Major role played by private investors often overlooked

If demand for office space equated with success, then the International Financial Services Centre has been an unbounded triumph, with over 1.2 million sq ft of fully let prime office development. If there are any shortcomings, it is that the provision of office space has failed to keep pace with the unprecedented demand at the centre.

A major factor in this success, and one that is often overlooked, is the important role played by private investors in financing the IFSC's development.

Estimates of private investor involvement run as high as 70 per cent of the total, although there is no definitive data on this, and the trends in rents at the centre indicate this enthusiasm has been more than justified.

That said, there are serious question marks over the future involvement of these investors now that much of the financial attraction has been undermined or threatened with elimination.

A key determinant of the IFSC's success was the double rent allowances for occupiers, which were designed to lure corporates from overseas and within Ireland to set up shop there. These allowances had the further benefit of making higher rents economically viable, and, coupled with the demand for space in the centre, had the effect of leading Dublin prime office rents for a number of years.

The highest quality accommodation in the IFSC achieved £27.50 per sq ft some time ago, and it is only recently that the rest of the city has caught up.

Ann Hargaden, director with responsibility for investment properties at Lisney, says it was Dermot Desmond who led the charge by the private investors by constructing one of the first three street frontage buildings at the centre. The floors there were let on the basis of a buy-back after 13 years, tending towards a 6.5 per cent yield.

That was neither the best nor the worst that the IFSC could deliver in terms of returns. The two blocks that were to be taken by McCann FitzGerald and Arthur Andersen have yielded 8.5 per cent off rents of £22.50 per sq ft for the developers, Irish Permanent and business partners Martin Naughton and Lochlainn Quinn. That is at the upper end of the scale, and the smaller, less prestigious developments have been less impressive, although sufficiently good to attract a steady stream of private investors. The George's Dock unit taken by Chase returns about 5.5 per cent to 6 per cent, although the US bank was in a good bargaining position on this sale-and-lease-back deal. Yields on some smaller units, meanwhile, tend to be down towards the 4.5 per cent level. Overall, Ms Hargaden reckons that between 60 per cent and 70 per cent of the development of the 39-acre site has been funded by private investors.

These usually act through consortiums of between five and 12 people comprised of high net worth individuals, and high earning professionals, with an accountant acting as the catalyst or facilitator.

In some parts of the site, such as George's Dock, the development will be almost entirely led by private interests, while in the Custom House Plaza the institutional/private split is more of the order of 50/50.

Des Lennon, of Jones Lang LaSalle, says his agency (then Jones Lang Wootton) sold £145 million worth of commercial property in 23 transactions to private investors between 1991 and 1998. This was all located in Phase 1 of the IFSC, and produced yields of between 7.25 per cent in 1991 and 4.75% last year.

In terms of sale prices, he says, they ranged from £1.6 million to £30 million, and the majority of sales were to consortiums of business people, with just two or three going to high net worth individuals. About 100 private investors were involved in these transactions.

Whether this level of private investor involvement can be sustained into the future is a moot point. The recent capping of tax breaks for investors represents a significant shift with the past practice of allowing them to offset everything spent on the centre at their marginal income tax rate. The £25,000 level at which the relief is capped is neither here nor there in terms of the IFSC's development costs.

An even greater threat, however, lies in the possible removal of double rent allowances for occupiers, which the EU insists constitute "illegal State aids" and hence a distortion of competition. If the EU holds firm in this view, Ann Hargaden says there will be no incentive for anyone to move from prime city locations to almost equally priced accommodation in the Docklands.

Against this background, private investors will want to see evidence of something to lure the tenant before they will stump up for expensive office development. Costs have risen to such an extent that investors must be reassured of good letting potential before they'll commit themselves.

If the remainder of the Docklands acreage is to achieve its potential, it is essential some anchors are committed to it first, and the most obvious candidate for this role has to be the National Conference Centre.