Overseas InvestmentsInvestment levels in overseas commercial property are running at almost three times those in the domestic market, writes Gretchen Friemann

Irish investors are continuing to fork out unprecedented levels of money on commercial property despite an upward shift in long-term interest rates.

The total spend on international and domestic real estate in 2006 is expected to hit a whopping €11.1 billion - and there is still no sign of a slowdown in this long-running investment boom.

According to agent CB Richard Ellis Gunne, which compiled the figures, a record €3 billion has been spent at home while €8.1 billion has poured into international markets.

And if Quinlan Private and its partners succeed in a €1.5 billion bid for a chain of UK hotels, then the 2006 spend could rise to even frothier heights.

A consortium including Derek Quinlan's investment company, the Israeli group Delek Real Estate and the lawyer Egal Ahouvi, is in advanced talks to buy 47 Marriott Hotel properties from the Royal Bank of Scotland with an announcement due on the deal within the next few weeks.

While Quinlan Private's stake in the acquisition has not been revealed, experts agree that it is likely to outstrip the €531.7 million spent by Irish investors last January for the Fosse Park shopping complex in Leicester.

So, if the Marriott bid is accepted, it will rank not only as one of the largest transactions in the UK market this year, but also as the most expensive overseas purchase by an Irish investor.

The former tax inspector's syndicate has been Ireland's biggest international property player for the past two years with the €1.1 billion take-over of the Savoy hotel group in 2004 followed by the €740 million purchase of the Knightsbridge Estate in 2005.

But, as the surge in spending this year illustrates, Quinlan Private is just one of a growing number of Irish investors that are now established heavyweights on the global stage.

The United Kingdom continues to attract the vast majority of the multi-billion euro spend even though currency fluctuations, higher funding costs and converging yields make this a tougher market than it has been in recent years.

Despite these restrictions the Irish invasion of Britain is accelerating at a breakneck pace with up to €5 billion - excluding the Marriott deal - expected to be ploughed into the UK market this year.

Compare this to the €1 billion to €1.5 billion that trickled across the Irish Sea six years ago.

According to Duncan Lyster of Lisney, large-scale transactions - such as the Fosse Park deal (which ranks as the biggest single retail property purchase in Britain since the early 1990s), or the Woolgate Xchange acquisition by David Arnold's investment vehicle D2 Private - illustrate what a "major role the Irish play in the UK investment market".

Earlier this year a DTZ survey revealed that Ireland had overtaken the United States as the single largest cross-border investor into UK commercial property, accounting for almost 22 per cent of total overseas purchases in 2005.

However, the international demand for UK property has rocketed in the past 12 to 24 months and the Irish are finding it increasingly difficult to compete against the wall of money flooding into the market.

While this problem was a feature of last year, Irish investors are now also contending with higher financing costs.

Mike Doyle of HOK claims lending rates can be as high as 6 per cent while average UK yields are around 4.5 per cent, "making it harder for debt-driven investors" to finance deals.

It's this widening gap between funding costs and yields that raises the spectre of price decreases in 2007.

Doyle warns investors may become "more reluctant to look at secondary locations because yields are low and the cost of funding is high" and he claims this will have a "negative impact on capital values".

Many of the large-scale acquisitions in the UK this year were shopping centres in regional cities. According to Doyle, this may become an even stronger trend over the next 12 months as the Irish look for assets that can be "actively managed" - a strategy that would enable them to add value without relying on further yield compression.

The mounting obstacles to the private and syndicated investors in the UK have resulted in greater amounts of Irish money flowing into European markets with over €2 billion projected as this year's annual spend on the Continent.

Predictably, Germany, with its strengthening economy and comparatively high yields, has become a major focus. Quinlan Private and Davy Private clients were both big spenders there this year and experts predict the appetite for property in the growth cities of Hamburg, Cologne and Munich will increase in 2007.

So is there anything that will temper Irish enthusiasm for bricks and mortar or will the next 12 months become another bumper year for commercial property investment?

Interest rates are on an upward cycle but, as Lyster points out, the impact on investment levels has been far less than many had feared at the start of the year.

Not only are the Irish continuing to snap up major properties, they are also banking massive profits.

In June business partners Pat McCormack and Michael Herbert clocked up a €22 million (£15 million) profit in just six months when they sold a Scottish shopping centre for €267 million (£245 million).

While nobody is calling time on this party yet the potential for a nasty hangover appears to be growing.

In a recent presentation to the Society of Chartered Surveyors, Marie Hunt, head of research at CB Richard Ellis Gunne, delivered a sobering warning for those charging blindly into what is becoming one of the biggest property bubbles on record.

"The fear is . . . that some Irish investors . . . are ignoring the core fundamentals of investment selection and valuation and paying . . . unrealistic prices to secure product. Property has to offer a premium to gilts to reflect depreciation, illiquidity and default risk. While some investors are reducing this premium they are leaving themselves exposed and may not be adequately compensated for the downside risk that property poses.

"At this point, we urge caution and advise investors to get back to reality and have regard to the core fundamentals of property investment of which the most important indicator is now rental growth prospects!"