Dublin Docklands Where U2 Fell Gets Bad Bank as Developer

Bloomberg

At an abandoned bakery complex near the Dublin studio where U2 recorded "Sunday Bloody Sunday," Ireland's bad bank is trying its hand at being a developer on a scale it's never attempted before in the Irish capital.

The National Asset Management Agency, responsible for cleaning up Western Europe's worst property crash, is preparing a plan to turn Boland's Mill and the surrounding docklands into a low-rise version of London's Canary Wharf financial district at a cost of about 1.5 billion euros ($2 billion).

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The project would transform the agency into a developer of Irish real estate, with all the risks associated with the project's success or failure. Until now, it has mainly been an asset manager. Dublin's docklands became a developers' graveyard when the Irish bubble burst in 2008, though the man charged with reviving the area is undeterred.

"This has been thought through and challenged to ensure it makes commercial sense," NAMA Chief Executive Officer Brendan McDonagh said in an interview. "If you have 20 office buildings over 75,000 square feet and you build a 21st, that's speculative. If only one Grade A building is available and you build a second, that's not."

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With the Irish capital running short of prime office buildings, one of NAMA's main goals is to provide workspace for the technology and pharmaceutical companies flooding into Ireland to take advantage of its low corporate taxes. Both Google Inc. (GOOG) and Facebook Inc. (FB) chose Dublin as the location for their European headquarters, while Pfizer Inc. and Allergan Inc. also have operations in Ireland. Another aim is to cool Dublin's soaring residential market.

‘Building Blocks'

The agency has the financing, expertise and contacts to help develop the docklands without risking the sort of oversupply that ruined the Irish market in 2008, according to McDonagh. NAMA will work with IDA Ireland, the agency responsible for bringing companies like Google and Facebook to the country, to gauge demand, he said.

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"It's building blocks, one site at a time," McDonagh said. "Nobody's going to build 3.5 million feet of new office space and hope they can be sold or leased. You might build 200,000 square feet and then talk to IDA, and they can tell us if more is needed."

Not everyone agrees with McDonagh's strategy.

"They've proven themselves very competent at the original brief," said Paul McNeive, former managing director at Savills Plc (SVS) 's Irish unit and now a real estate commentator. "But the fastest way to produce office blocks and houses is sell their sites and lend money to developers until banks return."

Fast-Track Planning

By the end of 2011, NAMA had paid five banks 31.8 billion euros in bonds for loans with a par value of 74 billion euros. As a result, the agency owns or is linked through loans to 70 percent of the 22 hectares (54 acres) of undeveloped land in the docklands earmarked for fast-track planning, known as a special development zone.

Much of the wider docklands area, historically dominated by flour milling and gas storage, is already built up. On the north bank of the River Liffey lies the gleaming buildings of the International Financial Services Centre, where New York-based banks Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) have offices.

On the south docks, Facebook's European headquarters is on nearby Grand Canal Square. The area, known as Dublin's Silicon Docks, is dominated by the 15-story Montevetro building that Google bought in 2011.

Rising Rents

"With so many companies bringing a lot of new staff to Dublin, accommodation is a big issue," Kevin Nowlan, a former executive at NAMA and now Hibernia REIT Plc (HBRN)'s chief executive officer, told reporters in July. "It's not healthy with our rents going up as quickly as they are."

On Aug. 26, Hibernia agreed to pay about 18 million euros for a riverside site on the south docks. It earlier bought two other properties in the area, including the site of the Windmill Lane Studio, where U2 made parts of the albums "War" and "Boy" and where graffiti is still scrawled in honor of Ireland's most famous rock group.

The docklands is also a testament to the real estate collapse that battered Dublin beginning in 2008. Boland's Mill plunged 85 percent in value at the depths of the crash, and empty lots and idle sites still pockmark the area.

Even a skyscraper supported by U2 failed to get off the ground. A short stroll from Windmill Lane, a site that had been earmarked for the 120-meter (394-foot) U2 Tower is deserted. After suspending the development in 2008, the Dublin Docklands Development Authority handed the site over to NAMA in 2011.

Unfinished Building

Across the river, a planned Zaha Hadid-designed tower was also never built. A headquarters for the failed Anglo Irish Bank Corp. lies unfinished after being sold to the country's central bank. Former head of asset management at NAMA, John Mulcahy, once likened it to a "burnt-out tank on the road."

NAMA is currently selling an adjacent land plot known as Project Wave. "It has been incredibly slow and disappointing the amount of activity going on down there given the prime sites," McDonagh said. With the special development zone in place, "the one thing you want to see is activity," he said.

Workspace Dearth

The property crash meant development finance dried up and no new Dublin office buildings have been completed in four years, leaving a shortage of quality workspace, according to Roland O'Connell, a director at Savills in Dublin. It could be three more years before a "significant" number of buildings are completed, he said. Dublin office rents will likely rise about 7 percent a year through 2018, the most of 19 European cities surveyed, broker Jones Lang LaSalle Inc. (JLL) said in July.

Home prices are surging too, with Dublin values rising 23 percent in June from a year earlier on a lack of supply. About 8,000 homes were built in Ireland last year, down from 93,000 in 2006, the height of the country's Celtic Tiger boom.

Against that backdrop, Irish Finance Minister Michael Noonan turned to NAMA, saying the docklands has the potential to be Dublin's answer to Canary Wharf. The first phase will be Boland's Mill, a landmark for Dubliners overlooking Grand Canal Dock and covering about 1.7 acres. The value of the mill, whose developer Versus Ltd. is in receivership, slumped from 61.3 million euros in 2007 to less than 10 million euros two years later, according to company filings by Versus.

Coming Application

NAMA now controls the loans and is due to send a formal application to city authorities for 35,000 square meters of offices and apartments in the weeks ahead.

"Once rents have gone through 35 euros per square foot, that's the break-even spot," McDonagh said. "Now rents are 40 to 45 euros per square foot, if you can deliver the building, it can be rented and sold."

Most of the projects linked to NAMA will be completed by 2020, McDonagh said. NAMA will provide finance to current landowners or will bring in partners to help develop projects where it has taken possession of the land, he said.

The agency is already working with Hines, the Houston-based property investor, to develop Spencer Dock, Dublin's largest city center office complex. Tenants include accounting firm PricewaterhouseCoopers LLP.

U2 Tower

NAMA also plans to develop buildings near Facebook's offices in a venture with Oaktree Capital Management LP, the world's largest distressed-debt investor, and Dublin-based construction company Bennett Group.

The agency is also seeking to resurrect the U2 Tower plan with Kennedy-Wilson Holdings Inc. as part of a venture to develop 5 acres of land, people with knowledge of the matter said last year. McDonagh and Kennedy Wilson declined to comment.

Boland's Mill was originally built in the 1830s and stopped operating in 2001. Today, its courtyard is overgrown and all 11 stories have broken windows. Paintwork is peeling off concrete, and stone walls are festooned with graffiti at street level, where Google employees stroll past to the glass-fronted Montevetro building 300 meters (328 yards) away.

"It's the only site on the south side of the Liffey that has decent height," McDonagh said of the aging mill. After creating the commercial space and 150 apartments, "we'll pick the sites and sit down with Dublin City Council to decide what you could put on each," he said.

To contact the reporters on this story: Neil Callanan in London at ncallanan@bloomberg.net; Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editors responsible for this story: Andrew Blackman at ablackman@bloomberg.net; Rob Urban at robprag@bloomberg.net Jeffrey St.Onge

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