Westgate deal transfers more risk to private investors
Irish Times Commercial Property Section, Wednesday November 16th 2005

Small investors have committed over €20m to a large speculative scheme near Heuston Station. Goodbody Stockbrokers has succeeded in raising over €20 million from private investors for the speculative development at Westgate, opposite Dublin’s Heuston Station.

The level of interest in the 8.2acre site means the developers will front up a fraction of the acquisition and construction costs with most of the financial risk transferred to the small investor.

Westgate Joint Venture, a new company formed by the building group, Rhatigan Commercial Developments and Goodbody’s bought the property last July for €79.3 million.

The disused brownfield site was owned by the Office of Public Works and Eircom, which has retained part of the land for the construction of its new headquarters.

Development deals largely funded by private investors have become a common feature of the commercial sector due to the widespread demand for property investments.

But Westgate is regarded as a speculative development and some market observers have been surprised at the willingness of small investors to sign up to a project in which the risks are potentially higher than other investment options either in property or an alternative asset class.

Under terms of the development agreement between the company and Goodbody’s private clients, Rhatigan will fork out a mere €5 million as an initial investment although the company, which is controlled by developer Padraic Rhatigan, has undertaken to invest a further €5 million if required.

For this minimal sum Rhatigan will own 50% of Westgate. Private investors, on the other hand, have so far committed will over €20 million to the venture. It’s understood the rest of the acquisition and development costs will be funded through bank loans.

But some property experts question whether the potential risks for the small investors outweigh the potential rewards. If Westgate flops, investors could lose their entire investment.

However, if the project is a commercial success, both the investors and the developer are guaranteed a minimum 5% annual return on their cash in addition to a profit share for amounts earned over the 5%.

It’s in this profit share agreement that the real upside lies for the private investor. As financial sources point out, a 5 per cent annualised return is modes in comparison to the recent double-digit returns form the ISEQ.

An information leaflet sent out by Goodbody’s to its private client base describes Westgate as “comparable to the first phase of the IFSC”. It said the development “will be a major part of a new business, commercial and residential quarter”.

The site, which overlooks the River Liffey, has full planning permission for a mixed-use scheme that includes office space, retail outlets, apartments, a new building for the Irish Museum of Modern Art and a hotel.

According to Goodbody document, Westgate will have 272 apartments with the 3-bed units generating a maximum sale price of €550,000 each. Estimates, construction costs or the residential element are €46 million.

But property sources claim it is the scale of the speculative office development at Westgate that poses the greatest risk for private investors.

So far the local authorities have given the green light for 17,442m² (187,744ft²) of office space but Goodbody’s and Rhatigan’ s are now seeking permission to construct an additional 7,432m² (79,997ft²).

With construction on the site not due to be complete until 2009, some industry insiders believe such a large-scale office development on the city’s edge is excessive, particularly given the sector’s recent weakness.

One source described the Westgate site, which borders the gardens of Kilmainham, St. John’s Road and Military Road, as the “edge of the worked for Dublin’s business community”.

Another claimed the area was “not established as a commercial centre” and predicted the IFSC and Grand Canal Dock area would continue to be the main focus for business looking to locate to Dublin.

The Goodbody document states the valuation for the office development is based on an average rent of €344 per sq m (31.95 per sq ft). This is regards as a competitive price given that the top rents in the IFSC are around €540 per sq m (€50 per sq ft).

Westgate has been designed by architects Anthony Reddy Associates. It will be constructed by Rhatigan Group, one of the largest development companies in the State.