Stick with the markets you know - and invest in Ireland and Britain

In recent times, Ireland has been out of favour, as institutional investors continue to switch their funds out of Irish stocks into Euro-zone companies and fund managers increasingly look to invest in Europe.

Having carried out a detailed analysis of several European capitals, Gunne Research urges property investors to stick to what they know and invest in the Irish and UK markets. Despite greater European integration, European countries remain very individual places in terms of property investment, since property returns are governed by far more complex issues than simply the rate of return on your initial investment.

Supply and demand factors remain heavily localised, different taxation and lease structures continue to influence the real rate of return of property investment, and it will be some years before all European countries reach the same point in the economic cycle.

Of course, there will always be opportunities abroad, but understanding them may not be as easy as envisaged.

While Ireland's phenomenal growth rates have certainly slowed somewhat, the Irish property industry is still extremely attractive when compared to other European markets.

From an economic viewpoint, European economists are predicting growth in the Irish economy of between 5 and 7 per cent per annum over the next five years, which is substantially higher than growth forecasted in any of the other European capitals investigated in this study.

In addition, the population of Dublin is expected to grow at a faster pace this decade than any other European capital, with a 350 per cent increase in the number of people employed in the greater Dublin region predicted by 2011 (Strategic Planning Guidelines for the Greater Dublin Region 1999). Continued high levels of net inward migration and a favourable demographic profile bringing high numbers into the labour pool will cater for this labour requirement.

Ireland's primary industries, e-commerce and financial services, are the fastest growing industries in the world and Ireland is now clearly established as the European hub for technology. We are now the largest exporters of software in the world, ahead of the United States for the first time. Ireland also has one of the lowest unemployment rates in Europe, in addition to being ranked the seventh most competitive country in the World Competitiveness Survey 2000, having moved up four positions from 11th place in 1999. This all augurs well for "New Ireland" in the future.

The most significant factor encouraging investment in Ireland is the attractiveness of the corporate tax structure. By 2003, Ireland will have a corporate tax rate of 12.5 percent, making it by far the most favourable European country from a taxation viewpoint. The true benefit of such a structure will not be fully realised or firmly understood for two years or so, but the future impact on the domestic economy is phenomenal.

On the property front, lease structures vary dramatically from one European country to another. In Rome, for example, leases are generally for six years with automatic renewal for a further six years and no rent reviews for the first 12 years of the tenancy.

However, lease structures in Ireland and the UK are much more favourable. Leases of 25 years with five-yearly upwards-only rent reviews are still the norm, with all of the internal and external repairing obligations remaining with the tenant. Office and retail leases in Ireland are the longest in Europe, due for the most part to the strength of demand in the Irish market. Thisis a major benefit to the landlord who effectively acquires the property and collects the rent, free of hassle.

From the banks' viewpoint, because there is such security within the long-term full repairing lease structure, the gearing an investor can leverage is much more attractive. Institutions will lend up to 70 to 80 per cent of the purchase price on traditional Irish and UK lease structures, compared to about 40 to 50 per cent on shorter leases with less favourable repair clauses, commonly found in other European countries. Less borrowing will have an impact on the return you achieve on your equity investment.

Prime Irish property investment yields remain the most competitive in Europe, reflecting the high level of economic activity and rental growth. While Paris, Madrid and Rome are experiencing prime office yields of 5.5 per cent, the Dublin equivalent is 5 per cent, despite the fact that our growth forecast is much higher than the other European capitals.

The security factor offered by way of Irish lease structures also explains the lower initial yield being achieved, not to mention the favourable prospect of rental growth, considering the supply and demand curves for each sector.

The latest SCS/IPD index reported an all property return of 31.1 per cent in Ireland in 1999. While this is slightly down on 1998's record return, it is significantly ahead of the UK and any other European capitals.

When vacancy rates and 1999 take-up rates for the major European capitals are compared, Ireland's performance is remarkable, the only problem being a lack of supply in the occupational sectors. When we consider that Budapest and Prague have office vacancy rates of 18.7 and 16.3 per cent respectively, the phenomenal Dublin office vacancy rate of 2 per cent seems incredible.

In conclusion, different legal structures together with economic and cultural factors mean that a pan-European commercial property investment market has not arrived and seems unlikely to happen in the immediate future.

In the meantime, Ireland remains a favourable location for investment.

Both the tax and legal framework surrounding property cannot be matched throughout Europe, and when you consider the future for "New Ireland" as the economy continues to re-invent itself, Irish property may still be seen as an attractive investment medium.

All of the economic variables are encouraging; the supply and demand curves indicate continued rental growth and confidence has never been stronger.

Our advice is: Stick to what you know.

Pat Gunne is managing director of Gunne Commercial