Even though rental yields in Ireland continue to plummet, Irish investors' love affair with property shows little sign of cooling. Savvy investors who did well out of the domestic buy-to-let market over the last 10 years or so, began to switch into UK property as soon as it became apparent that supply was set to outstrip demand in Ireland. Rising interest rates in the UK over the last twelve months and oversupply in some UK locations have taken some of the gloss off the market there. Far from acting as a deterrent, the Irish investor has cast his net wider and individual investors are now to be found in virtually every property market from Australia to Lithuania, in fact anywhere that holds out the prospect of capital growth.
Some overseas markets are highly speculative, and investment in these is little better than a trip to the bookies. Those investors who base their investments upon research in proven markets, however, generally have an aversion to high-risk strategies which may result in substantial loss should things go pear-shaped. Many of these have chosen to invest in commercial property which offers greater security of income and a higher degree of predictability when it comes to capital growth. Our nearest neighbour, the UK, is the market place of choice for offshore investment in commercial property. There are a variety of reasons for this, among them:
- The UK is the largest traded property market in Europe. Dealing in such a
large and liquid market gives the investor a degree of confidence in his ability
to dispose of his property rapidly should the need arise;
- Stamp Duty in the UK costs a maximum of only 4%, compared to 9% in Ireland;
- As the Irish economy boomed over the last decade, the capital value of property here rose sharply reducing rental yields and making Irish commercial property a relatively unattractive investment. The UK, on the other hand, did not experience the same dynamic;
- Acquisition of property in the UK is relatively straightforward. The UK legal system is similar to our own. Moreover, unlike in some EU countries, Landlord and Tenant law is not unfairly skewed in favour of the tenant;
- There are no language barriers. This is something we tend to take for granted, but consider making a purchase in a non-English-speaking country. Unless an investor has the good fortune to be fluent in the local language - and that means being able to converse with local lawyers and understand the legal and tax issues involved - he will find himself in the hands of intermediaries and interpreters. The opportunity for error in these circumstances is considerable and generally it is the investor who carries the risk.
The UK retail sector, the darling of Irish investors, has seen a gradual erosion of rental yields over the last 12 to 18 months. The are two main reasons for this:
- the retail sector has demonstrated amazing resilience in outperforming most other investment sectors over the past quarter century; this has led to extraordinary levels of investment in the sector, reducing supply and driving capital costs upwards
- and the downturn in the office market in the wake of 9/11 has further concentrated investor capital in the retail sector.
With bargains thin on the ground, it has never been more important for the investor to buy right. As affordable investments of good quality become scarcer, investors now realise that the most valuable tool available to them is to be found in the person capable of finding value in challenging market conditions.
"Indeed, when UK property is reported
moving at unusually sharp yields it is very
often because it was snapped up by an
Irish investor or investors following a
flying visit to the site."
Every property investment begins with its own profit and loss account. At the time of acquisition factors such as the rate of future rental growth and the attendant rate of appreciation in capital value will be unknown, leaving the investor and his bankers in the position where they must make estimates in order to judge the likely outcome of the investment.
The easy availability of both bank lending and investment capital can tempt investors into making sky-high assumptions of future returns merely to justify a gut feeling about the "rightness" of their investment choice. Sometimes this feeling rests on nothing more than a whistle stop visit to the location and a perusal of a number of current alternative offerings.
Indeed, when UK property is reported moving at unusually sharp yields it is very often because it was snapped up by an Irish investor or investors following a flying visit to the site. When operating in a mature, sophisticated investment market such as the UK investors, whether operating individually or as a syndicate, cannot rely on a superficial view of the market to produce a worthwhile return on invested capital. Investors therefore need to make sure that they understand the difference between a great property and a great investment.
The good news for investors is that it is possible to find value in UK commercial property. To do so requires patience, research, energy and dogged determination. Many properties, acquired using stringent investment criteria, have shown consistently positive performance. In investment terms, the reward for getting it right can mean the difference between a return equivalent to a bank deposit and a double-digit return on invested capital.
