Portfolio prizes: overseas investors seek prime assets in Dublin

The latest DTZ research shows that European investment volumes reached €59bn for 2009 and this puts the Irish figures of €100m into context. The European figure for 2009 is 47% lower than the €111bn recorded in 2008. However, the final quarter of 2009 saw a strong level of transactions with an increased number of institutional investors returning to the market. For many Irish investors with overseas assets this increase in liquidity will be positive news. The key activity has been focused on the UK, France and Germany.

The performance of the Irish commercial property market has offered little positive news in recent times for existing investors. The outward movement of both rents and yields has however attracted overseas investors and occupiers to review the opportunities in Ireland as they see value back in the market. This has not translated into a flow of investment acquisitions to date due to the difficulties in securing opportunities at current yields. As a result the market has remained more or less illiquid.

The typical requirement for overseas investors who are looking at Ireland is for prime assets in Dublin with long income to strong covenants. Properties with this profile are highly prized in the portfolios of investors and bankers and unless liquidity is an issue then the current pricing for prime offices of 7.5% is unlikely to tempt sellers. There is an expectation from overseas buyers that stock will come to the market in 2010 through Nama although the common view is that this will be on a phased basis and the jury is out on whether the prime assets will be held for their income or disposed of to release capital. International buyers look at Dublin in comparison to other capital cities with similar fundamentals and the flow of capital is based on the pricing and comparative risks.

The UK saw €7.4bn in transactions in 2009 with prime yield compression due to demand for these assets outweighing supply. In particular the key London markets attracted both private cash buyers and institutional investors from all over the world. Irish banks will see certain assets in their loan books benefit from recent yield compression although depending on the timing of their acquisition they may still be below current debt levels. The liquidity in the UK market does however provide options for owners and bankers, as there are buyers, joint venture partners and asset managers searching for deals.

There is nervousness about what is going to happen to the recent yield compression in the second half of 2010. The market is concerned about the high volume of properties due to be refinanced in 2010 and how banks will deal with the breaches of loan to value covenants where investors do not have the equity to invest and revised margins will leave a shortfall in the income generated.

The key features of the European markets have been the divergence of yields between primary and secondary locations, and the money chasing the "best in class" assets. Irish investors own many of these type of assets and it is likely there will be many Irish sellers in the first half of 2010.

Michele Jackson is investment director at DTZ Sherry FitzGerald