One of the noteworthy phenomena arising from the Celtic Tiger has been emergence of the private Irish investor as a major player in the property market at home and abroad. This is particularly true of the London market and, with the introduction of the Euro, is likely to become increasingly evident on the continent. It is estimated that while approximately E500 million was invested in Irish commercial property in 2001, around double that was invested in the UK by Irish buyers, either privately or in syndicates.
The main attractions of a UK property are as follows:
Value: initial yields, or the cash-on-cash return on investment, tend to be higher in the UK than in Ireland. For example, good quality offices can be bought at yields in excess of 7 per cent compared to near 6 per cent in Dublin. However, this is partly because Sterling interest rates are higher than in the Euro zone (between 0.50 per cent 0.75 per cent) and partly because of the currency risk.
Liquidity: there is a greater choice of property available at any given time. Also, when selling, there are more potential buyers, as the UK is a major market for overseas investors such as American, continental, Middle East, Far East as well as the domestic institutions and property companies. This contrasts with the Irish market, which is very much dominated by the domestic institutional and private investor.
Diversification: The UK property market is clearly unaffected by the Irish economy and so provides an excellent means of diversifying investment risk, particularly for the investor who has an existing Irish portfolio.
Banking: the UK is well served by a variety of domestic and international banks and this creates a competitive environment in which to secure funding.
Transparency: the UK market operates within a similar legal and business framework as in Ireland and is well covered by surveying practices and other professional advisors.
Prospective returns: This chart compares UK and Irish initial yields as measured by the Investment Property Databank, a sort of ISEQ/FTSE for commercial investment property. It can clearly be seen that Irish property is more tightly valued than UK, though the gap is closing. This suggests that Irish yields are likely to increase, impacting negatively on values, but this will be to a large extent offset by rent review settlements as currently historic rents are adjusted to take into account the phenomenal growth of recent years. In the longer term the still relatively high economic growth forecast for the Irish economy would suggest that rental, and hence capital growth should be superior than the UK. On the other hand the UK offers initially higher cash returns.
Irish investors
1. Private Investors
These are very high net worth individuals, or small groups, who acquire a particular building or portfolio. They will gear quite aggressively, often in excess of 75 per cent, sometimes using mezzanine finance. The investor(s) would tend to have full control over the property and become involved in the management of it.
2. Private syndicates
These are groups of high net worth investors put together by a syndicator. A good example is the Stg?240m Goldman Sachs HQ in the City of London, which was acquired last year by such a syndicate put together by Warren & Partners. Again such syndicates are characterised by a high level of gearing and tax efficient structures. The investors tend to be passive with control delegated to the syndicator.
3. Syndicates
These are wider groups of investors usually investing in a package structured by the private banking arms of the main Irish banks. A recent example is the acquisition of Plough Place by the Bank of Ireland on behalf of clients. Gearing levels tend to be more restrained and the sponsoring bank usually provides bank finance.
4. Funds
These are the Irish institutions such as Irish Life or Bank of Ireland Asset Management together with pension funds such as the ESB Pension Fund. These acquire UK property on behalf of policyholders. There is usually no gearing involved. An exception to this is the BCP London Commercial Property Fund, which has the added advantage of gearing.
Types of property
The main emphasis is on London offices though prime retail is a close second. Traditional, period office buildings in the West End, particularly Mayfair, are eagerly sought after. To secure bank finance a good covenant (tenant) on a lease with, ideally, in excess of fifteen years left to run is required. As rents in London have softened somewhat one must be careful that the property is not over-rented, or in excess of current market levels, as this will suppress growth prospects.
The City is more characterised by larger, more modern buildings but very often with top class, financial services companies as tenants. Also popular is the M25/Thames Corridor area, though suffering somewhat from the fallout in the TMT sectors. The larger provincial centres, such as Manchester and Edinburgh, have also seen Irish investment, though more caution is now evident.
Prime retail property, especially Bond Street, is becoming more popular with Irish investors who have overcome perceived management problems. Similar to Ireland, it is very difficult to get planning permission for retail development and this enhances the value of the existing stock. In addition, the UK institutions overestimated the threat to the high street posed by the internet and abandoned the sector. This means that good value can be obtained: for example prime yields on Bond Street are in excess of 5 per cent compared to around 4 per cent historically.
Residential property tends to be avoided due to the hassle and cost of management. Apparently attractive initial yields of around 10 per cent can quickly be eroded by the cost of rent collection, repairs and maintenance as well as rental voids.
Future trends
In the absence of a significant economic downturn, the accumulated and growing wealth in Ireland is likely to continue to find a home in bricks and mortar. This is especially so in the wake of well publicised disasters or setbacks in the stock markets. Historically low interest rates also provide strong support for property investment and lenders are keen to finance good quality assets. As a consequence, the UK will continue to see investment from Ireland.
With the final advent of the Euro, it is likely that Irish investors will venture onto the Continent. Some selective investment has already taken place in France and the Netherlands. However, different lease structures, tax treatment, language and culture are very real barriers. That said, these along with many now defunct barriers, will erode over time.
Lastly, the Irish market is likely to see more overseas interest. Historically, some of the UK institutions such as Norwich Union and Standard life invested in Ireland, though more recently were put off by their perception of an overheated market. Now that growth levels have settled down to more acceptable levels we may see more interest from overseas and some of the German and Dutch funds are actively looking at the Irish market. |
