Investors swoop overseas as local options dry up

The upsurge in interest in commercial property in the UK and beyond is prompted by the Irish economic boom and the dearth of opportunities at home, writes Colm Keena

One of the main reasons - if not the main reason - Irish investors are investing billions of euro in commercial property in the UK and further afield is because there simply isn't enough stock at home for all the money that is around, in the view of sources in the banking and real estate sectors.

The Irish economic boom lies behind the phenomenon that this week saw an unnamed group of Irish investors buy the Savoy Hotel group in London for €1.13 billion, according to the sources.

The purchase of the prestigious hotel group by Irish investors fronted by Quinlan Private - who were competing against a Saudi prince, Prince Alwaleed Bin Talal - is the latest in a number of recent high-profile purchases by Irish investors in the UK.

In January, Mr Michael Whelan, owner of Maplewood Homes housebuilders, paid €239 million for the Victoria House office block in London, while Mr Garret Kelleher of Shelbourne Developments fronted the €345 million purchase of the prestigious Lloyds Building.

That same month, businessman Mr Seán Quinn paid €145 million for the Hilton in Prague. A spokesman for Mr Quinn said at the time that the purchase was the first step in what will be a €1 billion spending spree by the Co Fermanagh entrepreneur.

In February, a group of private investors put together by Anglo Irish Bank, along with Irish property group Clarendon, bought the Royal Opera House retail portfolio, in Covent Garden, for €114 million. Clarendon, which runs the Powerscourt Centre in Dublin, has significant retail investments here and in the UK.

Its principals are Mr Tony Leonard and Mr Paddy McKillen. The latter's property interests include the Jervis Street Centre in Dublin.

What some elements of the UK establishment think of the Savoy sale to Irish investors can only be imagined. Two years ago, the attempt by Treasury Holdings to buy the Millenium Dome site in London was frustrated by what were considered at the time to be political objections.

A report published this week by property consultants DTZ said Irish investors came third in a table of foreign investment in commercial property in the UK in 2003. First in the list came Germany, with Saudi Arabia coming next. Total foreign investment was £6.9 billion with Irish investment being £1.1 billion or approximately one-sixth. Foreign investment accounted for one-quarter of all investment in UK commercial property last year, according to DTZ.

Interest in investing in foreign commercial property, combined with low interest rates and instability in the stock markets, has led to the growth of a service now being offered by banks, accountancy firms, law firms and even estate agents whereby deals are lined up and involvement then offered to clients who can become part of syndicates.

Anglo Irish Bank, working with HOK, lined up the Covent Garden deal, which was then made available to high net-worth individuals who wanted to get involved. It is understood there was huge demand for the deal. The average investment in the deal was approximately €250,000, though some of those involved put up a substantially higher figure.

Ms Denise Turner, a director of HOK, has been involved in overseas investment by Irish investors since the phenomenon began to take off in the mid-1990s. She says the scene today bears no resemblance to what existed five or six years ago.

She says that around 1996/1997 the supply of opportunities for good commercial investments in Ireland began to get a bit "tight". She was seconded for a year to a UK property firm and then returned to begin work on HOK's service for Irish clients looking to purchase investment properties.

"Since then we have done about 130 transactions for Irish investors in the UK market, in deals involving approximately €2 billion." The investment department has four people working on the UK and three on mainland Europe.

While early investors were buying apartment blocks, Ms Turner says that the focus now is very much on commercial property. She says the clients are professional and business people, including property developers, many of whom may already have Irish properties. Her view is that the difference between Irish and UK stamp duty rates is not a key issue, and that many Irish investors would pay more for a property here than they would for a comparable property in the UK. However, the properties are simply not coming on the market in the numbers needed.

"There just isn't the capacity in Ireland to hold all the wealth that has been generated in Ireland in recent years," she says.

In recent years banks, stockbroking firms, accountancy firms and legal firms have become involved in putting syndicates together to make significant property deals. The phenomenon got a huge boost when the stock markets took a hit after the September 11th attacks on the US. HOK itself has what Ms Turner calls "an embryonic Quinlan Partnership".

Before 1996, 100 per cent of the investment business handled by HOK involved investment in Irish property. Last year, half of the investment business handled concerned foreign assets. This year, foreign assets will account for more than 50 per cent of HOK's investment business.

Ms Turner says investors are attracted to the UK because the lease terms and tax systems are clear and relatively familiar. There is also the issue of language, and the fact that the geography is familiar. With mainland Europe there can be the drawback of not knowing the market so well, though there is growing interest, she says. Some believe that the Brussels residential and office markets currently represent good opportunities because of the accession of 10 new states into the EU.

Irish investors are also increasingly interested in the US, for currency reasons. "People are already doing deals - they just haven't been publicised yet. I think it will come more into focus over the coming 12 months."

One banker familiar with the foreign investment scene believes the difference between UK and domestic stamp duty rates is a key factor in the amount of money going abroad. A second key issue is the choice abroad.

Why would somebody with a good commercial property here put it up for sale? he asks. Where could they put the money where they would get a better return than from the property they are selling?

The gathering together of syndicates allows people access to top-quality commercial investments, he says. Each deal is different but a key issue is the quality of the tenant in the property being purchased.

The people in the syndicate would typically put up 20 to 30 per cent of a deal, with the banks supplying the rest, though the amount of equity required depends on the "cash flow" arising from the asset. The tenant would be expected to cover the cost of the loan, paying off the interest and some of the principal. The investor would gain from capital appreciation. "The critical thing is that the tenant keeps paying the rent."

For major deals, the banks would take interest-rate risk out of the equation through the use of hedging instruments. Normally, such deals would involve investments of at least seven to 10 years.

He says the exchange rate with the dollar has more and more people looking at the US and says geographical spread reduces risk exposure. "There was a lot of money made in Ireland over the past 10 years, and people are actively looking for investments."