Irish investors bought €2.5 billion worth of British property in 2003, almost three times the amount invested in Irish commercial property. This would suggest an insatiable Irish demand for British office buildings, shopping centres, prestige hotels and flagship department stores. But in the first six months of the year Irish investors also offloaded UK property worth more than €250m and doubled the value of deals done in other parts of Europe to €500m.
The big question now, according to property analysts, is whether Irish investors have again got their timing right. Do the risks of operating in countries such as Hungary and the Czech Republic outweigh the rewards?
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BOND STREET is home to many of the biggest names in world fashion. Any credible designer-label retailer knows there is really only one place to be in London — and the chances are that the landlord lives in Ireland. Most of the €600m worth of acquisitions in the street over the past three years have involved private Irish investors and, amid a depressed rental market in many other parts of the English capital, prime pitches in Bond Street rocketed because of the nature of the tenants.
“Bond Street has been a magnet for the Irish. They probably own between 25% and 30% of it,” said Antony Thesiger, a retail specialist at property consultant Strutt & Parker.
Possibly not for much longer. In the past three months alone, Irish syndicates have sold three Bond Street properties, with the latest deal agreed only last week. The balance of power in European commercial property is changing. Interest rates in the UK have risen four times since the beginning of the year, up from 3.75% in January to 4.75%. Commercial property is also back in vogue with UK fund managers.
When the first wave of private Irish money broke on British shores in 1999, it was a very different market. Without warning, the big institutional names of UK property investment found themselves being outbid on deals by largely anonymous syndicates, about which little was then known — except that they were heavily geared and seemed to be run almost entirely by accountants.
“Initially it was groups of two or three individuals, then there was a raft of smaller investors and after that the Irish banks became involved and saw opportunities for syndication,” said Alan Mathews, a director of FPDSavills in London.
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In 1999, the dice was loaded in favour of the Irish investors, who were operating in a low interest rate environment and were backed with debt of up to 80% for their purchases. At the same time, UK institutional buyers were already overweight in property and had no gearing to play with.
Many British commercial property agents were initially dismissive, to their cost. “ didn’t know much about property essentials and they weren’t as hands-on as other buyers, but they knew exactly how the market was moving and they got their timing just right — much more so than anyone else,” said one London-based analyst.
Derek Quinlan, a tax specialist, and Kevin Warren, a property accountant, are regarded as the pioneers of syndicated property investment in the UK. Having already blazed the trail in tax-minimisation schemes in Dublin in the early 1990s, it was a logical progression to apply similar principles elsewhere. The UK was next door, English-speaking, had a glut of commercial property available, a similar legal system, transparency, liquidity and a stable currency.
Other groups included Lioncourt, run by David Andrews and Michael Tunney, and Davy Stockbrokers, which launched its own syndicates, along with the private banking operations of Bank of Ireland and AIB.
The same formula was adopted by accountancy practices across the country. Working from modest offices in provincial towns they were able to pool the financial resources of their private clients to acquire gleaming new office blocks in London and other cities throughout the UK. The rents rolled in, the value of the buildings increased, and everyone was happy.
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For the past five years Quinlan has been one of the pre- eminent players in UK property investment and recently bought the Savoy hotel group for €1.1 billion. He was also one of the earliest arrivals on Bond Street.
The acquisitions made by Irish investors soon moved up from small suburban office blocks to huge shopping centres and prestigious City properties such as the former Goldman Sachs building on London’s Fleet Street — purchased for €365m by Green Property and a consortium of private investors in 2001, and Thames Court, another City building bought last month for €200m by Jaguar Capital — a consortium led by the accountants Liam Dowd and John Burke.
The property deals have made millions for a mixed bunch of entrepreneurs who have invested money made during the Celtic tiger years. Today, the principal private investors in London real estate include some of the best-known names in Irish business, such as Tom Quinn, the hotel developer, and Donal O’Mahoney, who made his money in the timber and sawmills industry. The pair teamed up to buy Royal Mint Court in the City for €141m in 2002.
Michael O’Leary, the Ryanair chief exectutive who likes to claim that he keeps all his money in the local post office in Mullingar, has also built up a property empire in the UK, investing more than €40m in London, Edinburgh and Glasgow buildings.
Others have come from the IT sector, such as Tony Kilduff, the former technology entrepreneur turned property mogul, whose British portfolio includes retail property worth more than €150m.
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Another group of IT entrepreneurs, led by Kevin McCullagh, an accountant, last year paid ¤60m for a development at 16 St James’s Street, in London’s West End. Aidan Brooks, the 33-year-old property tycoon from Limerick, has also become a significant London investor and is a big player on Bond Street.
The success of the syndicates over the past five years has been based on the liquidity of the British market and the availability of top-class buildings with long leases and quality tenants.
It is no coincidence that an army of accountants has been running them. They saw the dual attraction of investing in the steady income streams and capital growth which commercial property in the UK offered, at a time when the cost of money was cheap. They now see the same value elsewhere in Europe and have more wealth than ever to play with.
For instance, the level of demand in Hungary is such that residential developments in Budapest are now being marketed solely to Irish investors. “If you are doing a deal, there is probably a 30% chance of an Irish investor pitching for it,” said Lorant Varga, the managing director of CB Richard Ellis in the Hungarian capital.
The Budapest office of commercial property consultant DTZ says it is currently receiving at least one inquiry a week from Irish developers looking to acquire land in Hungary.
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“We’re doing a deal right now with an Irish investor buying a ¤6m residential portfolio. There is a lot of interest from the Irish now, but it’s sometimes hard to pin them down. The syndicates are particularly secretive and it is often difficult to know who is behind them,” said Mark Freeman, the regional investment director of DTZ in Budapest.
“With yields tightening and interest rates going up, it is not as easy for Irish debt-driven buyers to acquire property in the UK, so euro-denominated purchases are becoming a little more attractive,” said Michael Moriarty, the managing director of HOK Investors.
His company has recently acquired around ¤50m worth of properties on behalf of its clients in Paris and Amsterdam.
But for those Irish investors who have already made millions from UK property, the riskier capitals of new Europe are proving irresistible.
Many of the pioneers of Irish investment in the UK are now spending a lot of their time in Hungary, Poland and the Czech Republic. Among them is the original syndicate guru, Derek Quinlan, who has bought buildings in both Hungary and the Czech Republic where, in addition to commercial developments, he owns the Four Seasons hotels in Prague and Budapest.
Ballymore, the Sean Mulryan-controlled business that has developed some of the most prestigous apartment complexes in London, has a growing presence in central Europe where he is developing an enormous office and residential scheme in Bratislava in Slovakia. Earlier this year Ballymore also acquired five buildings at Wenceslas Square in Prague, the capital of the Czech Republic, for around €25m.
Several smaller Irish developers are also now targeting Hungary. Again they are stealing a march on the big pension funds that have been more reluctant to risk entering markets that lack tranparency.
John Casey, the head of Irish investor services at the London office of Cushman & Wakefield Healey & Baker, is also spending more time in eastern Europe.
“In Europe we are now seeing a two-tier approach with the syndicates looking at cities such as Paris, Brussels and Amsterdam while the less risk-averse private investors are heading straight for central Europe, particularly places like Prague and Budapest.”
THOSE pushing eastwards, however, are leaving a safe and fairly predictable market for a much riskier environment.
In central Europe, quality covenants are very hard to come by, so private investors are being forced to lower their standards and acquire buildings with shorter leases where the risk of tenant default is far higher. To mitigate that risk, investors are targeting high-spec buildings in the central business districts, but stock is very limited. There is also the problem of possible currency fluctuations.
A number of analysts are less than enamoured of this trend, warning it could all end in tears. “As you move further east, the risk profile increases and I would really question if the premium is there in the yields to reflect that,” Moriarty said.
Market transparency in central Europe, although improving, remains a problem. Investors in western European real estate pool financial information on acquisitions, which they use collectively to assess performance and risk, but this practice has yet to become established in central Europe where even the ownership of property is often unclear.
“The situation in the UK now is that valuation yields have been driven down to almost unprecedented levels, so a lot of investors will be scratching their heads and maybe thinking it is a good selling opportunity,” said Robert Gilchrist, managing director of Rockspring Property Investment Managers, specialists in central Europe.
“On the face of it, they may think that they can find better yields in central Europe, but some do not take into account the relative risk. A yield of 8.5% in central Europe might look sexy, but is it better than a yield of 6% in the UK where you have more transparency, a clear exit strategy and the law on your side? “In central Europe, if your tenant leaves, you have to look at whether the law falls to your advantage as the property owner or whether it sides with the tenant, and this is largely untested,” Gilchrist warned.
Nor is choosing the right location to acquire quality offices or retail properties is not as straightforward as in the UK. “If you take cities such as Prague, Budapest and especially Warsaw, their markets are still evolving in terms of the development of modern office stock, so exactly where the prime areas are going to be located is still being determined. You might strike it lucky, but then again, you might not,” Gilchrist added. Nick Tyrell, the head of European research at JP Morgan Fleming, puts it more bluntly: “It may not be completely clear where the central business district is in Prague. You might be buying this fantastic new office building but five years down the line you find it is in the middle of the red-light district.” Caroline McCarthy, head of overseas investment property at CB Richard Ellis Gunne, is sanguine. She believes the Irish expansion into central Europe signifies a risk but one investors are in a position to take. “If you have been a syndicate on the go for five or 10 years your clients will have made a lot of money from traditional property investments and they will be prepared to take a little more risk,” said McCarthy. “There will be winners and losers. It represents a new level of maturity in the market.”