Caution is being counselled as the investment value of British commercial property drops by 20 per cent. Neil Callanan and Emma Kennedy report.
Irish investors who bought commercial property in London in the past year have lost about 20 per cent on their investment value, as the credit crunch and diminished appetite for commercial property has led asking prices to drop.
The recent fall-off in asking prices comes on the back of what has been a huge growth in the amount of Irish investment in the British property market.
In 2005, Ireland overtook the US as the single largest cross-border investor in British commercial property, accounting for more than one in five overseas purchases that year. Irish investors spent €4 billion on commercial property in Britain in 2005 ,€138 million more than their American counterparts.
Significant investment continued and, in the second quarter of 2007, €2.1 billion of Irish money was invested in the British property market, or 71.5 per cent of the total overseas investment.
‘‘They shouldn’t panic. They’re going to have some writedowns. But if they don’t have to sell, they shouldn’t,” said one senior estate agent in Britain. ‘‘There is going to be quite a lot of short-term pain, but the worst thing they can do is sell at the low point of the cycle.”
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‘‘It’s scary stuff at the moment,” said another investment specialist. ‘‘Yields on property in the City of London went down to 4.25 per cent at the start of this year, compared to a 10-year average of 5.5 per cent and a yield of 6.25 per cent at the end of 2001. The yields had come in on the back of huge rental growth, which is expected to be 15 per cent this year so the yields still stacked up.
‘‘Now, however, the banks are starting to lay off people, and the big question is whether assumed rental growth targets will be hit next year.”
The specialist said that investors had to take a five to 20-year view of the market.
‘‘It’s not like the stock market where you’re buying for just 12 months,” he said. ‘‘Irish clients have bought prime product - that’s been the least affected and will be the first to recover. The general view is that there will be flatline rental growth next year and marginal negative growth in 2009; after that there will be a recovery.”
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There have been some recent concerns among British investors that they could end up locked into poorly performing commercial property funds, with investment companies imposing exit penalties to stem the predicted run on cash in the wake of poor returns.
