UK property - brave souls required

It’s been a jittery few weeks. No more so the past two, which has claimed the heads of Merrill Lynch and Citigroup. Irish bank stocks have been tumbling, while sentiment against financials remains seriously gloomy. Property prices are trending down. It’s enough to make you wonder what you should do with that property portfolio you’ve lovingly nurtured.

Even in London, where Irish magnates such as former tax inspector Derek Quinlan, and others including Limerick-based Aidan Brooks and co have spent years acquiring commercial property, it’s a question of holding nerves, and maybe even making a timely exit.

But even a price correction is making for opportunity.

UK-based Rowan Asset Management has just launched fundraising for a €15m fund for Irish investors that hopes to capitalise on falling prices in the UK. With gearing, the fund should have a total of €40m to invest. The Rowan 4 fund is being specifically established for clients of wealth management firm, Wealth Options, based in Kildare.

This is, obviously, the fourth Rowan fund to be raised, and so far the track record appears solid. Last year the first fund booked a 77% return on capital when it sold an office block on Palace Street in London, while other investments also performed well, with the existing funds having properties in cities such as Manchester and Peterborough.

Despite the global credit squeeze, Rowan Asset Management maintains that people still see UK property as a “safe haven”. The question is, for how long?

The FTSE UK Commercial Property Index has risen 115.6% in the five years to the end of the third quarter in 2007, beating growth in the FTSE-100, which was up 106.8% in the same period. And in the three-month period to the end of the third quarter 2007, the FTSE UK Commerical Property Index managed to post a 1.5% rise as world stocks were battered. The FTSE 100 dipped 1% in the same period.

So far, so good.

But for Rowan and its Irish investors, securing the types of returns that led to the greening of Britain within the past few years, may be a lot more difficult.

Earlier last month, the Royal Institute of Chartered Surveyors (RICS), said that the events in credit markets “have raised risk premiums across all asset classes” and that “following the rampant growth of the last four years, the returns outlook for UK commercial property has weakened”.

For the Irish, with so much money stuffed into UK bricks and mortar, this isn’t the type of news they want to hear.

Even back in June, the RICS was pointing out that the foot was off the accelerator in the UK commercial sector. In the first quarter of this year, 1,038 commercial properties were sold at auction in the UK, compared with 1,402 in the last quarter of 2006.

The most recent report by the RICS notes that the credit crisis will “undoubtedly” put upward pressure on yields and that the adjustment is likely to be “short and sharp in nature”. It added that a “marked repricing” of secondary commercial properties will continue.

While the RICS said it expects a soft landing in the commercial property sector, it noted that property shares are currently trading at a discount of around 30% below net asset values, “suggesting that the market is expecting more significant declines in commercial property values than we are anticipating”.

Many heavyweight Irish investors such as JP McManus, Sean Mulryan, John Magnier and Michael O’Leary have already generated significant returns from the UK commercial market. Among the other buyers are Michael Whelan of Maplewood Developments, Bernard Doyle and David Courtney of Spain Courtney Doyle, and former managing partner of Andersen Consulting, Roddy Ryan.

Despite the RICS’ expectation of a soft touchdown, it may take brave souls to sign up for what could now be a much longer term UK property play.

http://www.rics.org/NR/rdonlyres/9044AA6D-C714-49D2-8FB1-D5EB06586726/0/CommercialPropertyandtheCreditCrunchOct2007.pdf

http://www.ftse.com/Indices/FTSE_UK_Commercial_Property_Index_Series/Downloads/FTSE_UK_Commercial_Property_Factsheet.pdf

http://www.wealthoptions.ie

http://rowanplc.com/