Institutions and pension funds re-emerge as dominant force

Financial institutions and pension funds are reemerging as the dominant force in the commercial property sector, out-spending private investors for the first time in four years. The switch in most investment activity from rent-producing buildings to pre-funding speculative developments has given the funds a clear run in a market, where the overall spend this year is likely to be down on 1998.

A report compiled by Gunne Commercial estimates that £376 million has already been committed this year on commercial properties valued at over £500,000. Marie Hunt, head of research at the agency, says a number of substantial deals in the pipeline will bring the spend up to £500 million and while that figure may be exceeded by year end, it will still probably be short of the £620 million reached in 1998.

Any slippage in the overall level of investments stems from the acute shortage of commercial properties coming on the market rather than any reluctance to put additional funds into property. With property showing a combined return of around 80 per cent for the last three years, owners simply will not budge because there are few opportunities to reinvest in higher value properties.

The scarcity has left hundreds of millions of pounds chasing commercial investments.

The strong performance by the property sector over the last three years compares with a return of 35 per cent on gilts and over 100 per cent on equities. This year, the picture has changed again with property showing returns of 15.7 per cent as against a decline of 1.9 per cent in gilts and a fall of 1.2 per cent on the ISEQ index of Irish shares.

John Bruder, of AIB Investment Managers, says the remarkable thing about the property market is that it remains so robust. Despite the dramatic growth in values of the last few years, "there is very little likelihood of a sharp correction for the foreseeable future".

Mr Bruder acknowledges that the institutions "are coming back into their own" because the pre-funding opportunities are generally not suitable for private investors.

Gunne estimates that 54 per cent of the funds going into property this year are on pre-funding new developments. These include 24 office schemes, 18 industrial projects, 13 retail ventures and seven other schemes.

It is no surprise that most of the investment is going into offices, given the shortage of space in Dublin and the fact that offices have been the best-performing sector in the market.

The most significant fall in yields has been in offices, according to the Gunne report. Prime yields have fallen to 4.75 per cent due to a lack of quality office investments. Yields in the office sector have, therefore, fallen by 27 per cent since 1994.

"As supply diminishes further and rental growth continues, we predict this yield to fall to 4.5 per cent by the end of the year. However, a slight increase in interest rates has slowed the fall in yields to some extent."

The slowdown in investment activity by the private sector this year is in sharp contrast with 1998 when it spent £467 million - three times more than the institutions. With stock so scarce, private investors and business syndicates have largely switched their attention to the UK, where returns are generally better.

The private sector has spent well over £1 billion on commercial property investments in the past three a half years and possibly as much as £300 million in the UK. A further £1.3 billion has gone into Irish residential investments since 1996, though this business has virtually dried up since the Government introduced the Bacon measures in 1998.