Overseas Review: Bumper spending by Irish investors overseas is predicted to continue in 2006, writes Gretchen Friemann
Irish investors have poured €6.8 billion into international and domestic property in 2005 and experts predict the bumper spending spree will continue at similar levels next year despite rising short-term interest rates.
The figures, which are compiled by CB Richard Ellis Gunne, show the UK has once again attracted the bulk of the money, but there are signs that many Irish investors are being squeezed out of this market due to intensifying competition and diminishing yields.
Some €3.2 billion was spent on UK commercial property in 2005 compared to €3.3 billion in 2004. It's a marginal drop but one that is expected to deepen as international money flowing into the UK increases. But the growing global demand for property appears to have had little impact on Irish investors' ability to win large-scale transactions.
According to a recent survey by Jones Lang LaSalle, the UK ranks as one of the largest property markets in the world and attracts, alongside the US and France, the majority of international investor capital. And yet the landmark British property deal for 2005 was the €740 million sale of the Knightsbridge estate to the former Dublin tax inspector, Derek Quinlan.
The Irish have gained an equally formidable reputation in western Europe with investors splashing out €1 billion this year, largely in the key markets of Paris, Amsterdam and Brussels.
To put this tide of Irish money into perspective, the €6.8 billion spent on property in the domestic and international markets in 2005 accounts for nearly 1.5 per cent of the predicted annual global spend in the commercial sector.
Such has been the strength of international demand for property that Jones Lang LaSalle last month predicted total global direct real estate investment will surge to an all-time record of $550 billion (€469 billion) in 2005. That's a 20 per cent increase on 2004 levels.
But there is little surprise among industry pundits at Ireland's sizeable chunk of the global property pie.
According to HOK's associate director of investments, Mike Doyle, "returns in the UK have been excellent this year", and he claims those that entered the market early reaped the greatest rewards.
The International Property Database predicts total returns for the UK market will exceed 17 per cent this year while analysts at CB Richard Ellis in London expect the final tally to reach 18.5 per cent.
Compared to the 15.1 per cent growth so far this year on the FTSE 100 or the 11.7 per cent uplift for the year to date on the ISEQ, this is a phenomenal performance.
However, the Irish influence on the UK property market may be on the wane. Last year, entrepreneurs like Derek Quinlan and Alfie Buller led an Irish assault on Britain's prime retail and office space across most of the major cities.
It was a similar story this year with Dublin lawyer Brian O'Donnell and his wife, Mary Patricia, snapping up large swathes of London's Canary Wharf while Quinlan bagged the valuable 3.2-acre Knightsbridge estate. But Lisney's Duncan Lyster warns that the deal clinching is set to get tougher as more and more international heavyweights flood the UK market.
He points to the failure of developer David Arnold to win the bidding war for 33 Cavendish Square as a case in point. The block, which houses BHS's flagship Oxford Street store and the London College of Fashion, was sold to the Abu Dhabi royal family for €625 million (£425 million) last month after they bid €160.5 million (£110 million) above the asking price.
Mr Lyster predicts that wealthy international players will continue to squeeze out Irish investors next year forcing a wall of money into the potentially riskier markets of Germany and central and eastern Europe.
According to Marie Hunt, head of research at CB Richard Ellis Gunne, increasing numbers of Irish investors are travelling to Germany to eye up potential deals, although she claims the number of actual transactions there are relatively low.
But volumes are expected to shoot up next year as investors chase higher yields at lower capital values. Michael Moriarty, managing director of HOK Investors, cautions against over-excitement at German property values. "There is a belief that the worst of the economic problems are over and that the only way property values are heading is up but I think that's a dangerous view. There are still serious problems with the economy and many areas are over-supplied with office space. If you're getting a 7 per cent yield on a property, there is a reason for that and investors should be aware of the risk factors. In fact, the well located, well-let property in Germany is selling for yields similar to most other major European locations so I don't think there are too many bargains on offer."
According to Ms Hunt, "yields are converging across Europe" due to the unprecedented level of demand for property and she said that the search for value will become harder throughout 2006.
So is the property boom nearing its peak? Short-term interest rates in Europe are now set on an upward curve and it's unclear how high the European Central Bank is prepared to raise the bar over the next 12 months.
But property experts insist that the levels of investment will remain broadly similar throughout 2006, driven by improving leasing conditions and robust capital growth. Mr Doyle says that the higher UK interest rates had little affect on Irish investors this year and the weakening interest rate cycle there will improve market conditions.
"The retail traders have really suffered in the last 12 months from the Bank Of England's attempts to take the steam out of the housing market. They did that successfully but it's generally agreed the rises were too steep and I think we can expect rates to come down further."
Ms Hunt agrees that higher interest rates will not dampen investor enthusiasm. She predicts the Irish will shell-out another €6 billion-plus next year on property but claims there will be a "shake-up" in the division of that money.
