Development accounts for 10% to 15% of our balance sheet on a projected cost basis, but that will decline as the speculative projects are leased up.

We see development of our current pipeline as more of an opportunity than buying assets and competing against lower-cost institutional capital.

Will you continue to focus on the office market or are other asset classes piquing your interest?

Offices are the dominant asset class, primarily driven by foreign direct investment, and make up 80% of our portfolio. About 15 months ago we looked at allocating more capital to retail, but we felt the structural risk around ecommerce and the disruption that is having hadn’t been priced into the direct asset market. We decided to make a play for logistics instead - you only have to look at what’s been happening in the UK and Europe to see it’s got the structural support behind it. So we’ve been allocating more capital to logistics and reducing our capital allocation in retail.

What’s next for Green REIT?

We’ve built out 850,000 sq ft at Central Park and we’ve got another 100,000 sq ft office in the pipeline that we expect to deliver a yield on cost of 7.5%.

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