Rising values give little incentive to sell

Investments Review: With investment at over twice the level of 2004 and intense competition for product at home, most syndicates have been concentrating on overseas markets, writes Jack Fagan

The commercial property investment market was dominated by a small number of large deals in 2005.

The 10 top transactions, ranging in size from the €50 million sale of the Merrion House office block in Dublin 4 to the €367.75 million pre-funding of the AIB headquarters, account for more than €1 billion and, with a spate of sales skewed towards the final weeks of the year, the indications are that the overall turnover will probably hit the €2 billion mark.

That will be more than twice the level of investment in 2004 but, in a still-too-small Irish market where investments are always scarce, most yield-hungry syndicates have been concentrating on overseas markets for investment opportunities.

The search in the UK yielded a staggering €3.2 billion worth of properties, according to CBRE Gunne, while another €1 billion was spent in western Europe and half that again in central and eastern Europe.

The rush to get money into property has raised the profile of Irish investors abroad and forced some of the institutions to think again about holding only 7 per cent of funds in property.

Investment specialist Lena Clarke of Lisney is speculating that the overall returns from the Irish property market this year are likely to reach 25 per cent, rivalling equities which showed growth of 24.8 per cent in the year up to September, 2005. Bonds have put in a poor performance.

With this level of return from property, the competition for the right investments can only intensify.

But finding suitable investments has become extremely difficult, one reason why a huge number of investors have turned to the property funds because of their strong recent gains, their attractive yields relative to equities and because they are seen by many as a safer alternative to investing in the stock market.

A good example is Friends First which has a cash holding of €30 million in its gross fund waiting to find a home in the property market. Luckily, property manager Roger Mansfield has a suitable investment in the pipeline which should meet its strict criteria.

Goodbody Stockbrokers has also been pulling in the cash and pumping much of it into building projects with capital allowances, such as Beacon private hospital (more than €160 million in this case), hotels and leisure projects and urban renewal schemes with tax breaks.

Many investors will be monitoring its decision to set up a joint venture company with building contractor Rhatigan Commercial Developments for a vast speculative office, apartment and retail development, plus a museum of modern art, opposite Dublin's Heuston Station.

The 8.3-acre site was bought for €79.3 million and, for an initial payment of €5 million, plus another €5 million in loan stock, Rhatigan will get 50 per cent of the project.

The balance will be held by Goodbody's private clients who have already invested €20 million in the project.

One of reassuring features of the site is that it adjoins one of the best transport hubs in the city, even if it is well outside the traditional office areas.

But that could change with Eircom also planning to build a new headquarters on an adjoining site.

The reality is that almost everybody is a property developer these days - syndicates, estate agents, financiers and farmers. Every development opportunity is chased by a range of developers but, as site costs rise inexorably, it seems only a matter of time before some of the over-ambitious and over-borrowed schemes run into trouble.

Developers may be inclined to forget that, while prime office rents edged up in Dublin city this year, the overall vacancy rate in the city and county remains stubbornly high at around 15 per cent.

Some of the senior figures in the industry are discreetly urging their clients to be cautious because they believe that parts of the market are beginning to look overheated. The same people contend that, while there has been real growth for the first time in four years, values cannot continue to rise on a significant basis.

There is certainly no such wariness about retail buildings in Dublin city centre.

Two Dawson Street retail investments sold by Lisney this autumn set new initial benchmark yields of 1.65 per cent and 2.35 per cent (the yields should move to 2.6 and 3.25 per cent when full market rents come through).

This has inevitably led to a revaluation of many retail buildings in the city centre but, even with higher values, owners are not tempted to sell on.

With so much money chasing retail buildings in the city, it was hardly surprising that British Land opted to cash in its chips and sell its 50 per cent stake in the Ilac shopping centre to developer Joe O'Reilly for €124 million.

The sale marked BL's departure from the Irish market where it has been a major force over the decades, not least in the IFSC where it and Hardwicke were the main developers.

British Land was not the only UK institution to exit the Dublin market in the past year.

Scottish Provident also took advantage of the inflated property values to sell its Irish portfolio to Irish Life for €140 million.

Royal Liver also offloaded its retail park on the Naas Road for €60 million and later spent €16.5 million of it on the Synopsis office investment in Blanchardstown.

The business syndicates were again the dominant force in the investment market, accounting for 45 per cent of the turnover and, though the institutions chased many of the decent sized lots, they were invariably outsmarted by fleet-footed private investors who have acquired very considerable wealth through the long running property boom.

AIB did manage to keep in-house its sale and leaseback deal for a new headquarters building in Ballsbridge.

The €367 million-plus transaction went, as expected, to its own stockbroking firm, Goodbodys, and AIB Private Banking, where it is now shared at a yield of 4.5 per cent by about 50 of its high net worth clients.

Otherwise, the cash-rich institutions are finding it increasingly difficult to get their hands on good property investments - not only because of fast-moving syndicates - but also because private developers with large schemes, such as Dundrum Town Centre and Whitewater shopping centre in Newbridge, have no difficulty in bankrolling them.

However, with long term interest rates now moving up, the investment climate could well change. A significant rise in rates could prove a godsend for the institutions.