The SCS/ IPD returns for Ireland have just become available and show an annual aggregate return for property of just 12.7 per cent. As a consequence, property remains the top performing asset class over the past three, five and 10-year periods and has increased in value almost two fold over the last decade.
This growth implies an average value increase of 17 per cent per annum for the past 10 years. The corresponding average annual growth rate for equities, property's primary investment rival, was 12.8 per cent per annum.
Whilst the performance of property has amazed most people, the overall size of the Irish investment market has also seen a staggering increase over the period. Turnover last year reached a record high of €750 million or nearly €15 million per week! This compares with an annual turnover 10 years earlier of less than €75 million.
But who is responsible for all this increased activity? Put simply, the private sector is. The major players within the private sector take the form of syndicates and high net worth individuals emerging from the Celtic Tiger with their spoils. The majority of property-holding institutions have been selling off significant portions of their portfolios (usually the "non-prime" elements) to these private investors since the late 1990s. Last year, one institution alone sold off over €100 million of its Irish property portfolio.
The reason for the institutional "sell- off" stems originally from an erroneous belief by the investment asset allocators that property had "topped out" and, secondly, because property weightings within investment funds were out of line with what was perceived as an appropriate property weighting.
Institutional property portfolio weightings peaked in the early 1980s at approximately 18 per cent of total assets under management but by 1996 this had fallen to approx 5.5 per cent. In recent years the standard institutional property weighting has been approximately 6-7 per cent. The reasons for the historical decline are many and varied but include a falling level of inflation (property being perceived as a major hedge against same), poor property performance, strong equity performance and the relatively high cost of running dedicated property departments. In addition, as their proportional holding of property fell, so did the diversification benefits that it delivered to the funds.
As a consequence of the virtual absence of institutional funds from the investment market in recent years, private investors have effectively represented the market. Their absolute dominance becomes apparent if we review market transactions in 2003 where, of the 16 open market acquisitions of a lot size greater than €10 million, only one deal involved an institutional purchaser. However, over the very recent past there has been a change-around in many institutions' attitude to property and they are now active buyers again. The diversification benefits of property combined with the relatively high income yield it offers is resulting in a number of institutions being put under increasing pressure to increase their overall property holding.
In addition, the recent solid performance of equities is putting institutional fund managers under pressure to merely maintain their property weighting. And institutions have been learning the lesson that they are no longer the big boy in the playground.
They are in fact being totally bullied out of the market by a private sector, which ironically, they helped to create. This fact was highlighted recently by the sale and leaseback opportunity offered by the partners of McCann Fitz-gerald in the Dublin docks. Not only has this property reportedly gone to an investment syndicate for a consideration of over €80 million at a yield of under 5.5 per cent, but none of the underbidders were believed to be institutional funds.
The institutional return to the property scene is good news for the sector as a whole, as their presence will serve to underpin the present high level of the market. But as long as the current interest rate environment holds, it is likely that the private investor will be the main competition for any stock that comes on the market and is unlikely to prove very fruitful for the institutions.
The supply of quality investments is not sufficient to meet the requirement of both sectors. The option is always available to the institutions to focus on the higher interest rate economy of the UK (twice the Irish interest rate); however, this poses two serious concerns. Firstly, the exchange rate exposure on the purchase price, and secondly, the private sector, both Irish and other overseas privates, are chasing down property yield in the UK where the same factors are at work as in Ireland.
Let the games begin . . .
Roderick Nowlan is an associate partner, Harrington Bannon
