Their investments may be dropping in value but many investors in Irish property funds are finding themselves stuck as restrictions on cashing in their investments remain in place.
It’s a far cry from the heady days of the Celtic Tiger, when commercial property funds were the best-performing asset class – outperforming even Irish equities.
While property funds struggled in the aftermath of the financial crisis, they turned it around but the environment has become challenging once more.
After a buoyant 2015, when Irish Life’s fund returned almost 20 per cent, it has been in the red for four of the last five years. Similarly, both Zurich Life and New Ireland’s funds had negative returns in the year to January 6th, with Aviva’s fund the only one of the four in the black – with a return of just 0.2 per cent.
Suzie Nolan, head of property with Aviva, says the life and pensions company’s property fund is facing “similar challenges evident in the wider Irish property market”. These include economic threats such as inflation as well as geopolitical uncertainty. The move towards working from home, and its consequent impact on demand for office space, as well as the ever-increasing requirement for landlords to provide more sustainable space have also had an impact.
Restrictions
Funds started restricting withdrawals back in spring 2023, as a sharp change in direction on interest rates at the European Central Bank saw a surge in the number looking to withdraw their money. They feared increased funding costs could lead to project writedowns that could push down the valuation of such funds.
It is not unusual for property funds to stop access to withdrawals, though that doesn’t mean investors are any happier to find themselves locked in at an inopportune time in the cycle. They typically carry warnings, like that of Zurich Life: “If you invest in this fund, there may be extended periods when you do not have any access to your money.
“This means you could be waiting for a significant period of time before you are able to encash your investment,” Zurich Life says.
And that is precisely the case at the moment.
Irish Life has had a six-month waiting period on withdrawals since March 2023, while Zurich Life has now stopped investments both in – and out – of its fund.
A spokesman says that “no inflows are permitted into the Zurich Property Fund, and a waiting period applies for withdrawals or switches out. The fund is reviewed on a regular basis and the restrictions for inflows and outflows may change in the future”.
This means that the fund is shrinking, down from about €33 million in March 2023 to about €18 million as of August this year.
Aviva introduced a moratorium of up to six months back in November 2023, due to “net outflows” from the fund and, according to a spokeswoman, this still applies.
The holdings of the fund, which merged with the Friends First Irish Commercial Property fund back in May 2022, include: Blackrock Village Centre and Zurich House, both in Blackrock in south Dublin; the Globe retail park in Naas, Co Kildare; and 18 Lower Leeson Street, Dublin 2, which is currently available for letting.
Typically, a fund will introduce a notice period to give fund managers time to make any property sales needed to pay future withdrawals.
Often, funds will move to restrict withdrawals if cash reserves decline. Normally property funds keep a buffer of about 10 to 15 per cent of assets in cash to meet the demand for withdrawals. This time around, however, most of the funds are cash rich.
New Ireland, for example, has 23.4 per cent in cash; Zurich Life has more than a quarter of its assets in cash, according to its most recent report; and Aviva has 12.2 per cent.
New Ireland, which had a restriction, is one of the few funds with no restrictions. A spokesman says the New Ireland Property Fund is open to new investment, and there are no restrictions on withdrawals and switches.
So should investors apply to withdraw their funds or wait it out?
Well, the issue here can be that, depending on the fund, the request will be processed only at the end of the deferral period and at the unit price of the fund at that time – ie the unit price after the six-month deferral, not the unit price at the time the instruction was given.
As a result, you are taking a gamble on where the price will go. You might also be faced with an early encashment penalty, so check the small print before making a decision.
Change in pricing
Many funds have also changed how they are being priced.
New Ireland’s fund, for example, is priced on a disposal basis, “which ensures that policyholders exiting the fund pay their fair share of property acquisition costs” the spokesman says. This has been the case since 2020.
This can happen when more money is going out of the fund than coming in, and is a strategy used to contain losses.
At a time of growth, when a fund is expanding and purchasing assets, it will usually be priced on an acquisition basis.
Moving to a disposal basis can be bad news for investors, especially in a market downturn; when New Ireland made the change it cut the unit price of the fund by as much as almost 8 per cent.
Given an overall office vacancy rate in Dublin of about 16 per cent – up from about 5 per over the last five years – the city now has one of Europe’s highest rates. This is also reflected in the property funds.
Irish Life’s vacancy rate is less than 10 per cent, while New Ireland’s is 9.7 per cent and Aviva’s is 8.4 per cent (which includes 3 per cent of strategic vacancy for redevelopment purposes).
Funds also have run into difficulty when trying to offload properties. Irish Life acquired 1 Harbourmaster Place, KPMG’s current headquarters in the IFSC, back in 2015 for €50 million. It put it back on the market in 2020 for €54 million but it failed to sell.
Now KPMG is set to move to Hibernia Reit’s development in Harcourt Square, and the lease on 1 Harbourmaster is due up in 2026.
Despite the challenges however, fund managers remain upbeat about the future.
State Street Global Advisors, which manages New Ireland’s fund, expects a bump in transactions as interest rates fall, which will lead to a “closer alignment of buy and sell side pricing expectations” – in other words more competitive prices.
It also expects vacancy rates to fall in the office sector.
“Despite offices generally being out of favour with investors in recent years, there are now signs that interest in the sector is turning”
Aviva’s Nolan expects more stability in valuations this year, “with the possibility of some upward movements in certain subsectors, such as retail parks, as new rental evidence becomes available”.
And she expects more economic opportunities to come through in 2025, such as the reducing cost of debt and a widening of the spread between bond rates and property yields, “both of which should be an impetus for further investment in the property sector”, she says.
Aviva itself expects to be busy, with projects including the redevelopment of a site in Dundalk to deliver a primary care centre for the Health Service Executive expected to start this year, alongside other “value-add initiatives”, such as further letting activity and the rolling out of additional sustainability programmes.
How have Irish property funds performed?
Fund annual return (%) Three-year return (%)
Aviva Irish Commercial Property 0.2 -1.3
Irish Life Property** -4.2 -14.2
Zurich -2 -4.0
New Ireland -0.1 -10.3
As of January 6th, 2025; **as of January 3rd
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