With strong performances over recent years, it is perhaps unsurprising that there has been renewed interest in property investment as an asset class. The historic way for getting exposure to property was to purchase a property directly. This means as an owner you have full control over the asset and gain from any increases in value. However, you also have full exposure to any voids or gaps between lettings, management responsibility and associated costs. This model works for many people, but a growing number are now investing through alternative forms including property exposure within their investment portfolio. There are many reasons for this shift towards indirect investment including changes in taxation, new regulations particularly in the residential sector, and the growth of alternative methods of investing which give investors a wide range of choices.
Ireland offers a range of different regulated real estate fund structures with varying levels of investment and borrowing restrictions, investment mechanics and timeframes depending on the composition of the proposed portfolio. The Central Bank is the authority responsible for authorising and supervising all regulated Irish property fund structures.
Property investment funds and Real Estate Investment Trusts (REITs) are two such fund types. A property fund is where a group of people pool their money together in a fund which then buys properties. Typically a fund is made up of a number of different properties with larger funds with values of over €400m and some smaller funds only owning a few properties. The fund provider is usually a life company but there are also other providers. A REIT is a publicly listed company whose main activity is the ownership and management of property-related assets.
It is useful to look at the underlying assets within the fund, the vacancy rate and the amount of cash that it holds. Most funds will provide information on the breakdown of the fund, i.e. how much it holds in office / retail / industrial. Another consideration is the strategy for the properties and what plans are for the value enhancement of the assets. The Friends First Irish Property Fund has almost 70% of the rental income provided by strong tenant covenants such as OPW, AIB, and Musgraves. It also has redevelopment plans for Royal Hibernian Way on Dawson Street in Dublin (where planning has recently been granted) and to redevelop 70,000 sqft of offices at Enterprise House in Blackrock which will be fully let to Zurich on its completion.
The level of vacancy is another consideration. This is space that is not producing any income and so will reduce potential returns in the short term. However, this is also the space with potential as it can be renovated and/or re-let and so be accretive to the overall yield. It would be usual to have some level of vacancy but too much can drag fund performance. This really comes down to the expertise of the internal property team and how they manage the underlying properties.
Cash can be a good buffer in a down turn, but too much cash can impact negatively on the return of the fund as that money is not ‘working’. Rather than purchasing a single house or commercial unit, investing in a fund provides diversity across a range of sectors and decreases the risks of voids or other risks to the income return.
Looking at historic performance is a useful metric – though as any good caveat in a brochure will note, this is no indication of future performance! There are always risks in investment and it is important that this is considered before making any decisions. An independent Financial Broker will be able to give details on the funds in the market and provide advice.
The views and opinions expressed in this article are those of the author.