UK Investments: Our love affair with UK property is still going strong - but many top investors are moving on. Gretchen Friemann reports

UK property has attracted billions of Irish cash over recent years and experts predict the tide of money flowing in from the Republic will continue for at least another year. But with competition for acquisitions now extremely intense and interest rates set on an upward cycle, many top investors are abandoning ship and seeking out higher capital growth markets in continental Europe.

While the exit of these seasoned investors might once have set alarm bells ringing, agents claim the sheer volume of demand for UK property means the €2 billion spent by Irish investors last year will be either equalled or exceeded this year.

So what's driving the Irish love affair with UK property? Higher transaction costs and a shortage of supply in the home market are part of the equation, but it's the UK's higher yields, wider purchase options and similar banking and conveyancing procedures that are fuelling this investment exodus.

Given the extraordinary amount of wealth gravitating to the UK property market it's clear Irish investors still have a lot of spare cash to offload, despite the demise of the Celtic Tiger - and "property is the asset of choice", as AIB's head of private banking, Mr John Rockett, recently commented.

The Republic's largest banks, AIB and Bank of Ireland, are said to be pouring millions of private investors' funds into the UK commercial property market every week while even their respective stockbrokers, Goodbody's and Davy's, operate sizeable property departments primarily focused on British investments.

After one of the most colossal bear markets on record, property's solid performance over the last decade gives it the appearance of a reliable asset.

According to latest figures from the Investment Property Databank, UK property is enjoying an unprecedented period of consistency, delivering real total returns of up to 6 per cent in nine out of the last 10 years - a new record in the IPD's 14-year history and a remarkable performance for a supposedly cyclical asset.

Last year, investors, still running shy of the stock market, boosted total returns from the UK's commercial property sector to 10.9 per cent from 9.7 per cent in 2002.

The bullish run from the UK is contributing an increasingly substantial share to the annual turnover of Irish agents, most of which run lucrative partnership deals with British companies.

According to Mr Pat Gunne, chief executive of agent Gunne, last year's merger of his firm with international property heavyweight CB Richard Ellis has generated more business in the first three months of this year than the whole of 2003.

He claimed the merger is an enormous boon for the business and said the overseas investment team has now doubled in size to deal with the additional demand.

Mr John Casey, Lisney's UK investment director who is based in the offices of the agent's affiliate company, Cushman and Wakefield Healy and Baker, said UK investments account for around 10 per cent of his company's turnover. If UK property continues to steam ahead, he believes this could rise to 20 or 25 per cent in a few years.

Mr David Clarke, head of Goodbody's property unit, which opened four years ago, claims "property has proved to be a consistent performer over the long- term and that's what attracts investors. They want good returns with as little risk as possible."

He points to Tiger Developments, a jointly owned property fund between Goodbody's and the Cork-based O'Flynn construction firm, which has amassed a UK portfolio worth over €300 million since its establishment in 1999, to illustrate his point.

According to Mr Rockett, high net worth individuals have an 80 per cent exposure to property because of the leveraging involved in acquiring assets.

And the destination for most of this private cash is the UK's ready supply of retail property, which is delivering annualised returns of between 5 to 7 per cent according to agents.

John Casey of Lisney says many high net worth individuals "are being brought in under the wings of the private banks" and said acquisitions are largely focused on retail units priced up to €3 million.

Regional centers are now staple alternatives to London and the south-east. Ms Caroline McCarthy, CB Richard Ellis Gunne's overseas investment director, said: "Regional cities such as Manchester, Liverpool, Newcastle and Leeds are showing they can give steady returns, low volatility and low risk. London has seen the biggest drop in rental growth but there are better returns to be had there when the market improves."

Property experts and economists agree the sanguine growth forecasts for the UK economy signal good news for commercial property, particularly in London's sluggish office sector where rental values in the City plummeted to 16.8 per cent last year.

However last Friday, the International Monetary Fund warned the UK is in increasing danger of a house price collapse, a scenario that would spell disaster for Irish investors.

Although the IMF predicted economic growth in the UK could top 3.1 per cent, it said the housing boom could turn to bust further down the line and urged the Bank of England to continue hiking short-term interest rates to head off any collapse in consumer spending.

According to Mr Clarke, it's not clear as yet where interest rates in the UK are going. But he claims if the bank's Monetary Policy Committee increases interest rates to avert a house price crash, then Irish investors could be looking at a depreciation in capital values. However if the Bank of England adjusts rates because of underlying growth, he argues Irish investors will see a subsequent growth in rental yields.

Mr Roderick Downer, who sits on the European board of Colliers International, claims there are clear signs of companies reclaiming space they had previously earmarked for subletting, and stresses this is a healthy sign for investors.

He said: "The investment market anywhere in the UK should be driven by occupier demand. When there is no sign of that, property investments really become very dodgy."

Ms McCarthy points to large banks looking to rent back property as evidence that London's lacklustre office sector is now turning a corner.

She said: "London is obviously lagging behind the improvements in the US economy at the moment but we're seeing bigger banks starting to recruit more people and when the market does turn in London City, it tends to do so very quickly. So I think we can expect to see real rental growth this year as the economy steadily improves."