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M7's search for 'Brexit-proof' and 'Trump-proof' investments leads to Ireland

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M7's search for 'Brexit-proof' and 'Trump-proof' investments leads to Ireland

? Real estate investor could pump as much as €120 million into the Irish market after its debut transaction.

? Ireland's European Union membership is a "good thing" in light of Brexit's impact.

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John Murnaghan, head of U.K.
real estate for M7
Source: M7 Real Estate Ltd

Following M7 Real Estate Ltd's first investment in Irish property — the €21.5 million acquisition of a mixed-use office and residential development in Dublin, adding to its assets under management in 11 other European countries — Teresa Gilchrist, head of investor relations and new business, and John Murnaghan, head of U.K. real estate, explain the pan-European real estate investment firm's thinking behind the acquisition and what it may target next in Ireland. The following is an edited transcript of that conversation.

S&P Global Market Intelligence: Why is M7 entering the Irish market now?

Teresa Gilchrist: E-REIP IV [M7's European Real Estate Investment Partners fund] is a Euro vehicle and what we're trying to do there is give investors a sustainable, attractive income. And with everything that's going on at the moment geopolitically, we're focusing on those economies that we think are likely to be least troubled on balance and really diving into the micro of the real estate deals to look at which assets we think would be able to deliver a good medium- to long-term sustainable income. So for E-REIP IV, we see Germany and the Netherlands as being the biggest market for us — probably the Netherlands bigger than Germany simply because of access of product.

We started to see, particularly through John and the work that he's been doing, that there were still some deals, particularly focused around Dublin, that we thought attractive. And in terms of the whole fund we see that we could potentially invest up to 10% in the Irish market, but only if we find specific deals that we think can deliver that medium-term sustainable income.

John Murnaghan: And just to step back from the Dublin perspective, what we see is that Ireland still remains on course to be one of the best performing economies in the Eurozone and we are still expecting to see a continual strong demand from the occupier base. And the type of property we have identified is a tech hub and creative center, so the majority of the tenants have the profile of being marketing companies, games designers, tech and IT firms, which are all expected to grow and improve over the short to medium term.

You mentioned perhaps 10% of the fund being attributed to Irish investments. How big is the fund?

Gilchrist: At the moment we have bought close to €300 million, and we have the capacity to buy about €550 million. We're hoping that we will grow it up to about €1 billion. It really depends on how long we can find good opportunities. So it will be minimum €550 million, maximum €1 billion to €1.2 billion.

You're entering the Irish market at a time of relatively high prices, especially in Dublin, a few years after the Irish property market bottomed out following the global financial crisis. What has taken you so long to look at Ireland having invested elsewhere in Europe?

Murnaghan: With the focus of the company, we have found the value proposition more attractive on the continent and in the U.K. But we are largely very opportunity-led here. So we'd just simply not found the right deal or the right acquisition target [in Ireland] for us to date. And although the [Irish] market has been maturing over the last three to five years, this particular property meets the criteria which we seek.

Gilchrist: To expand on that, if you look at the history of M7, we started off very much as an operating partner for the big private equity groups. A number of those were going into Dublin and Ireland directly, and we weren't really in a position to necessarily offer them what we were able to offer them in a number of other markets. They were doing that on their own. We've been doing our own funds for the last two to two-and-a-half years, and initially they were quite small and focused funds. This vehicle, E-REIP IV, is still a very focused fund. But it's on a large scale, so therefore we're bringing in more jurisdictions. So we had more scope to invest in Ireland as well as not having found the right opportunity before.

Over the last few months, and especially in the last couple of days following Theresa May's speech on how the U.K. plans to approach its exit from the European Union, there has been a lot of speculation about Dublin perhaps benefiting from the relocation of some U.K.-based companies to other EU cities. Did that play any role in your thinking when you went to purchase property in Dublin?

Gilchrist: I think it's certainly helpful that a number of people have talked about putting offshoots or moving certain functions to Dublin. But then similarly you hear things that may not be so positive with what Trump is doing and all sorts. I think as a business we are obviously very aware of what's going on, but at the moment it's so difficult to try to make predictions of exactly how it's going to look and what's going to get affected.

But we're trying to focus on what we think we can focus on: Pick the stronger economies and really make sure that the micro works. And buy buildings where hopefully we've got flexibility in our business plans and there are options, so that if things don't go quite how everyone hoped, there are a range of occupiers for a space that is adaptive and will appeal to a broad range of people. And that we make sure that we get our pricing right.

But, yes, the fact that [the Republic of Ireland's] in the European Union, that's got to be a good thing in terms of what's being said here [in the U.K.] at the moment.

And on the flip-side, Ireland is also exposed more than any other EU country to the U.K.'s exit from the European Union and, as you mentioned, the effect of Donald Trump's policies. Is there any concern that this could affect the investment you've made and future investments?

Murnaghan: In terms of what we've purchased and the task which I had, we sought to identify and to purchase a property that we saw as — and I'm not sure if this is a phrase — Brexit-proof and as far as possible Trump-proof. Where we find a lot of the defensive part of M7's offering is that we have an incredible diversity of income streams through the number and the type and the profile of the occupier base that we've got. So within Fumbally [Lane, the mixed-use office and residential development M7 purchased in Dublin] we've got 26 tenants, soon to be 28, and they come from a variety of different sectors of the market. So the income stream that we're going to drive is coming from very low rents but also from a very diversified income stream, which gives us a defensive, sustainable yielding property in the Dublin area.

Gilchrist: We're not worried per se. We'll wait and see what happens and deal with what actually comes to fruition. I think a number of people have said that with Trump coming in the U.S. economy should actually grow, so there may be some pluses and minuses. At the moment we're focusing on the real estate and trying to be defensive at that level.

In your statement earlier you said that you are planning to add further Irish assets in the near term. Can you give me some details on these: What kind of assets will you be targeting, the location, the value?

Murnaghan: Just as I said at the very beginning, we are very opportunity-led. It's very hard to be specific, but suffice to say in terms of a location we are almost exclusively focused on the Dublin and the greater Dublin area and it's unlikely that we would seek to invest outside of that for the time being. I am currently reviewing opportunities across all different sectors, but I perhaps see stronger fundamentals in the multi-let and logistics-industrial sector and also, in a very similar vein to the purchase we've just made, I see good opportunity in the multi-let, cross-sector office offering.