With interest rates close to zero, and “safe” government bonds also offering very low returns, investors are seeking out a more attractive potential performance for their hard earned savings and pension funds. Investors’ risk appetites are now returning (albeit with due caution and awareness), and as a result there are an increasing number of people looking towards property as a diversifying asset class within their personal portfolios.
Investing in property is the combination of purchasing a future income stream together with the acquisition of a tangible, real asset. The performance of property as an asset class is highly linked to economic growth. Ireland is the best performing Eurozone economy for three consecutive years, with unemployment at an eight year low (6.6%) and GDP growth forecasted at 4% for 2017. These positive macro indicators are supporting a robust Irish property market.
The total value that can be derived from a property (or a portfolio of properties) is a combination of the capital value of the property itself and also the property’s income generating ability (both rental level and income yield).
Property lends itself to active management which can further enhance both rental and capital value for the investor. There are a wide range of management strategies that can be implemented for a property, positioning it in a different position on the risk/return curve. The objective of moving up the risk curve is to accept a level of risk in the knowledge that active management aims to manage the risk and generate value at the same time. This can be achieved through a range of activities including letting vacant space (existing or developed) or through capital expenditure and refurbishment which can contribute to future performance and value creation. A key benefit of investing in property through a unit linked fund structure is that the fund can hold a number of properties at different positions along the risk/return curve, providing investors with exposure to a combination of “core” and “value add” property investments. The Friends First Irish Commercial Property Fund has an attractive mix of core assets, on long term leases with very reputable tenants, alongside a number of significant redevelopment projects which aim to unlock the embedded capital value in these properties.
The main drawback of investing in property is illiquidity, or the relative difficulty in converting an asset into cash and cash into an asset. Unlike a stock or bond transaction, which can be completed in seconds, a property transaction can take months to complete. Investing into an open-ended property fund, rather than investing in individual, direct properties, can alleviate this liquidity somewhat (although most property funds will be able to impose a moratorium (of typically six months) in the event of a market downturn, or cash constraints within the fund).
Access to ownership of direct commercial property can be difficult for individuals, as there are several barriers to entry such as high acquisition prices, associated transaction costs, time to complete, property management requirements and so forth. The pooling together of investors’ contributions in a unit linked fund, such as the Friends First Irish Commercial Property Fund, allows for easier access to investment in commercial property, through a suite of pension or investment products. This unit linked fund structure also provides individuals with the ability to participate in larger transaction sizes that would otherwise be outside of their reach, and provides diversification across a broad portfolio of commercial properties.
A well-managed property fund is a very useful diversifying asset class in a wider investment portfolio.
The views and opinions expressed in this article are those of Suzie Nolan, Senior Manager, Property Fund Management at Friends First