Property lures across frontiers with promise of better returns

Interest in UK and European commercial property is rising, with private syndicates and traditional property funds pitching products to Irish investors, writes Laura Slattery

Investors hoping to give a solid foundation to investment portfolios have been clambering into the relatively stable world of bricks-and-mortar of late.

Investment funds and syndicates investing in commercial property pop up with increasing regularity, and many fans of the asset class are now looking beyond their own backyard in search of the highest rental yields and greatest scope for capital appreciation.

"People have exposure to the UK and Ireland property markets and they're looking at the accession states to diversify," says Ms Maeve Corr, director of Deloitte Pensions and Investments. Either that, or they feel they have simply missed the best chances here and in the UK.

Ms Corr says interest in overseas commercial property has risen in recent months, with people forming syndicates to buy in the Hungarian capital of Budapest, the Czech capital of Prague and France. More recently, Irish syndicates have looked to Belgium for investments free of any currency risk.

Deloitte has heard "a lot of negative comment" about the burgeoning residential market in eastern European cities.

But on the commercial side, Ms Corr believes there are opportunities to find both office and retail properties in prime locations that are let to tenants with strong covenants.

Manchester and other northern cities in the UK are still targets for the syndicates, however, and one advantage the UK has over Prague and Budapest is that leases tend to be longer, often 20 or 25 years.

In the rest of Europe, "the leases will possibly be up to 10 years, but you're not going to get the lengths that you can get in the UK or here", Ms Corr says.

Five-year leases are also common, giving investors even less income security.

In the Czech Republic non-nationals must usually set up a limited company before they can buy property. "It's just adding another layer to the transaction as there is going to be the cost of maintaining that company," says Ms Corr.

Syndicates set up by tax and legal experts and offered privately through accountants, advisers and property firms are one way for individuals to benefit from the returns available from prime commercial buildings with blue-chip tenants - assets that would otherwise be out of reach.

But most syndicates, which typically comprise 20-30 people, are still aimed at the high net worth brigade, with minimum investment sums of €100,000- €250,000 often needed before you can sign up.

Unit-linked investment funds offered by insurance companies, including Irish Life and Hibernian, are an alternative and more accessible way for smaller investors to get into overseas commercial property.

"The UK market looks attractive, there's a lot of money floating over there," says Mr John Cronin, head of investment bonds at Dolmen Butler Briscoe.

"Commercial property in this country, we don't see any value in it at the moment. Stamp duty is at 9 per cent, the yields on Grafton Street are only 2 per cent. But the yields on the UK funds have been 6 per cent on good, long leases of 25 years with tenants like Dixons and Woolworths."

Dolmen recommends two very different examples of such funds in its new guide on lump-sum investments: the Standard Life UK Property Fund and the New Ireland UK Geared Property Fund, which is also available through Bank of Ireland Life.

This second fund, open for a limited period, is substantially higher risk than the Standard Life fund, Mr Cronin says.

As a geared fund, borrowings are added to the money placed by investors in the fund: up to two-thirds of the purchase price of the properties will be financed through borrowing.

Gearing increases the potential for higher returns, but it also brings more risk. If property values collapse, the loan-to-value ratio on the borrowings goes up. The fund is also exposed to the risk that interest rates could shoot up.

Dolmen gives the New Ireland fund two out of five for security, but five out of five for (potential) growth.

"The type of people who invest in this are the type of people who are comfortable with property," says Mr David Swanton, marketing director of Bank of Ireland Life.

"You don't have to apply for the finance yourself and there's no recourse to the investor," he says. In other words, investors will not be personally liable for the loan repayments.

The minimum investment needed is €30,000.

The fund has already bought three properties and expects to buy up to seven more. The investment will then last five to seven years, but it's not a "hard-and-fast" term, Mr Swanton says.

The asset manager, Bank of Ireland Asset Management, reserves the right to defer sale until "an appropriate time in the market cycle".

Lack of liquidity is something people must take into account with property funds before they tie their money up for a long stretch. To prevent being forced to sell at a discount and to deter speculative investors in search of a quick profit, early exit is often prohibited or hampered.

Exit from the Standard Life fund will be slightly easier than from the New Ireland fund, as it is constantly open, with investors coming in and out, Mr Cronin says.

The fund invests in 21 UK commercial properties across office, retail and industrial sectors. According to Dolmen, it is well-diversified with blue-chip tenants and a strong track record.

Unlike people who buy property in the UK in the normal way, investors in the Standard Life fund will be protected from any sterling-related risk, as the currency is hedged in the fund.

The minimum investment is also lower at €10,000 and there is no gearing, meaning it is suitable for smaller investors prepared to take only medium risks.

"It's a little more secure than the New Ireland fund, but we wouldn't expect the returns to be as high," says Mr Cronin.

Overall, returns from UK commercial property have been steady, although not uniform, with rental yields falling in some cities. But it is still a strong market with a favourable stamp duty regime, Mr Cronin notes.

With opinion divided on whether the best returns have come and gone, it makes sense to avoid investing too heavily in any one sector or region.

Something like the New Ireland fund should represent about 20 per cent of a person's portfolio, according to Mr Cronin.

Meanwhile, new rules introduced in this year's Finance Act allowing pension schemes to borrow to invest will spur additional interest in property, according to Mr John Lowe, managing director of Providence Finance Services.

Company directors holding small self-administered pension schemes will also be able to borrow using their fund.

However, the properties selected must be at arm's length from the pension scheme member.

"From my experience, people want to touch and feel and hold their property," says Mr Lowe.

Buying one single residential house or apartment is closer to Irish people's traditional view of property investment. "It's yours, it's there and you can sell it when you want," Mr Lowe says.

On the other hand, property funds are often hassle-free, he adds. "You don't have to worry about who's doing what because it's all done for you."

Private investors need to get independent financial, legal and tax advice, then decide what it is they want, he says.

Do they want to put their name to tangible residential property they can control themselves?

Or would they prefer to go into a pool with tens or hundreds of anonymous others and either collectively reap the rewards or "all go down together"?