Investors in several Irish property funds received news in January that valuations were being reduced by c.8% and withdrawals or switches from certain funds were being suspended for up to six months.
The funds in question are well managed with high quality assets. However, fund suspensions happen from time-to-time, usually in times of market turbulence like the Global Financial Crisis or more recently relating to Brexit and UK property funds.
Investing in property via funds is usually the only option for retail investors. They get access to property market returns without having to take on entire buildings or deal with conveyancing, property management etc. The normal mechanism is that investors buy and sell units in the fund and with cash management there is no immediate impact on the underlying fund holdings.
However, the ultimate exposure is to the individual properties within the fund and although funds usually offers daily liquidity, underlying fund assets are not liquid.
If there are more (or larger volume) sellers than buyers of units in the fund, there may not be enough cash holdings in the fund and assets may have to be sold to fulfil the sales orders. The nature of the property market is such that it takes time to sell assets (perhaps up to six months) and as an investor you do not want to be a ‘forced seller’, hence the occasional temporary suspension of fund withdrawals.
Where did the selling come from?
We can only speculate as to the reasons why people have been net sellers in recent months. This happened well before the General Election and the risk of a left leaning government which could result in higher taxation on commercial property. The 1.5% increase in commercial stamp duty in the October ’19 budget was unwelcome in property circles, but hardly sufficient reason for a mass exit. One theory has been that the sale of Green Reit to a UK Property Company in the second half of 2019 was taken as a signal of a top in the Irish office market. In the end, the driver may simply have been a decision to take some money off the table after a strong run in Irish property from the post-crash lows.
Does this present an opportunity?
It’s interesting to observe the significant discount to asset value of some listed property vehicles, and this has grown even wider post-election. Property can form part of a well-diversified investment portfolio and can come in many forms like direct investments, traditional funds, ETFs and Real Estate Investment Trusts (Reits). However, in Ireland property often forms far too large a part of portfolios as investors learned to their detriment during the financial crisis. A suspension of withdrawals from one fund should not meaningfully impact a well-diversified portfolio, but can certainly impact an investment portfolio invested too heavily in one corner of an asset class (Irish commercial real estate in this case).
When investing in equities we would never advise clients to invest everything in a single country fund, or a fund focused on just one sector of the equity market. However, this is usually what people chose to do with property, i.e. investing all of their property allocation in a single fund, a single country or sometimes a single sector of a single country.
Diversification is a key part of our investment advisory process. The equity funds we recommend for client investments in some cases contain more than ten thousand individual company holdings, across all sectors of the global economy in dozens of developed and emerging market countries. When assessing property investments, we take a similar approach, i.e. considering a mix of funds with investments in multiple sectors of the property market in multiple countries, thereby spreading risk and reaping the long-term rewards of diversification.
Property as a long-term investment
Good quality Irish residential property price data exists for only 15 years (CSO Property index started in 2005). For reference we could look to a long-term history from UK data. A US Federal Reserve paper * shows an average annual real return of 5.36% for UK property in the 145-year period from 1870-2015, or 6.57% for a more recent 65-year period from 1950-2015.
When we compare this to UK equity market returns in the same periods, we see that property underperformed in both cases, coming in below the 7.2% average annual return for equities over the 145-year period and 9.22% for the 65-year period.
This is not to suggest that one should invest only in equities. Indeed, there may be periods when property outperforms equities for years. Property can certainly be considered as a component of well diversified long-term investment portfolios, along with Equities and Fixed Income securities.
A professional Financial Adviser can independently assess your pension and investment portfolio, analyse and discuss your cashflow, investment risk profile, investment time horizon and make recommendations about what you should own to help achieve a successful long-term investment outcome.
Ardbrack Financial Limited
First published in the FM Report
*Jorda, Oscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2017. “The Rate of Return on Everything, 1870–2015,” Federal Reserve Bank of San Francisco Working Paper 2017-25. Available at https://doi.org/10.24148/wp2017-25
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