'There is an obvious demand for more investment products'

Market Trends: With strong demand for property, niche investment products - like medical centres, private hospitals, infrastructural projects and leisure facilities - could become more common, says John Moran

Irish investors spent over €7 billion on commercial property investments at home and abroad in 2005.

Demand for property investments remains strong and, with a lack of suitable supply, there is a greater need than ever for the creation of new property investment opportunities.

The sheer weight of money seeking a home in Irish property means that yields will probably remain more or less the same as they are - in spite of increases in interest rates which commentators predict over the coming months. It also means that a large amount of money will continue to flow abroad, to the by-now predictable markets in the UK, western and eastern Europe and the US.

The search for investment products has already led some investors, both individuals and syndicates, to move up the risk curve by becoming involved in developing property. Such a move has been dictated by, firstly, the need to find a way into a very tight market and, secondly, the pursuit of higher returns than the modest yields available in the most popular sectors.

The search for new opportunities and new vehicles to invest in property will be helped by the launch in the UK of REITs, real estate investment trusts, this year. Although the British government has decided to make them more restrictive than had been expected, they will still provide a new and simple avenue for property investment.

It may be time, though, for some new niche investment products to come on the market to complement the three main sectoral divisions of offices, retail and industrial. As the market matures and, as affluence continues to grow, there is an obvious demand for more investment products.

On the basis that an asset that is capable of producing a positive cash flow can be turned into an investment, we could well see the likes of medical centres or private hospitals becoming niche investment markets in their own right. Equally, leisure facilities could be packaged and sold as property investments in the same way as, say, distribution facilities can be.

Infrastructural projects could also become pure investments. For instance, toll roads in France, packaged into groups, are for sale at present to investors. While toll roads in Ireland are currently the preserve of public-private partnerships - not to mention other issues - it is possible to see them being parcelled out as investments at some future date.

Meanwhile, an already established trend - the sale and leaseback of property by corporates - is likely to continue to provide more investment opportunities in the future. We have already seen this happen with the largest property deal of 2005, the sale and leaseback agreement on AIB's new headquarters in Dublin, the creation by Fyffes of their new property company, Bluestone, and by Eircom of a property company, Osprey, to hold its properties.

In the US, two-thirds of companies lease their offices or other premises while only one-third are owner-occupiers. The proportion is exactly the other way around in Europe but we are likely to move to the American pattern in the not-too-distant future.

The reason is simple: the opportunity cost of the capital tied up in property. If a company's property is making a yield of 4 per cent a year and the company can make 20 per cent on the capital in its business, it makes obvious sense to use the capital tied up in the property in the business instead. As the Jury's deal in Ballsbridge demonstrated last year, land values can dictate a change of use to the benefit of everyone involved.

The changes in the property market in recent years, notably the emergence of private investors and syndicates with real financial clout, has meant that institutions have found themselves having to re-consider their positions. They have sometimes been pushed aside by private investors who don't have to justify to a board of directors the prices they have been willing to pay and the yields for which they've been willing to settle.

Smaller institutions have found themselves unable to compete and, consequently, to expand.

As a result, a number have left the direct property investment market altogether. That does not mean, however, that they and their money have been lost to the market completely or at all. They have gone the indirect route by investing the proceeds of the sales of their property portfolios in property funds or, like the Guinness Pension Fund, simply transferred their portfolio into IPUT.

The process has meant a consolidation of the institutional sector with the bigger funds - such as IPUT, Irish Life, Bank of Ireland Asset Management, and AIB Investment Managers - becoming more dominant, enhancing their buying power, and improving their geographical diversity.

Although it is the prime focus of other areas, residential property prominent among them, the wall of money about to be released by SSIAs could have an effect on commercial property investment too.

Individual amounts available under the savings scheme may not be enough on their own to create a toe-hold in the investment property market but a married couple could have up to €50,000 available, offering them the possibility of becoming involved in a property market which has significant advantages over the residential one.

Among the clouds visible on the horizon for the property market is the rise in interest rates expected over the next year. To put them into perspective, a rise in the ECB rate by a full percentage point would take it to 3.25 per cent - this would leave the rate at similar levels to those that pertained in the late 1990s when the market was rising at a record level of growth.

While obviously of major importance, interest rates are not the only factor to affect the property market. Of equal importance is the availability of debt - if you can't find someone willing to lend you the money to buy property it doesn't matter what the rate is.

With increased competition among lenders, that does not look likely to become a problem for the property market in the foreseeable future. Looking into the future, however, is a dangerous occupation, always at risk of being proved wrong by the unpredictability of events, like an unexpectedly sharp spike in interest rates or the sudden erosion of confidence among consumers and investors because of geopolitical developments.

John Moran is capital markets director with Jones Lang LaSalle in Dublin