OVERSEAS INVESTMENT:IRISH INVESTMENT into international commercial property has suffered a dramatic collapse with just €2.1 billion spent abroad so far this year compared to a record €10 billion in 2007.

The sudden reversal reflects the severity of the crisis that has hit the industry in the wake of the credit crunch and market experts are warning that next year's investment figure will show an even greater drop as Irish property players move to sell off assets.

Although a contraction in 2008 was widely anticipated, the speed and scale of the downward lurch is unprecedented and many investors are now nursing large losses as property values plummet.

The slump in activity is most evident in the UK market where the total spend for this year is expected to reach €1.25 billion, according to Marie Hunt, head of research at CBRE. That's a reduction of €3.5 billion on the 2007 figure of €4.75 billion and brings investment levels for this market back to the turn of the century. It also ends an extraordinary seven-year spending spree that has seen Irish investors plough billions of euro into British real estate.

A similar stampede for the exits is underway in Europe where CBRE predicts the total spend for 2008 will be around €800 million, compared to €3.8 billion in 2007.

Irish investors are also abandoning the higher yields that had attracted them to the US last year with just €268 million spent in the first three quarters of 2008, compared to €908 million in 2007, according to Jones Lang LaSalle's head of research, Dr Clare Eriksson.

Yet it's thought that even these figures overstate the reality. As many industry experts have pointed out, the more expensive deals were negotiated in the final months of 2007 when investors expected an imminent recovery from the financial crisis and believed the hefty price reductions in the UK market represented bargain basement levels.

That mentality has now gone out the window as the credit crunch threatens to turn into the greatest economic emergency since the 1930s depression. Amid the growing panic and the desperate dash for cash, asset values are falling rapidly, leaving large numbers of Irish investors in breach of their loan-to-value covenants. Well-informed sources claim banks are extracting higher margins from borrowers who are in breach of lending terms and are seeking additional levels of equity on some deals. However, institutions are stopping short of foreclosing on distressed investors, largely because, as one source points out, "there is no point in a bank taking over an asset they can't sell. There is no market at the moment so institutions have no choice but to work with their clients."

However, Ann Hargaden, investments director with Lisney, claims that "reality still has to hit home for many investors" and she predicts there will be a greater number of Irish property owners selling next year as the tough conditions persist for at least "another 18 to 24 months".

Domhnaill O'Sullivan of Savills argues that those able to weather the storm will reap the rewards of contracting yields in the medium term but he acknowledges the immediate challenges are "not pretty", particularly for UK investors who must contend with sterling's depreciation on top of a "250 basis point shift outwards on long-term yields".

This deterioration in market fundamentals, as well as the virtual shutdown in bank lending, has turned debt-leveraged players, like the syndicates, into asset managers. Their exclusion from the market massively depletes the ranks of Irish investors at home and abroad and, according to JP Sisk of DTZ, they are unlikely to stage a swift return. "Anyone relying on investors to raise equity will be out of the market for at least two years. That model is gone for the moment."

A source within one of the top Irish stockbrokers confirmed this prognosis, claiming there was little appetite left among smaller investors for the sector. "Asset values in property are on the floor … and all anyone can do is manage the situation."

Although syndicates account for six out of the top 10 international deals in 2008 (see table), all these transactions were made in the first half of the year, prior to the financial chaos unleashed by the collapse of Lehman Brothers.

Industry experts predict next year's heavyweights are more likely to be cash-rich property firms and families who have been fairly inactive in the market over the past few years.

Green Property, the Cosgrave family and the Clancourt Group, which is controlled by the Mayo businessman Charlie Kenny, are all understood to have discussed potential acquisitions in recent months.

But observers point out that even these investors will be unable to match the purchasing power of the syndicates which were behind so many of the mega-deals that characterised the credit-fuelled property boom.

And in the face of reduced liquidity, the industry has lost its capacity to thrill. Last year, Quinlan Private's acquisition of the Marriott hotel group's UK portfolio for €1.6 billion ranked as the top international deal. Below that were three more deals each worth over €500 million. This year the most expensive transaction was the purchase of a central London office block for €190 million by the Dublin-based property syndicate Jaguar Capital. The deal closed in early January.

However, O'Sullivan claims that demand for property even at this price level has dried up in recent months.

"The tight lending conditions mean that investors are finding it very hard to secure funding on anything above €50 million", and he added that buyers were wary of tying up large amounts of equity into one asset.

Activity is also suppressed, according to Caroline McCarthy, head of international investments at CBRE, because "those with cash are nervous that markets have not reached their floor". She says there are "likely to be more forced sale situations" in 2009 and claims "those who do return to the market are likely to concentrate on prime locations where there has been a substantial price adjustment, on secure well let assets".

John Moran, an international director with Jones Lang LaSalle, points out this flight to quality will also mean Irish investors will renew their focus on the London market next year, where he says "the turnaround has been swift" and buyers have "greater transparency".

In recent years vast amounts of Irish money has flowed into the property sectors of central and eastern European countries as investors pursued higher yields. Until recently, these economies were thought to be insulated against the banking shocks ricocheting throughout the US and UK but, as McCarthy points out, it is "clear now that virtually no market in Europe is immune".

She says the average yield movement across the 27 European countries so far this year has been around 70 basis points but adds that in "some markets the movement has been considerably greater".

As investors brace themselves for further bad news in 2009, some may take comfort from Moran's view that just as yields in the boom times reached abnormally low levels, "historical evidence suggests they are moving too far out" in this bust cycle.

He claims that yields should typically move within a range of 5-6 per cent. However, as he also points out, for those who bought at the peak - when yields were frequently dipping to 3.5 per cent - a swing out to 6 per cent "represents a 45 per cent drop in value". So for many property players there may be a painful day of reckoning ahead.