Ires was the big story last week. A contingent of North American shareholders were very unhappy with Ires’ management. They wanted Ires to sell off its apartment buildings and wind itself down.

The leader of the malcontents is Vision Capital’s CEO Jeffrey Olin. At the EGM on Friday, he pointed to the example of Hibernia and Green Reit. Those former Reits, he said, “recognised reality and exited, in transactions greater than independent valuations”.

Hibernia was one of the original Irish Reits. It was focused on offices in Dublin. Hibernia was taken private in a big transaction by Brookfield, a huge Canadian real estate investor. Brookfield bought Hibernia lock, stock, and barrel in June 2022.

A lot has happened in the last four years. But if you think back to June 2022, it was a moment when the worst of Covid had just passed. The economy, which looked to be going off a cliff in March 2020, had bounced back strongly. The S&P500 index was up 65 per cent from its 2020 low point.

In the first half of 2022, things seemed to be looking up in the property market as well. The following chart from Goodbody shows change in the capital value of different types of Irish commercial real estate. Retail had taken a hammering but was recovering; offices had suffered a bad year or two but were on their way back.

With the benefit of hindsight, June 2022 was about the worst possible time to buy a load of offices in Dublin. It was bad for two reasons.

One month after the deal, the ECB started the most aggressive rate-hiking cycle in its history. For a real estate investor in particular, this is terrible news. Commercial real estate is priced relative to interest rates. Higher rates hydraulically lower the capital value of office buildings.

The second problem with buying offices in June 2022 is that Covid's impact on offices turned out to be slower and more severe than on any other asset class.

High-street retail was badly hit by lockdowns but, when lockdowns ended, people still wanted to shop. By contrast, working from home became the norm during Covid. And it never went away. The following chart shows the percentage of days US workers spend working from home.

The following chart from the estate agent Knight Frank shows the gross take-up of office space in Dublin City. Take up is the amount of office space rented in a given year.

The inverse of take-up is vacancy. And Dublin office space doesn't look good by this metric either. The following chart shows the vacancy rate in Dublin offices. Note that commercial leases are usually for five or ten years. The shock to demand would be expected to take time to play itself out.

Hibernia

Where does this leave Brookfield? Hibernia's results to March 2023 were released at the end of last year but didn't make it into the media at the time.

The first thing to note is the write-downs. The company wrote down the value of its investment properties by €111.9 million in 2023. That's 11 per of their total value.

So in March 2023, Hibernia's assets were worth 11 per cent less than a year before. The liability side of the balance sheet tells another story. Hibernia repaid €200 million of bank debt in 2023. That was funded by a €197 million loan from its parent company. The upshot is that there was no bank debt held against its €1.15 billion of real estate assets.

What's going on there? For a standalone real estate company, it would be strange not to be funded with debt. Either Hibernia wanted to roll over its €200 million of bank debt and could not. Or, alternatively, it didn't make sense for this particular subsidiary to carry debt, and the debt is held at the corporate level.

Who knows what's going on with the debt. The assets are the worrying part from Hibernia's perspective. Last year, it wrote the buildings down by 11 per cent. But as we've seen, the office real estate crisis is a slow burner. It'll take years for tenants to roll off their lease commitments and rationalise their space.

In a 2023 paper for the National Bureau of Economic Research, Gupta, Martinez and Nieuwerburgh estimated how much working from home would reduce the value of office buildings in the US.

They found a generic class-B office building — that is, a less than brand-new office building — would be worth 54 per cent less than before working from home. 54 per cent is an aggregate of lower rents, more vacancy, more risk, less growth, and more credit defaults.

If an asset must drop in value, it's normally in the creditors' interest to get it over with. In this scenario, the creditors would get control of the asset, sell it, take their lumps, and move on.

But with office property, there are reasons to think it might not happen this way. Banks, wary of their regulators, might be slow to realise losses on office buildings. It makes sense for both sides to "extend and pretend", for the moment at least.

At some point, people will get sick of waiting around and will sell an office building for a big loss. This has happened on a small scale in Dublin with lenders recently appointing receivers to the Beckett and the North Docks 1 and 2 buildings. The outcome of those processes will show where the market really is. But for now, it's all notional.