Kennedy-Wilson Holdings Inc: Luck of the Irish by Christopher Pavese, The View from the Blue Ridge

Promising investments can come from anywhere. There are no patents on investment ideas. The only common factor in our search for fifty cent dollars is the thrill of the hunt. Often, some of our best ideas are sourced from within the existing portfolio. This may entail less of a “hunt” but can be even more fun and just as rewarding.

Last year, we committed significant resources to understanding the opportunity set in European real estate and presented our investment thesis on Kennedy-Wilson (KW) at ValueX in June.  In that presentation, Around the World with Kennedy-Wilson, we illustrated the positive fundamentals underpinning the Irish real estate market, where KW enjoyed first mover advantage.

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In that presentation, we explained that cap rates had come down, but relative to local interest rates, spreads remained very attractive. Commercial property prices and rents fell 60-70% during the crisis. Both had rebounded, but Irish property was coming off of a very low base.

The real opportunity was on the supply side or lack thereof.  There had not been a single crane on the Dublin skyline since 2006-2007. Construction completely dried up. At the same time, demand for prime real estate was soaring. Prior periods of declining rents in Dublin (illustrated above) had historically been followed by mulitple up years.  After such a dramatic fall, we suggested last year’s move was just the beginning.

We’ve since made a second investment in the space, focused specifically on Dublin real estate. A crashing euro masked strengthening fundamentals for a while, but it appears the market has begun to get it right.

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To put this story in perspective, CBRE’s 2015 Irish Commerical Real Estate Outlook demonstrates the recovery taking place as does Jones Lang LaSalle’s Dublin Office Market Review and Outlook 2015.  A few highlights:

Availability of prime office space across Dublin declined by over 40% last year. The Grade A vacancy rate in Dublin 2/4 at year-end was 2.0% – you read that right – 2.0% vacancy.  Overall vacancies are forecast to drop further.

No new space was delivered last year. And no new space is expected to be delivered this year.  Consequently, supply shortages have pushed prime rents in the region more than 28% higher during the year.

Prime headline rents in the district have increased to about €45 per square foot. CBRE expects rents to rise by as much as 22% in 2015 to €55 per square foot.

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Prime Office yields stood at 5.0% at year-end. CBRE is looking for another 50 bps of yield compression in 2015. Probably not a stretch if rates continue on their current path. The Irish 10 Year currently yields less than 1%. Treasuries over 2% not looking so bad all of a sudden.

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With 95% of Green’s portfolio based in Dublin and an investment yield north of 6% today, we think the potential upside from rental growth and cap rate compression remains significant.  And perhaps the strongest indication yet of Ireland’s recovery:

The volume of transactional activity in the Dublin pub sector during 2014 exceeded all expectations. In total, more than 38 Dublin pubs sold during the last 12 months with a further 19 under contract at year-end. With considerable deleveraging still to occur and the underlying economic recovery boosting consumer sentiment and in turn the pub trade, strong volumes of transactional activity are expected to be witnessed in the pub sector again in 2015. 

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