The global credit squeeze means property syndicates must be more discerning about how to get money and where to spend it, writes Caroline Madden

In recent years, property syndicates - whereby private investors pool their money together to purchase property - have delivered phenomenal returns to those in the know. Opportunities to invest in syndicates are now becoming more widespread and accessible but, with the Irish and British property markets on a downward spiral and the global liquidity crisis putting a squeeze on credit, has the property syndicate boat sailed? Are the days of triple-digit returns behind us?

Not necessarily. "Strong returns are still available, but you have to choose a market that holds out a prospect for them," says Richard Kingston of CMC Capital, a property syndicate promoter.

Markets come and go, he says, citing the City of London as an example. Until last summer this "micro market" had been delivering superb returns, he says. "That was because there was such a wall of money chasing assets in that area . . . However, now that you have the credit crunch crisis, you are starting to see the London market fall back."

Germany is now emerging as a firm favourite with syndicates.

"It's very popular because of the low values there," he says, adding that buildings are valued very modestly compared to British and Irish property. "The idea is that you're hopefully buying in at a very low point in the German cycle."

Malachy Mitchell, managing director of Farrelly & Mitchell, which specialises in sourcing and structuring commercial property investments, agrees that returns are very much dependent on where you invest. Emerging markets still offer the possibility of very high levels of return, but Mitchell says that he prefers to source properties in less risky and more developed markets such as Germany.

"We want something that is reasonably secure but also [ has] the potential to give what would be seen as a decent, acceptable rate of return," he says.

One of the biggest attractions of property syndicates is that they tend to be highly geared, which means that investor funds are heavily supplemented by bank borrowings to acquire a property. The level of gearing varies, but 80 per cent is fairly typical. However, with the credit crisis intensifying, property consortiums may find it harder to access investment capital.

Are the days of 80 per cent gearing over, at least for now?

"I don't think they're over, but certainly you might find there are more conditions attached - maybe the payback is quicker or the level of security that the bank requires might be greater," Mitchell says. "Those days are not over, but in the current environment it's very important to have existing relationships [ with lenders]."

Mitchell says that, although the credit market has obviously changed, syndicates with existing track records and existing relationships with banks can still access credit "on reasonably favourable terms".

"There are opportunities for the more established and developed syndicates," he adds.

Kingston also says the credit crunch hasn't had an impact. "The target level of gearing that we always had was around 80 per cent," he says, adding that because of its strong banking relationships, CMC Capital hasn't had to reduce this level of leveraging. Also in its favour is the fact that it targets modestly-valued properties in Germany that, "from a banking point of view, are safe bets because of the quality of the rent roll".

But while syndicate promoters say that it's still business as usual, individual investors have not been immune to the liquidity crisis. Standard Life organises syndicates for groups of individuals seeking to invest their pension fund in residential or commercial property in Ireland and the UK. Aengus Byrne, head of property, has noticed that the level of finance that lenders are willing to extend to such investors has definitely tightened up over the last six months.

"Where they would have been looking at 75-80 per cent [ loan-to-value] six months ago, now you're looking at probably tops of 75 per cent," Byrne says. "Definitely the underwriting, and the view that is being taken of the level of the finance that they'll make available, is much more conservative."

Still, despite tighter credit conditions and the fact that the Irish and UK property markets have been distinctly shaky in recent months, Byrne has noticed that "opportunistic medium- to long-term investors" are now looking around the market and "sniffing out" good deals. "They're doing so on the basis that it's a buyer's market," he says. And because they are effectively cash buyers, with pension funds at the ready, they are "squeezing very hard" and negotiating better purchase prices.

"If you look within the Irish market, on the residential side of things, we're finding that the more astute investor is not prepared to buy at the moment unless they're getting about a 20 per cent discount on the highest price that a property would have achieved in the third to fourth quarter of 2006," he notes.

He adds that, over the last three months, some syndicate investors have also taken advantage of the dramatic price falls in the British commercial property market.

However, at the moment commercial property - whether British or Irish - is not for the faint-hearted. Although Irish prices haven't fallen as much as in Britain, Swiss bank UBS recently predicted that commercial property prices in this State could fall by as much as 30 per cent.

If such a slump materialised, highly geared property syndicates could find themselves sliding into negative equity. And if their loan-to-value ratio increases above the level specified in their loan covenant, the lender can insist that the loan is repaid.

According to one industry source, as long as the borrower is able to meet the interest repayments, banks are unlikely to call in the loan. Nevertheless investors must decide whether that's a risk they're willing to take.