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Are Irish Commercial Property Funds In Trouble? Blog 135

3rd February 2020

Paddy Delaney

This week there have been two ‘big news’ revelations about Irish Commercial Property Funds, neither of which will be deemed positive. This media coverage has many thousands of investors very concerned and dare I say, anxious.

In a break from tradition, I am engaging in current market events, in the interest of helping ease some anxiety for investors. This week we share some ideas and experience which might be useful for anyone who has concerns about their investments in Irish Commercial Property Funds, whether through your pension or investments. I hope it helps.

Oh, so as to be totally clear, a couple of comments on where we stand on these funds.

  1. Whatever about investing directly in bricks and mortar or via a clients’ pension structure, Commercial Property Funds are not something we engage with for our clients (partly due to the very things that are currently happening to investors in them)
  2. We have zero professional financial planning relationship with any of the companies that are getting the brunt of the media coverage this week. We are on the side of the investors on this one. This is a message aimed at giving some context for investors that are ‘in the eye of the storm’.

We’ve Seen This Before

Back in the mid 2000’s I was a traditional advisor – helping investors get invested, and generally little else by way of advice. During 2006 and 2007 most investors wanted to invest in Irish Commercial Property Funds. They had seen capital values increase of 20% per year for several years. Fear of missing-out was the primary motive for investors, and rarely is a good rationale for investing. People had the mindset that prices would never fall, that this would roll-on forever.

But, as we all well know, they did fall. If you invested €100k in an Irish Commerical Property Fund in May 2006, depending on the insurance company you invested with, you would have had in the region of €125k by May 2008. You would have been delighted. You might have felt that you would stay in for another year or so and then maybe cash your chips. However, the values descended rapidly. Within 12 months your statement would have shown a value of approximately €52k, or a decline of over 50%. While it is easy to forget the hysteria that was going on then, lets not forget just how manic it all was.

Joe Duffy and Co were in full swing. Commercial Property Funds were plummeting by the day and being revalued to always lower prices. Media headlines were pouring fuel on the fire, sensational statements only driving more people to panic-sell. Clients were feeling like their money was going to disappear entirely, that the properties their investment was based on would suddenly become worthless, zero, that nobody would ever again pay a cent for these mostly prime commercial properties!

A Slow Recovery

Depending on which fund you were in, it took between 10 years and 14 years for your statement to show a value of €100k again. These are long periods of time, no question, but they got there.

The properties did not become worthless. The valuation was revised, the restriction was lifted, the values slowly recovered. Between May 2012 (the bottom of the Property price cycle) and end of 2019 one of the funds’ value went from €52,000 to €130,000.

You can see from the chart below, the value of one of the funds hit that €130k mark as of December 2019. This ascent proved many things about investing. The aspect I would like to draw your attention to is that the hysteria and madness that was being spoken and written about during the decline was just that, hysteria. It’s sole agenda was to sell newspapers and online clicks.

Current Media Coverage

History has shown us that ‘Bricks and Mortar’ is a reasonable long term asset class for a patient and stoic investor. Similar to equities, it will experience significant periods of ups and downs. It’s temporary declines of 2008 to 2010 was a particularly heavy one, but it recovered.

The media coverage of the current changes in three of Ireland’s biggest Commercial Property Funds is as one would expect it to be. Scary headlines appeal to human nature of reading awful news stories.

A headline on 1st Feb 2020 in Irish Times ( I won’t link to it because that’s what they want!), stated:

“Irish Property Prices Forecast To Fall In Bank Stress Tests” – when I read the article, it was referring to analysis done by European authorities in stress-testing banks across the EU. When you read further it shows that the research suggested there may be no growth in values of property in Ireland in 2020 and a 1% fall in values in 2021!! If they had changed the Headline to

“Irish Property Prices Won’t Fall Or Rise in 2020” they would not have got the clicks they needed to hit ‘target’ for the article. Perfect example of click-bait journalism/editing.

That article was totally unrelated to the Irish Commercial Property Funds and what is happening with them. In my view it is deliberate scare-mongering, and pursuit of ‘clicks’. It has the undesirable effect of adding fuel to the fire, increasing the chances an investor will become anxious and prone to irrational decisions.

How many headlines did you see when these very same funds were increasing at double-digit rate in recent years? Exactly.

Why The Revaluation Of Irish Commercial Property Fund Prices?

The high profile funds, with a reported €1.4BN of investor funds, have moved to what they call ‘disposal basis’ pricing. The impact of this, in this instance, is a reduction in your value of 7-9%, which is quite the haircut to be handed. This alternative way of putting a price on the units in your fund, generally only happens when there is more cash leaving the fund by way of withdrawals, than cash coming in by way of new investors.

We have seen this before, during the years outlined above this restriction was also applied, albeit that it was only done once funds had already fallen quite considerably. It was a very nasty surprise for investors, but is something that is part and parcel of these Commercial Property Funds. The providers are entitled to do this under the contract you have entered.

Why The Insurance Company’s Restrict You Withdrawing Money?

This is another aspect of these funds that is unpleasant for investors who are looking to exit, but is a legitimate restriction the providers can apply. The defence, rightly or wrongly, is that if everyone in the fund wanted to exit today, the entirety of the commercial property portfolio within need to be sold tomorrow. This would result in what is known as a ‘fire sale’ and assets being sold for very very low prices, further reducing what you would get from the fund. While it might not make you feel any better about it, that’s the logic.

What To Do Now With My Irish Commercial Property Fund?

The very fact that they have blocked your ability to get your money out of the fund might motivate you even more to get your money out. Heck, you can probably give notice now to exit, and take whatever it is worth in 6 months once notice has passed. But to what end? Stick it on deposit for the next 30 years?

If you put money into these Irish Commercial Property Funds with a view to a short-term gain, a quick-win, I dare say that you are a speculator and not an investor. Long term and patient investors in well diversified and wisely selected portfolios have rarely if ever ever lost. Speculators know that they will win some and lose some.

Speaking of winning and losing, nobody knows where these funds are heading. You can see all the ‘property outlook’ articles you will see on the providers websites. Not surprisingly, they are saying things are still looking positive for the fund values. Truth be told, while they know the market inside-out, they have about as much probability of predicting future Commercial Property Fund prices as I do, which is not saying a lot at all.

Nobody knows what Irish Commercial Property Fund values will be in 6 months, in 12 months, in 5 years. Nobody. Just like any informed investment – you should really only enter it, or remain in it, if you believe in the long term potential it offers. You should also be prepared for significant volatility, particularly if you are invested in a single asset class in a single tiny country such as Ireland.

If history is anything to go by, the long term prospects, despite how it may feel right now, have always been positive for any well diversified and sensibly run portfolio.

I will again re-state my non-involvement in these Funds. While I know them well, and have experience with them, this piece is neither promoting nor slating them. I merely hope that the info here might help assuage any anxiety or help an investor make a decision that they won’t regret, one way or the other.

Paddy Delaney QFA RPA APA

P.S. The value of your investments can rise and fall. You can get back less than you invest in any investment. Always seek personal financial advice before making any decisions or altering your arrangements. This Blog is for information and is not individual advice. But you knew all that!


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