It’s now 22 months since Irish property funds tanked. In the last week of January 2020, investors in the Friends First Irish Commercial Property fund woke up to the news that the value of units in the fund had been slashed by 9.1% overnight by the fund manager, Aviva.
Irish Life was hot on Aviva’s heels with a similar move, down 7%. As we’ve written, this followed some years of strong growth. Long before Covid-19 was affecting markets, many investors had decided to take some profits from their Irish commercial property investments. This caused significant demand for cash within the funds.
Withdrawal restrictions have been slow to lift
As if the fall in the value of the funds wasn’t bad enough, the managers then imposed restrictions on withdrawals. Aviva and Irish Life operated a waitlist, requiring a six-month notice period from investors looking to get their money back.
Irish Life’s fund re-opened for no-notice withdrawals in April of this year.
This week Aviva announced that its two commercial property funds would do the same, starting on 2 December. There’s a long queue of investors waiting for their money back.
Here are three lessons from the extended restrictions on these major Irish commercial property funds.
1. Know what a property fund is for
Typically investors allocated a proportion of their money to property investments for a couple of reasons.
Firstly, there was an expectation of a rental yield – steady cashflow coming from the assets. Secondly, the prospect of growth in the value of the underlying asset. And thirdly, you could diversify your investments – for example, to give a different performance characteristic to the equity markets.
But for many investors, investing in Irish property is not the ideal way to achieve these goals. Let’s consider each point in turn.
If you pay tax in Ireland, there is usually no advantage to taking dividend/ yield income from an asset, rather than drawing a regular return by selling units.
Secondly, when it comes to growth prospects, an overnight fall of more than 9% should give anyone pause for thought.
And in terms of diversification, there are many other ways to diversify from equity markets, from precious metals and bonds, to infrastructure and commodities, to non-correlated assets like private equity and even royalty-based funds.
2. Understand the limitations of open-ended funds
The root cause of the devaluation and then gating of the major Irish property funds (ie preventing withdrawals from them) last year is that they are open-ended. In short, this means that in order to be able to deliver when investors ask for their money back, the fund manager has two alternatives:
a) Keep enough cash in the bank (thus diluting returns)
b) Sell a building (which takes months or even years)
The Irish funds have done a combination of both. Aviva’s two Irish property funds both have more than 20% of investors’ money held in no-growth cash. And perhaps their highest-profile property disposal was the sale of the Royal Hibernian Way shopping and office area on Dawson Street, for a reported €74 million.
In contrast, in a closed-ended fund (sometimes called an real estate investment trust or REIT), investors buy and sell shares in the fund on a stock exchange. These shares can go up or down independently of the value of the underlying assets, but importantly, when investors sell, they are not paid out of the fund itself.
That means that scenarios (a) and (b) above are much less of a worry for closed-ended funds.
3. The risk-reward of commercial property has changed
There’s no doubt Covid-19 has had a major impact on how we use property. It’s probably too soon to conclude how widespread and how permanent working from home and hybrid working models will prove. But the longer restrictions go on, the more established they will become, at least for some types of work.
This has wide repercussions for residential, office, retail, and warehouse property. It’s leading some property investors to wonder – controversially – if the real returns in Irish property are on the residential side.
Whatever the case, before you invest in an Irish commercial property fund, consider if you are comfortable bearing the risks, and potential rewards, that come from putting your money into a sector which is undergoing fundamental change.
We believe that there are more appropriate options than Irish commercial property for most investors. Get in touch here or let us know your requirements here if you’d like to discuss alternatives, whether that’s income-producing infrastructure funds, closed-ended Irish funds, or easily accessed global property funds.