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When an individual investor or a fund invests in a property, returns are derived from a combination of capital value movements and rental income.
Over the past five years, since the global economy began its recovery, Irish commercial property has experienced exceptional double digit returns, mainly driven by capital growth. Historical evidence supports the fact that although there will be fluctuations in the short term, capital values should appreciate over the long term, in keeping with or ahead of inflation. I expect that, for the foreseeable future, commercial property returns (combining capital valuations and rental income) should be above cash deposits and inflation.
Following a period of exceptional capital growth, we are now witnessing a slowdown in market-driven capital appreciation (positive capital growth is continuing, but at a slower pace than in recent years). I expect that rental income will likely be the main impetus of returns going forward. For example, the Lisney Retail Index has shown that prime rents on Grafton Street increased by 5.5% on year on year, and JLL has predicted growth of up to 8% over the course of 2018 in prime retail rents. Other commercial sectors such as industrial and suburban office are also experiencing very strong rental growth at present. The Dublin city centre prime office sector is the only exception, as rental levels are already slightly above the previous peak, being driven upwards by a current shortage of supply (which is being addressed by new developments in the city). I expect that these rental levels will stabilise and may even come back in the near term, when the supply/demand imbalance is addressed.
Active property management involves balancing the above components of income in order to arrive at an acceptable, appropriate, overall portfolio income profile for the Fund.
The Friends First Irish Commercial Property Fund places great importance on income as a significant contributor towards overall returns. Sourcing and retaining high quality tenants and pursuing ‘value add’ strategies in order to generate additional income from properties contribute to strong income statistics for the Fund, as I have highlighted in the three diagrams below.
As I have mentioned above, it is my expectation that total property returns are likely to be driven mainly by income going forward. Therefore, the strength and quality of a portfolio’s rental income is of critical importance when assessing a fund for a long term investment. The income statistics and the tenant profile of the Friends First Irish Commercial Property Fund (as outlined above) are particularly noteworthy, and the in-house property team will strive to maintain this calibre going forward.
For more detailed information on this topic download ‘Property Investing – The importance of Income.’
Analysis based on data available up to September 2018.
The views and opinions expressed in this article are those of the author, Suzie Nolan, Senior Property Manager, Friends First.
The funds referred to on this page may be linked to an insurance-based investment product and the Key Information Document (KID) for this product is available at www.friendsfirst.ie/kids. The Risk Ratings of the funds referred to in this document differ from the corresponding Summary Risk Indicators shown in the KID. An explanation of the differences between the Risk Rating and the Summary Risk Indicator is available at the location above.
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