€2.5bn spent abroad, only €800m at home

Private investors and various consortia have upstaged the institutional investors in a year when over €3 billion was invested. Jack Fagan reports

It is all change in commercial property with private investors now spending three times more abroad than at home.

The institutions who once held sway in the Irish market continue to be upstaged by private investors and various forms of consortia with access to cheap finance and almost any amount of it.

With relatively little commercial investments available in Ireland in recent years, most yield-hungry players have been buying mainly in the UK and to some extent on the Continent.

Turnover in the Irish market this year will exceed €800 million, a long way short of the estimated €2.5 billion spent abroad by both private investors and institutions.

The search for investment opportunities in the commercial property market by the private sector has been accentuated over the past two years because of a visceral aversion to equities after the collapse of dotcom shares.

The ever-changing profile of the commercial property market underlines the shift in wealth to business and professional people who have been able to gear up to buy investments which in the past would have been outside their reach.

While most of the seriously rich players have made fortunes on commercial property both at home and abroad, even greater numbers have invested here and overseas in residential developments that frequently show more modest returns.

After the investment bonanza of recent years, it is clear that the Irish have a preoccupation with property.

The intense competition for revenue-producing commercial investments here - in part triggered by legislative changes that allows pension funds to get in on the act - will continue to put pressure on prime yields, already ranging between 3-3.5 per cent for good retail on the high streets and between 5-5.5 per cent at the top end of the office market.

The availability of cheap finance has meant that developers now seldom sell on newly completed offices and shopping centres as was the custom in the past. Even the huge new Dundrum Town Centre - with a likely end value of at least €450 million - is being retained by Castlethorn Developments, one of the shrewdest operators in the Irish market.

Nevertheless, Lena Clarke, divisional director with Lisney, is fairly confident that there will be improved levels of supply in the year ahead. She says that a general pick-up in the occupier market - coupled with many new developments reaching completion, including offices and shopping centres - should offer new opportunities in 2005.

However, she predicts that yields will remain relatively static with limited room for further compression.

After returning to the market last year, the financial institutions and the pension funds have been doing what they do best - devising innovative ways of acquiring new office blocks to be let to blue chip companies.

Like everything the funds do, the private partnerships have been quick to chase this business.

Top legal firm McCann FitzGerald was one of the first to embark on a sale and leaseback for its planned new €90 million headquarters of 10,219 sq m (110,000 sq ft) in the Grand Canal Docks.

The deal is expected to produce a windfall of at least €30 million for the 56 partners and a return of about 5.5 per cent for the investors.

In September, another leading legal firm, Dillon Eustace, also agreed a sale and leaseback with IPUT for its €40 million headquarters in the docklands. The arrangement will channel handsome compensations to the partners in the firm and a 5 per cent yield to the pension fund.

Michael Clarke of Hamilton Osborne King estimates that forward funding - like the deals with the two legal firms - accounted for about 43 per cent of all investment properties sold in 2004. This compares with only 10 per cent in the previous 12 months.

In order to save substantial stamp duty, Mr Clarke says that many companies are entering into site sale and building contracts with investors for headquarters buildings, and leveraging off the strength of their own covenants.

Those best placed to profit from this type of transaction are multi-national and strong national companies.

Apart from their interest in the limited number of pre-funding opportunities, the institutions had a relatively uneventful year and ended the 12 months with a huge weight of money that they still have to find a home for in the property market.

Investors are showing increasing interest in vacant office buildings now that there are signs of further economic recovery and more especially in a pick-up in occupier demand.

Vacancy levels in the city centre have fallen to below 10 per cent and, though a previously unheard of range of inducements are still being offered to tenants in the suburbs, the oversupply remains stubbornly high.

Retail warehousing, once restricted to a few areas of our major cities, is being developed at a ferocious rate in most cities and major towns and, though new investment opportunities will obviously follow, some of these developments will obviously go belly up because of over-development, particularly in towns with relatively small populations.

There is a relatively small number DIY anchor tenants around and, though most of the promoters are pitching for B & Q, that multiple can pick and choose where to go. It will opt only for the most strategically important locations.

The high level of interest in the commercial sector is hardly surprising given that the overall returns in 2003 were 12.7 per cent.

The latest SCS/IPD index for the 12 months up to the end of September last showed returns of 10.9 per cent, about twice that of bonds but considerably less than equities with returns of 28.2 per cent.