Overseas InvestmentsWhile attention focuses on the debate over Irish property values, vast amounts of cash are flowing into international markets, writes Gretchen Friemann

Irish investors have ploughed up to €10 billion into international commercial property in 2007 despite a slowdown in the domestic market and tighter credit conditions following the US sub-prime debacle.

The bumper-spending spree represents a massive increase of almost €2 billion on last year's figure of €8.1 billion and confounds the negative sentiment surrounding this sector.

According to Marie Hunt, head of research at CB Richard Ellis, the higher investment in international property is partly a result of the reduced spend in the domestic market which has attracted a mere €2 billion this year, down from over €3 billion in 2006. And she points out that, while total investment levels this year have remained the same as last year at €12 billion, the "division of that money has shifted".

Jones Lang LaSalle's forecasts are slightly lower with the agency's head of research, Dr Clare Eriksson, predicting the spend on international property will hit €9.5 billion by the end of December. She calculates the total investment in commercial property for 2007 will reach €11.1 billion as domestic market activity stalls amid concerns over pricing levels.

Yet while attention focuses on the debate over Irish property values, vast amounts of cash are flowing into international markets. Within the past few weeks Quinlan Private has raised €320 million from its clients for a €2 billion US property fund while Bank of Ireland's private clients have coughed up €130 million for a stake in an Asian property fund led by Australia's Macquarie Bank.

On the strength of these figures Irish investors might appear unscathed by the financial crisis that has shaken property markets in most developed countries. In fact, the global credit crunch and the tighter borrowing environment it has precipitated are impacting severely on investor confidence.

The mega-deals that characterised the first half of the year have been almost non-existent since the US sub-prime story started to unravel. Of the 10 most expensive international acquisitions this year, listed opposite, not one was negotiated after the month of August.

And there have been reports that the debt market turbulence may have caused a delay in the closure of Quinlan Private's €1.6 billion purchase of Citibank's headquarters, which it bought in July with Propinvest. However, it's understood financing for the deal, one of the most expensive property transactions this year, is in place and the transaction is expected to close on time.

While most of the pain has been concentrated in the UK, where major syndicates such as Quinlan Private and Warren Private Clients have had to withdraw from deals because of funding difficulties, industry experts claim the loss of confidence is affecting nearly all markets.

Even in Germany, where yields are far more attractive and where the Irish have concentrated much of their buying power recently, investors seem to be sitting on their hands waiting for calmer conditions to return. Robert Janke, a director at Lisney who specialises in this market, says the "fourth quarter has been very quiet" but blames this on the ongoing "uncertainty" arising out of the global financial crisis rather than any "fundamental factor", such as a drop in yields or rental values.

In the UK, however, the fallout from the credit crunch has been dramatic. Debt-backed investors - already under pressure earlier in the year from successive interest rate hikes - are now struggling to secure financing as loan-to-value rates sink to between 70 to 80 per cent.

Capital values are reported to have plummeted by over 20 per cent in some areas, although official statistics from CBRE show an average drop of 10 to 15 per cent.

As the financial crisis deepens there is a real fear London's multi-billion pound office market will see further price falls after a recent survey revealed major banks and organisations are starting to opt for short-term flexibile leases amid continued uncertainty over potential job cuts in the industry. Intense competition for UK property and the higher borrowing costs were already squeezing many Irish investors out of the market. This year, however, there has been a mass exodus.

According to CBRE, just €4 billion has been spent in the UK in 2007 compared with €5.5 billion in 2006. While this still represents the bulk of money invested in commercial property by Irish investors it shows buying patterns have radically shifted.

Michele Jackson of DTZ points out that, four years ago, the Irish were snapping up straightforward investment properties in the UK based on the safe assumptions of "annual capital appreciation and rental growth". To achieve similar returns today investors must venture into the far riskier waters of development projects, or opt for properties that require active management.

Inevitably, the UK's more challenging environment has channelled Irish money onto the Continent. Before the credit crunch hit, investors there were not only splashing out on major properties, they were banking substantial profits.

Last July Bank of Ireland's private clients enjoyed a 100 per cent return on the Cite du Retiro building in Paris, for €370 million. The property, which houses the luxury goods giant Cartier International, was purchased by the bank in October 2005 for €285 million.

But this year timing has proved crucial. Industry sources claim the bank may not have secured such a healthy profit margin had the deal been completed after August when the credit crunch hit.

Peter Collins, a director of the institution's private banking arm, acknowledges that the current conditions "mean this is now not an ideal market to be selling in". But he claims the bank's property focus for 2008 will remain on the retail sector as it is "likely to prove very resilient in a period when yields in many assets types will move out".

Aside from the Continent, the other key market for Irish investors has been the US where Sloane Capital, the property investment vehicle owned by racing tycoons John Magnier and JP McManus, bought a massive retail portfolio, amounting to around a quarter of Rodeo Drive in Beverley Hills, for €225 million.

While this is another example of a major transaction in the first half of the year, industry sources claim investors are now taking a currency punt on the US market, in the belief that the dollar is undervalued.

Both the US and the UK markets have seen sharp yield shields in the wake of the global credit crisis and experts claim there are now significant buying opportunities.

According to John Moran, a director of Jones Lang LaSalle's capital markets, investors are likely to return to the UK market in 2008, claiming yields in certain areas have "probably moved out too far", offering clear opportunities to savvy investors.

Other sources argue the drop in transaction volumes across all markets will persist until the uncertainty caused by the credit crunch has disappeared.

As one expert put it, if the banks "aren't lending it's hard to get a deal done. And I don't think we're really going to see a resolution to this problem until the financial institutions have revealed the extent of the sub-prime crisis on their balance sheets."