Irish investors look to break into US market

Real Estate Alert, June 2, 2004

Irish investors, who have made a big splash in Western European real estate markets in recent years, are turning their sights to the U.S.

Bank of Ireland, Anglo-Irish Bank and Quinlan Private are among the Irish players looking to invest in conservative, high-end urban properties with minimal leasing risk. Those institutions operate real estate funds in Europe that are capitalized by Irish families that have accumulated wealth through land ownership and development. Now they plan to export the strategy to the U.S.

To be sure, no one expects anything like the giant wave of German capital that has flooded into U.S. markets since the late 1990s. But Irish investors are likely to selectively start buying office and retail properties in the Boston-to-Washington corridor later this year.

The Irish players will mostly target properties that either are not formally listed for sale or are not marketed widely. They will then syndicate the investments, likely one by one, creating closed-end funds, which will hold properties for the long term. That's the same strategy used in the U.S. by German closed-end funds. However, while the German funds can have several thousand investors, the Irish funds have had a limited number of investors--often fewer than 100.

The Irish operators will shoot for initial annual returns of 7-8%. They will use up to 80% leverage, which should boost yields to more than 10%.

Several U.S. firms with offices in Dublin are advising the Irish operators on European investments. CB Richard Ellis has been particularly active. It represented Quinlan last month on its landmark 750 million pound ($1.4 billion) acquisition of Savoy Group, which owns a 722-room portfolio of luxury hotels. The seller was a joint venture between Blackstone Group and Colony Capital.

Other U.S. brokerages that operate in Ireland include Jones Lang LaSalle, Colliers International and Cushman & Wakefield's London division, Cushman & Wakefield Healey & Baker.

The pooled funds, which sprang up in the 1980s, got started by investing in Irish development projects. By the mid-1990s, the funds began investing in England, and more recently have expanded to other European markets, including Paris, Amsterdam, Brussels, Milan, Budapest and Prague.

A lack of investment-quality real estate in Ireland has led Irish investors to increase their foreign acquisitions. Last year, they spent some 2.5 billion euros ($3 billion) in Europe, or about triple the amount in their home country.

The pool of investors is expected to grow, following a tax-law change earlier this year. Self-directed pension plans are now permitted to buy income-producing properties without incurring taxes until funds are withdrawn from the accounts.

Separately, investment has become more attractive because of a sharp reduction of the capital-gains tax, to 20% from 40%, that was phased in from 1992 to 2002.