They say a week is a long time in politics. Given the underlying shift in markets post Donald Trump’s success in the US elections, a month has been a long time in markets.
In that time, further dark clouds have descended on the Irish commercial property market, and the recovery, which started in early 2013, has most likely played itself out, for now at least.
But, there’s a silver lining for investors in the life company Irish property funds. Because of how they are priced, the unit prices of such funds remain at or near recovery highs, and investors in such funds should consider taking the opportunity to sell their units now. Here’s why!
Earlier in 2016, investors were relatively sanguine about the significant supply of new commercial property coming on stream in late 2017 and early 2018, specifically in the Dublin market. The economy was on the up and demand for good quality office space from multinationals was expected to absorb the new supply easily enough. But throw in the uncertainty for the Irish economy arising from Brexit and the Trump threat of a lower US corporate tax rate, which has the potential to lower the multinational-driven demand for office space in Ireland, and investors in Irish commercial property have been properly spooked.
Such nervousness about the outlook for Irish commercial property has seen the share prices of two Irish listed real estate investment trusts (REITs) decline sharply post the Trump win. At the time of writing, Green REIT’s share price is down 18% to date in 2016, and Hibernia REIT’s share price is down 13%. This, despite growth in the balance sheet value of their property portfolios in 2016 to date of 15% and 11%, respectively.
Their share price declines have left their share prices well below their respective net asset values (balance sheet values). In Green REIT’s case, its shares are now trading at a 16% discount to the balance sheet value. In Hibernia REIT’s case, 12%.
The life company’s value the property assets in their funds in the same way as the REITs, to reflect current physical transactions in the property market. And similar to the REIT property portfolios in 2016, the value of the life company Irish property funds is up year-to-date, with Aviva’s fund value up 6% in 2016, Irish Life’s fund value up 7% and Friends First’s fund value up 12%.
Unlike REITs, where shareholders sell their shares to other investors in the marketplace when they want to realise their investment, to sell your units in a life company unit-linked fund requires the life company to redeem your units and sell an underlying asset in the fund to pay you back. But the underlying property market is illiquid. It takes time to sell a property – several months perhaps. Indeed, if investors collectively move to redeem their property fund holdings such funds have little choice but to close, as they can’t get cash quickly enough to fund a wave of redemptions. Such funds did close to redemptions in Ireland post the banking and fiscal crisis in 2009 and, more recently, in the UK post the Brexit vote.
The silver lining referred to earlier is that, despite the darkening clouds in the Irish commercial market, investors can still redeem their units in life company Irish commercial property funds at or near peak recovery prices. Whether you subscribe to the gloom or not, it appears obvious that it’s a good time to redeem units in the life company Irish property funds, especially if the investment is held in a tax-efficient pension structure. If your investment is a personal one and you are sitting on a gain, you can avoid paying the 41% exit tax now by reinvesting in another fund on the same life company platform.
There’s also an opportunity to reinvest in the shares of Green REIT and Hibernia REIT knowing that they are already priced for a substantial 12-16% decline in Irish commercial property values.