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Aviva funds Q&A: Why has this been done, what's happening with property values and will the market crash again?

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The move by pensions and investment giant Aviva to stop investors cashing out of two property funds has spooked a lot of people.

Why has Aviva done this?

Aviva has had to stop investors making any withdrawals from the Aviva Irish Property Fund and the Friends First Irish Commercial Property Fund after too many investors rushed to take their money out. The funds have a value of almost €1bn, but were recently revalued downwards after high levels of withdrawals. Smaller investors seem to have been pulling out of these funds over the last half a year. They got spooked when they saw commercial property legend Stephen Vernon selling his Green Reit commercial property company for €1.3bn. Mr Vernon has a deserved reputation for calling the top of the market.

The withdrawals from the Aviva funds seem to have intensified in the past few days. Reports that Aviva and Irish Life have had to lower the values of the funds, amid fears they are overvalued, pushed Aviva into locking in existing investors.

That is something we have not seen since the last property crash.

What is happening with residential property values?

Residential property price rises have stalled, and are falling in Dublin. Affordability is being blamed for this. Potential buyers are struggling to meet Central Bank requirements on deposits and amounts that can be borrowed relative to incomes. Some economists argue that this means constrained demand is finally meeting supply.

A survey of chartered surveyors, estate agents and auctioneers estimates that residential property prices will increase by only 2pc this year. A lack of supply of affordable homes, especially in the €200,000 to €300,000 range, is also hampering the market, the survey found.

Will the property market crash again?

That is the $50m question, but the signs are we have learned lessons. Banks are no longer able to engage in loony lending, where credit-fuelled buyers chase up prices. A herd mentality in the residential market could be avoided.

On the commercial side, there is certainly a feeling that values are reaching the top of the market. This is despite strong demand for office space in Dublin.

Tech giants such as Amazon, LinkedIn and Facebook are in expansion mode. It may be that smaller investors have taken fright from the sale of Green Reit by its founder. Property fund experts insist there is still demand from institutional investors, such as pension funds, for commercial property. And they are adamant the commercial property market is not about to blow up.

What we can say with some confidence is that both the residential and commercial markets are stabilising after a long period of very sharp growth. The smart money says the residential property market will grow modestly this year, increasing affordability for buyers, and the commercial market will continue to be buoyed by strong demand for office space in our cities.

What is happening in markets elsewhere?

The vote in Britain in 2016 to leave the EU prompted a sharp fall in commercial property values. Some funds blocked investors cashing out, but it was only a short-term measure. We generally have not seen property crashes in other countries lately.

Irish Independent