Sunday 21 January 2018

Commercial market attractive but volatile

Anne Breen
Anne Breen

Anne Breen

THE Irish commercial property market is ranked as one of the most volatile institutional investment markets internationally. Returns have been as high as 43pc and losses as low as 40pc: a range more typically associated with stock market volatility – not bricks and mortar.

Having already delivered returns of nearly 13pc in 2013, Irish commercial property is now generating total returns of over 25pc a year. Compared to current account interest rates or low yielding government bonds, the returns that can be made on commercial property at the moment make it highly attractive. There are five golden rules, however.

Being selective is crucial

Not all of the Irish market performs identically. The recovery has been focused on the office market, predominantly Dublin offices and namely within a stone's throw of St Stephen's Green, where occupancy rates are higher and investors most active.

Given that Irish market values fell over the past five years, the Dublin office market became the first port of call for global investors. This has pushed prices up rapidly in Dublin city centre and many investors are now deterred by the low prime yields of around 5.25pc. The retail and industrial markets are starting to follow the office market precedent, but with tenants stretched to pay high rents, these sectors carry their own risks.

Active management is a key driver of returns

Fund managers use a wide range of property management tools and techniques to help maximise the asset's returns. Securing high-quality tenants on secure leases not only ensures a strong income stream but also supports the asset's value. While development or refurbishment can add risk to a fund's performance, undertaking works can also add value.

Diversifying a portfolio can stabilise returns

Most property investors will not put their eggs in one basket, especially if the market is volatile. Pan-European property funds offer investors exposure to pools of assets in different markets. For example, the UK commercial property market which has delivered returns of 8pc per annum over the past five years and Standard Life Investments expects this sector to return around 9pc per annum over the next three years. For smaller funds, investing across a wide range of markets is difficult due to the amount of money required to fully diversify a portfolio. This is where Real Estate Investment Trusts (REITs) can help.

Timing is everything.

Most fund managers aim to "buy low and sell high", yet in property this is not always possible. In a long-term investment class like property, it is important to understand the risk/return relationship of the markets.

Residential property is a tough nut to crack for investment funds

For commercial property investors, the rented residential market lacks scale, which is the barrier to investment. Investment funds would need an enormous number of apartments to reach the investment amount required. Only in countries such as Germany and the US – which have substantial populations renting apartments – does the residential sector form a significant part of institutional portfolios.

Anne Breen is head of real estate research and strategy with Standard Life Investments

Sunday Indo Business

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