From a barely visible presence a decade ago, private investors have come to dominate Ireland's commercial property market, driven by a combination of growing personal wealth, low interest rates, rising rentals, and an overall "feel-good" factor that fosters investment. The institutions that formerly dominated the sector have found themselves corralled into an ever shrinking pool of investment options, but they are far from downcast, and have used a growing market to open up new investment routes that simply did not exist previously.
The private investor accounted for 76 per cent of the estimated £615 million commercial property market last year, and there is no indication that this will change much in 1999, even though total returns are predicted to slide from a record breaking 38 per cent to somewhere in the mid twenties.
This is likely even despite the drying up of the supply of tax-based investments that initially tempted the private buyer into the market. Yields are still healthy enough to justify commercial property investment regardless of the tax background, and the likelihood is the private buyers will simply switch their attention in greater numbers to the mainstream market, adding to the intense competition they already pose for the institutions.
Thus says Ian French of Hamilton Osborne King, who sees no let-up in the factors that have driven the private investment revolution this far. Only a rise in interest rates can undermine the positive returns now available on borrowing for rental property investment, but it will take a very serious external shock for that to happen. The dynamics of EMU will drive interest rates further downwards, and although this will be nothing as dramatic as the falls seen in recent years, it will nonetheless reinforce the incentive to borrow for property investment.
Rental income has proved the real attraction for the private investor, who typically seeks out a long, secure lease (preferably running to 10 years or more), and is more concerned with income streams that capital appreciation - hardly surprising, given the high gearing that finances the majority of these investments, and the insistence of bank managers on income streams to cover the bank's own risk.
But the tax concession developments that fuelled this boom (such as the Docklands and Temple Bar) are now drying up fast, says Mr French, so that private investor demand will come even more into direct competition with the institutions. Private buyers will also divert into areas they have previously avoided, such as the acquisition and refurbishment of derelict or substandard buildings, or seeking higher value options by forming syndicates. Where previously the private investors might have stalled at around the £2 million mark, syndication has now expanded their options as high as £10 million, he says.
Sean O'Brien, property investment manager at Irish Life, concedes that much of the institutions' traditional territory has been overrun by the private investors, but points out that there are still some property niches beyond the reach of the smaller players. The institutions have simply shifted direction in order to exploit this.
The high gearing that finances the private investor (70 per cent is not unusual) effectively limits the choice of property to higher yields and relatively lower values, which puts the prime office and retail sector out of bounds to all but the wealthiest of individuals, he suggests.
The average property in the £600 million Irish Life portfolio is valued at £4 million, says Mr O'Brien. This is too high an entry level for most private investors, and even those who can afford this much will be deterred by the low yields (prime office yields are under 5 per cent, while Grafton Street retail is under 4 per cent).
Of course, capital appreciation is there for those who can wait, but have private investors the patience? Transaction costs are heavy, with 6 per cent stamp duty and 2 per cent administration and sales costs on acquisition and disposal, making for a 10 per cent "round trip" that takes a good five years to amortise.
Mr O'Brien believes this is all more hassle and uncertainty than the smaller guys can handle, and does not believe that syndication will bring the private investor to this end of the market in numbers. After all, everyone forming a syndicate first has to be assured as to the bona fides of the other partners, and then has to be certain that all the others can stay in for the required time.
The smaller players are hampered by more than a restricted time horizon, he continues. Individuals usually do not want anything to do with building management, which the institutions are well versed in, nor do they want to take on the risk associated with the pre-funding or construction of new developments. By contrast, the institutions are increasingly involved in the early stages of property acquisition and development, to the extent that some are now acquiring land and applying for planning permission for industrial/warehousing use.
Expansion into overseas markets is not an option for the pension funds, because the tax benefits they can avail of in the domestic property market are not available beyond our borders. What they have done, however, is look very closely at our provincial cities, and the search has produced some very worthwhile results.
A combination of population growth, infrastructural development, and the impact of the Urban Renewal Schemes has created opportunities for new retail developments in a number of urban centres around the country, which have been largely funded out of pension and investment fund investment. The participation of incoming UK multiples in this process has added an extra dimension to this process, which has engaged the institutions to a far greater degree than the private investors and opened up to them a whole new investment medium, says Mr O'Brien.
