Rising UK property prices drive Irish funds up

FUND FOCUS:UK property funds

Best performer YTD:

BoI Life UK Geared Property - +41.38%

Worst performer YTD:

Standard Life Property - + 6.9%

While the Irish commercial property market may still be stuck in the doldrums, its UK counterpart has been booming, largely driven by a recovery in the London market. Irish investors have also benefited from a strengthening sterling.

However, the rally is expected to cool off, as a stringent emergency budget and less interest from international investors is predicted to dampen down the market.

According to MoneyMate, in the year to June 9th, Irish gross domestic funds invested in UK property returned about 15 per cent on average, or almost 30 per cent on a 12-month basis.

Bank of Ireland’s UK-geared property fund has been the strongest performer so far this year, advancing by more than 40 per cent in the year to date, bringing its 12-month return up to almost 100 per cent.

According to Eoin Kennedy, head of products with Bank of Ireland Life, the fact that the fund is geared – meaning it has the ability to borrow – has enhanced its growth. When the fund was launched, €20,000 was borrowed for every €10,000 put in and, while Kennedy acknowledges that this level of gearing was “painful” when markets fell, it is now boosting returns.

BoI has a buy-and-hold strategy, having bought the properties in 2004 with the aim of holding for a seven-year term. Although it had considered selling up last year due to faltering market conditions, it now plans to hold on, with the scope of deferring into 2012.

While values in the UK market fell considerably in line with the credit crunch, international investors have now come back into the market, boosting property prices. The London market has been performing particularly strongly, especially in the case of the central London office market, where rents have gone up.

However, yields overall have started to dip, due to a combination of rising property prices and falling rents outside of central London.

The major uncertainty on the horizon arises from next week’s emergency budget, with a significant increase in capital gains tax from its current rate of 18 per cent to as much as 40 per cent expected.

“Any increase in tax on property transaction will have a negative impact on the UK market in general, although some of this will have been priced in already,” notes Kennedy.