Irish Life Investment Managers are planning a return to the European property market having beaten a retreat from the continent in the mid-1990s. Europe and the Irish market outside Dublin are the two areas that Sean O'Brien, property investment manager for Irish Life, believes offer the best potential. "We had invested in continental Europe over many years but following the general downturn triggered by German unification in 1993 we decided to move the money to Ireland and the UK," he explains.
It proved a fortuitous move, as it gave the fund additional exposure to the subsequent Irish property market boom and the returns on the UK investments have also been good in hindsight. "We took the view that European markets would not perform and that there was a considerable currency risk involved," he said.
Irish Life is now looking at the post-monetary union scenario. "The French and Dutch markets are recovering. Frankfurt is also strong because of the decision to locate the European Central Bank there," explains O'Brien.
If they do decide to return to Europe, they will not invest directly but through an investment vehicle or limited partnerships. This approach has worked well for Irish Life in the UK where they have a portfolio worth around £70 million. An example of this approach is that by taking a £3 million stake in the limited partnership that owns the Bluewater shopping centre south of London they have achieved the appropriate level of exposure to the UK retail sector. A similar level of investment is being contemplated in continental Europe.
Although Irish Life is keen to diversify it does not feel that the Dublin market is played out. "It is just sensible to diversify. It is similar to the way that pension funds have reduced their exposure to Irish equities down to 20 or 30 per cent over the last few years," according to O'Brien.
Dublin still offers the prospect of good returns although, technically, it peaked in 1998. In that year the return on commercial property in Dublin was 38 per cent, including rental yield and capital gains. Last year the return was 31 per cent and this year most observers are expecting between 12 and 16 per cent. O'Brien believes these forecasts may turn out to be a bit conservative. The return in the first quarter of 2000 was 5 per cent, compared to 7.5 per cent last year and, as a result, he has revised his full-year forecast upwards to between 15 per cent and 20 per cent. Yields remain fairly constant at between 5 and 6 per cent. "It is capital appreciation that is driving returns," he said. Ireland still has a number of attractions over Germany - the most likely European country in which Irish Life will invest.
"In Germany leases tend to be short and the tenant is not responsible for repairs and, as a result, the income stream is not as good," he explains.
Office space in Dublin is still cheap compared to London despite the shortage of modern office blocks. Rents - which set the price of building - are in the region of £30 per sq ft, which is £24 sterling. Prime office space in London's West End demands rents in the region of £60 per square foot. On a rental basis Dublin is equivalent to regional centres in the UK.
"When you consider that Dublin is a capital and a financial centre, it is still cheap," said O'Brien.
When you add in demand as a result of the growing economy and increased inward investment there are still good reasons for investing in Dublin, he believes. In recent years Irish Life has started to look outside Dublin, mostly at retail property opportunities. The decision by the retail multiples to move into the smaller towns has created a new property market. Previously the majority of shops in small towns were owner occupied and as a result there was no investment market. The arrival of the multiples, who prefer to lease rather than buy, has created a new market.
The values of these types of property are now sufficiently high - more than £1 million - that it is worth a big fund manager's while to buy them, says O'Brien.
"We have bought in Cork, Limerick, Waterford, and are trying to buy in Galway. We have recently bought in Navan and Mullingar," says O'Brien.
Provincial retail property actually out-performed Dublin last year. It was due in part to technical factors as the very low rate of turnover in buildings in Dublin's prime retail locations means that the increase in their values has not fed through into the statistics. One area that Irish Life has no plans to re-visit is property development. Having developed some of the biggest schemes in Ireland, including the ILAC Centre, the company got out of development after going public in the early 1990s. "It was not a suitable activity for a life assurance and pension company to be involved in," he explains.
They still have a few small projects. Recently Irish Life doubled the size of their retail park on the Malahide Road, but most of their other interests are joint ventures with developers. Irish Life has co-developed a number of buildings with Davy Hickey Properties in City West.
"It has advantages. It gives us access to brand new buildings without having to bid on the market and, because we shared some of the risk, the return is higher," says O'Brien.
