If there was ever a pot of gold at the end of the rainbow, it has been Irish property investment. This certainly has been the case for pension funds using the Irish Pension Fund Property Unit Trust, based in Dublin.
This specialised vehicle was originally formed in 1967 to provide a unitised approach for local funds providing indirect exposure to the local market on a more diversified basis than by direct investment.
Now with a fund value at the end of 2000 of Ir£468m (E594m), investors have seen a return of over 21% in 2000, when allowing for inflation meant a real return of nearly 16%. Down slightly from the even giddier returns of 24% for the previous year, this translated into a spectacular 20% in real terms. These results were not the peak and are just part of a series of returns making Irish property one of the past decade’s star performers.
With yields in 2000 calculated on the portfolio’s market value a mere 3.78%, based on rental income, or 5.5% when reversions are taken into account, the increase in unit offer prices up from Ir£411 in 1996 to Ir£831 at end 2000, has come from the dramatic appreciation of the property portfolio, perhaps not surprisingly with its concentration in Dublin office premises. Some 62% of the fund at year-end were in offices, 26% in retail and 12% in industrial, all in the Irish republic. This is almost identical to the average of the IPD Irish portfolio, IPFPUT points out.
The trust’s investors grew by two to exactly 100 by the end of 2000, and there are a number in the pipeline, says chief executive Gus MacAmlaigh, following presentations were to investment advisers and others potential investors. “We are open to new investors.” Originally formed for pension fund investment only, the brief has been extended to other include charities and other tax exempt investors over the years.
The income yield to investors depends on rental income and in 2000, the fund achieved 100% increases in respect of some of it major office premises, which it regards as the trend to be followed. “Almost two thirds of the trust’s office portfolio has yet to undergo rent reviews to reflect this trend,” IPFPUT chairman Conor Sexton, told investors recently. All properties in the fund were fully let at year end, another indicator of the buoyancy of the economy.
This buoyancy has presented the opportunity to cull the portfolio of properties that are no longer considered prime, but will still realise excellent returns for the fund. Though this can result in unexpected cash holdings, which can be a drag on performance in the shorter term. For example, at the end of 1999, 11.5% was in cash, which had the effect of reducing the property return from 29% to 23.6%, plus the income distribution.
The trust’s demand for cash, depends not only on the acquisition programme, but also its development activities, where it has been involved in an ongoing series of major projects.
More recently, Sexton has warned that the good days cannot go on for ever for investors. One consequence is the decision to rebalance the portfolio with a greater concentration in larger rather than small properties and in prime locations, as these could hold their position better in a market downturn. “Any slowdown in the economy will impact quickly on the market,” he says, particularly noting the increasing over-supply situation as more speculative developments, as opposed to those that are pre-let, are finding it harder to obtain finance.
IPFPUT has obtained the necessary clearance to invest in the UK, but has yet to take this step, because of the outperformance of the domestic market. It looks as if this concentration of focus is set to continue for the moment.