For well over a century London has beckoned to the Irish with an almost irresistible attraction. Like iron filings to a magnet, the Irish were initially drawn to this teeming metropolis in search of, if not exactly fortune, at least an escape from the grinding poverty of home.
Ireland's fortunes have improved immeasurably since the dark days of mass unemployment, reversing the generations-long trend of emigration. London's magnetism however, has lost none of its potency and continues to fascinate. This time around, the Irish aren't arriving cap in hand. Today it's more a case of cash-in-hand as Irish investors make their mark on London by buying up as much investment grade property in the Capital as they can get their hands on.
So what is it about London and the southeast region that excites so much investor interest?
The answer is growth - or at least the expectation of growth.
The exceptional growth experienced by the UK during the 1990s was driven largely by the economic success of London as one of the world's foremost "global" cities. The southeast as a region benefited most from London's economic strength, reinforcing the city-region relationship which gives London its critical mass in terms of the concentration of knowledge, innovative and entrepreneurial talent.
The power of this economic growth engine is best demonstrated by comparing the rise in GDP per head of population in the three regions for which London is the principal economic driver i.e. London, the South East and Eastern and all of the other regions of the UK. Between 1995 and 1999 the rise in GDP per head was 74% greater in the three southeastern regions than in all of the other regions. This is at the heart of the rationale for recent headline-grabbing property deals involving high profile Irish investors and may go some way in explaining the eye-watering prices some are prepared to pay for trophy assets.
Investing in a fast growth region brings with it its own difficulties however. An individual investor seeking exposure to prime commercial property in the London / South East region will face several problems i.e.
- Really good quality property tends to come in large lot sizes, putting it outside the reach of many individual investors.
- The London / southeast market is a complex one. Some sectors such as retail have done particularly well over recent years while others such as City of London office have performed poorly. Moreover, within each sector there can be significant differences in the returns generated by different properties depending on factors such as location and tenant covenant. Proper research is vital. For an individual investor, research and due diligence is both time and energy consuming and can be costly.
- The UK is the largest traded commercial property market in Europe. Having found his ideal property, an investor will often find himself facing stiff competition for the asset, driving the price to an unrealistic level. Knowing when to walk away from a deal can be problematic for an under-researched investor.
"Collective, or syndicate, ownership has made it possible for groups of Irish investors to acquire prime commercial property ranging from relatively modest investments to some of London's most impressive landmarks."
To overcome these obstacles, many investors have chosen to join property investment syndicates.
A property investment syndicate consists of a group of investors who are brought together by an investment manager to pool their resources in order to purchase a property. The size of a syndicate can vary from a handful to several hundred investors (depending on the size of the deal). In simple terms, each member of the syndicate purchases a share in the property by way of an equity contribution which in turn is geared to provide the full purchase price of the property.
Collective, or syndicate, ownership has made it possible for groups of Irish investors to acquire prime commercial property ranging from relatively modest investments to some of London's most impressive landmarks. Viewed initially with some suspicion at the outset, syndicate ownership is now the vehicle of choice for many of Ireland's most prolific property investors. The main attractions of this type of investment are:
- It provides the investor with access to a quality of asset he could not afford on his own.
- Most syndicates use non-recourse finance to purchase their investments. This enables an investor to limit his financial risk to the amount of equity that he contributes to the project.
- It allows for diversification of risk. By investing regularly an investor can spread his investment risk i.e. his funds can be spread across a range of investment properties.
- The investor can drip-feed his funds into the market at different stages of the economic cycle. This allows him to avoid the infuriating error of committing all of his capital to an investment at the top of the market
- The economics of the investment can be very attractive. Syndicates for pension investors, for instance enjoy the twin advantages of financial gearing and tax deductibility for premiums contributed to the scheme. In a rising market these factors can produce serious growth in an investor's level of wealth.
- Acquisition costs are shared.
- By investing a relatively modest amount the novice investor is able to gain experience in investment property without becoming over exposed to financial risk.
Trophy assets apart, many property syndicates are made up of ordinary investors, contributing equity sums from as low as €50,000 per head which is then geared to acquire well-let commercial, retail or office property in high street and business park locations. Retail, the favourite sector for Irish investors, is ideally suited to syndication as lot sizes in this sector tend to be more manageable than in the office sector. Indeed, although they are unlikely to make the headlines in the Sunday newspapers, syndicates investing in commercial property that is well located and let to a tenant of strong financial standing can deliver very respectable results over time regardless of the scale of the deal.
As with all forms of investment there are risks. Anyone contemplating an investment in a property syndicate needs to be aware of the following issues:
- Liquidity. An investor wishing to exit a scheme prior to maturity may find that at best there is a limited market for his share in the property.
- Overpayment. If a syndicate succumbs to the temptation to buy at a level that is significantly above a property's valuation its return on capital will suffer.
- Market conditions. There is no guarantee that market conditions prevailing at the targeted time of disposal will be favourable.
A prudent syndicate promoter will take precautions and provide the members of the syndicate with realistic estimates of the likely growth in rent and capital value. Stretching assumptions on future rent reviews and gambling on currency stability in order to justify initial overpayment imposes a burden of risk that could have serious consequences in a market downturn. Intending investors would do well to be wary of over-egged projections. If these look too good to be true, the chances are you're right. The current action by the UK government aimed at curtailing the activities of certain companies operating 'get rich quick' schemes in the buy-to-let residential sector underlines the point.
Syndication has proved itself as having many valuable advantages for the investor. It has enabled many Irish investors to profit very handsomely from the commercial market in the London / southeast region. Provided the technique is used with care there is no reason to think that it will not continue to do so.
