European Investments: Irish investors are attracted to Europe because of low volatility and good value

Portfolio diversification and decreased currency risks associated with the introduction of the euro are combining to fuel commercial property investment in mainland Europe, an investment conference has been told.

This market in many cases provides better value than comparable investments in Ireland, according to an investment specialist at CB Richard Ellis Gunne.

The company yesterday hosted a breakfast conference at the Four Seasons Hotel in Dublin for a group of major Irish investors. The company brought in speakers from Paris, Amsterdam and Brussels who provided in depth analysis of their markets.

The company also took the opportunity to launch its third quarter 2003 Irish investment market bulletin. It estimated that more than €580million was spent in the Irish investment market during the first nine months of 2003, with year end expenditure now likely to exceed €750 million. It puts prime yields in the office sector at about 5.75 per cent, with 6.75 per cent being achieved for prime industrial and 3.85 per cent for prime retail.

The company pushed hard on the returns available on the mainland European market, claiming Irish investor interest is now turning in that direction.

"Over the past five years, investors have sought to diversify their portfolios to include commercial property outside Ireland and many have invested in the UK," said Caroline McCarthy, director of UK/European Investment at CB Richard Ellis Gunne.

"With the introduction of the euro, currency risk has been removed and relative pricing can now be compared across Europe. Mainland Europe offers a selection of mature property markets, which are liquid, offer low volatility and in many cases appear to be better value when compared to Ireland."

Economic indicators were more positive in Ireland with GNP forecast to run higher here than the EU average and unemployment figures below the EU average, she said.

"However illiquidity in Ireland means that there is more demand than supply and with stamp duty at nine per cent there is no incentive on portfolio owners to sell, because re-investment is so costly."

The assembled investors heard company estimates that while prime office yields in Dublin stood at 5.75 per cent, the comparable figure for Paris was six per cent, 6.25 per cent in Amsterdam and 6.5 per cent in Brussels.

"One of the characteristics of the mainland European markets is short leases," said Ms McCarthy. In Paris and Brussels, leases were typically for nine years with a tenant break every three years and in Amsterdam, leases were five or 10 years with the option to extend.

"Despite the short leases, banking terms are similar to Ireland. However it is important that the property fundamentals are correct, namely the property is not over-rented, the building is well located and the design of the space suits occupiers needs."

On its Q3 market bulletin, the company said improving economic conditions and a Eurozone interest rate of just two per cent are continuing to underpin demand for commercial property investment in Ireland. Strong demand coupled with limited supply had pushed up capital values but with yields contracting.

The increase in the rate of stamp duty in last year's budget is still exerting a downward pressure on activity levels but low interest rates were helping to neutralise this effect, the company believes.

"It now appears that 2002 represented the bottom of the cycle of total returns in the Irish investment market," the bulletin states. Following a total annual return of 2.2 per cent in 2002, returns in the first six months of 2003 reached 4.6 per cent, "which would suggest that the market is once again on an upward trajectory", the company stated.

Of the €589million spend, about 53 per cent was invested in the office sector, a further 37 per cent in the retail sector - the best performer according to the company - and only 10 per cent in industrial property.

Despite the stronger performing Irish market, investors continue to be attracted to UK market opportunities, the bulletin indicates. The lower stamp duty - nine per cent in the Republic compared to four per cent in the UK - has helped to fuel this demand.

It put Irish investment in the UK at more than €900million for the first six months of 2003, which equates to about 20 per cent of all foreign investment there. About 65 per cent was in office, 27 per cent in retail and 3.5 per cent in mixed office/retail investment with 4.5 per cent in other investments. It is anticipating an end of year investment total of about €2 billion.

Retail remains the top performer there as a result of positive rental growth and capital appreciation, it states. The office sector was hard hit by the deterioration in world markets and central London has seen rents fall by as much as 20 per cent, the company said.

"As markets begin to improve, it looks as if rents may be close to the bottom, although it may take some time to return to the rental levels achieved in 2000."

Prime yields for west end offices in London are currently 5.75 per cent and major provincial centres are 6.5 per cent.

In the retail sector, prime high street retail yields are 5.55 per cent and shopping centres are 6 per cent.