Business & Finance Magazine 15/06/2007 - Building into the Irish psyche – Sean Conlon, Ireland’s best-known real estate investor in the US, talks to Constantin Gurdgiev about his strategy and why the US counts.
In 1990, at 21 years of age, Sean Conlon left Kildare in search of the elusive American Dream. After less than two decades in business, Conlon is now recognised as one of the top real estate experts in the US. Yet, despite having appeared on CNN and CNBC and having being interviewed by the New York Times and the Walls Street Journal, he is still largely unknown to the average Irish punter.
This is about to change. Having co-founded a joint venture with Investor First, the successful Dublin-based real estate investment and development company, Conlon is expecting his business empire in his native land.
“Coming back to Ireland”, says Conlon, “I can see the amount of wealth created in the last 15 years or so. It is tremendous. However, I also see opportunities here – opportunities to open up Irish investors’ horizons to the prospects of global investment.” In short, he is opening his investment vehicle – a boutique investment management bank – to Irish investors.
Conlon has a simple, transparent and, as his record shows, proven strategy. “I follow the contrarians. When I went to the US, people said ‘Ah, you should have been here in the 1980s. You’ve missed the real boom.’ I got into real estate when everyone was saying that real estate was dead. I saw an opportunity to buy low at the time and sell high in the future. Having sold some $6bn worth of real estate, I think I have proven to be right. Two years ago, I started a mezzanine finance company with $150m. Again, people around were saying: Why would you be doing financing now? The economy is in trouble.’ From my point of view this is the perfect opportunity. When you think of the US, it is an incredible economy – it is the most stable and robust economy in the world. All of these predictions of doom and gloom are stupid.”
Betting on the US
He’s got a point. According to the Association of Foreign Investors in Real Estate, the US is the number one market in the world for foreign investors. In the last annual survey in December 2005, 155 corporate members from 16 countries, with global real estate portfolios of over $250bn, overwhelmingly identified three out of the top five cities for global investment to be in the US.
And the returns are there to prove these points. The US National Council of Real Estate Investment Fiduciaries Index shows that commercial real estate in the US generated a 9.4% average annual un-leveraged nominal rate of return from 1978 to 2005, implying a leveraged rate of return of 15.9%. Yields are also very competitive compared with Europe. Typical yields are more than double those being achieved in Ireland currently, reaching 8% in prime US cities. “When you look at the yields in the US markets, you are getting robust returns and low risk. Take trophy properties in London and Ireland – these yields average 4.5 – 5%. Madison Avenue today has 5.5 – 6% yields.
At the same time, there is no denying that the US real estate markets are currently in the contraction part of their cycle. If Conlon is buying now, does this mean that he believes that the US slowdown has bottomed out?
“It might have some room for further slowdown,” cautions Conlon, “but most of the slower growth period is behind us. The US is still the largest economy in the world, built on entrepreneurship and business creativity.” Indeed, the US economy added some 2.3 million jobs in 2005 and an additional 2.5 million jobs in 2006 – despite the economic slowdown. “Many tried to write the US off, but it always comes back. If you are an investor, you must see the business cycle as part of your overall longer term strategy. Human nature tells us that when we get spiked by lower returns, we need a quick fix. So we chase higher short term returns. In contrast, every time I’ve done a deal having a five year horizon in mind, I made incredible profits. So, if you have patience, you would see incredible returns from the US today. You should listen to people like Warren Buffett on this. In the real world, I can’t really tell if the markets, especially in housing and new construction, have bottomed out, but I can tell you that it feels like there is now value in the market for acquisitions.”
Irish Wealth
Conlon’s bet on Ireland as a source for investment in US real estate is sound given our fundamentals, but risky given our immature attitudes to wealth and investment management.
Jones Lang LaSalle recently estimated that there is currently €10bn of Irish investment money seeking investment opportunities. Bank of Ireland Private Banking claimed that Irish investors had invested €30bn in commercial property between 2001 and 2005. CB Richard Ellis estimated that by the end of 2006 this figure would reach €40bn. In 2006 alone, Irish investors purchased €8bn worth of overseas commercial property.
Only €98.5m was invested in the Irish commercial property market in the first quarter of 2007, according to an analysis by Dr Clare Eriksson, head of research at Jones Lang LaSalle in Dublin. However, €1.8bn was spent overseas by Irish investors over the same period of time. Yet, in 2006, 40% of Irish investments went into UK property and 32% into Germany. Only 2.5% of Irish investment portfolios went into the US. Given the US position in the global markets and Ireland’s economic links with the UK and Europe, this is hardly a rational risk diversification strategy for Irish investors.
Conlon is fully aware of the challenge of attracting Irish investors into the US. “We had a meeting recently with a prominent financial institution here. They gave us a chart showing Bratislava as a better investment – by yield – than the US. I asked them, politely, if they were joking. Forget these sophisticated managers, in Ireland an average investor is going into Romania, Bulgaria, Turkey and the likes today. These are not the markets for an average investor with no local knowledge. I would never invest a penny in a market where I do not have deep local knowledge.”
In fact, Conlon is more than cautious in assessing the emerging markets. “One must remember that in the US, legal and professional services and environment are the best in the world. In Bulgaria, going to court over a title or property rights is a costly and uncertain proposition. We have a title insurance company backing our investments in the US with some $6bn in assets. This means that if you buy property, there is
no problem with a title, with the contracts. You buy the same property in Bulgaria – who the hell knows what you have in terms of legal protection?”
In any asset class, Conlon insists, an investor should always look at the risk/return trade-offs behind their investment strategy and choices. In the stock markets, return to a mid-cap equity will be higher than returns to a blue-chip stock simply because of different risk profiles. Yet, when it comes to investing in property, we are seeing increasing numbers of self-administered pensions – conservative investments in their nature – going into risky real estate deals in developing economies.
“I think this question is better understood from the point of view of the Irish psyche. Last year, Bank of Ireland published a report, Wealth of the Nation, in which they talk about how much of our current wealth is new wealth. What this means is that we have people today who 10 years ago were only worth, say €500,000 and today they are worth over €5m,” says Conlon. People who move fast up the income ladder are also people who would have excessively high appetites for risk without necessarily understanding what these risky investments imply in terms of their overall wealth management.
“In a rapidly growing market, anyone can make high returns, but when you get into the real market, like the US, you are no longer shooting fish in a barrel. Instead, you are playing their local game on their local turf and terms. When you look at recent Irish investment in the US, you have some big players competing against one another for trophy properties in downtowns. Yet, the real value might well be outside their field of view – in smaller suburban locations or, as in the case of one of our recent projects in Michigan, in rural locations.
“Or the value may be in how you manage your investment. I’ll give you an example. I purchased a trophy building recently in a prime downtown location. I paid a rather high market price for it. Instead of sitting on the site, I put a Ralph Lauren store in it and now, in two years, the building is worth four times what I paid for it. And this happened in a soft market.
“There are very specific deals in the US that you can do and this is the reason why I am here in Ireland. I do not pretend to fully understand the Irish investment psyche, but I do understand what I do in the US. It is quite contrarian – it is focused on getting the starting value right and securing the right return. And it works. What happened in Ireland in the last, say 10 years is comparable with a perfect storm. It will not last. Ireland now is at the point in time, where if we do what Americans and British did before us – preserve wealth and manage it properly – things will be fine.
“But the spectacular growth? It will end.”
|
