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Irish Commercial Property:
Health Check


Irish commercial property has been a fantastic asset class over the last 5 years returning close to 15% per annum. Indeed the pace picked up in the past 3 years when the annual growth has been over 25% p.a.[1]  Ireland was one of the best performing commercial property markets globally in 2015. This is in stark contrast to the collapse in values we saw in 2008 and 2009.


2016 has started on a positive note, both in terms of activity and value. The total return on Irish commercial property in the first quarter of this year is in the region of 3%. Overall activity was driven by a large number of smaller transactions.

Higher property prices have naturally led to lower yields in the asset class. Data from CBRE Research suggest the following yield levels in different sectors currently:
 
Sector Prime Yield Trend
Office 4.65% Stable
Retail (High Street) 3.25% Stronger
Retail (Super Prime Centre) 4.0% Stable
Industrial 5.75% Stronger

Irish commercial property has performed well both in absolute and relative terms. How should we regard it at this stage in the investment cycle?

Clearly in a low interest rate and low inflation environment, current yields still rank as very attractive. The underlying demand dynamics, given the forecast growth in Irish GDP, remain positive.

There are a number of indicators that we would note as being critical in framing an outlook.

Certainly, as the “crane count” shows, we are seeing increased supply in the Dublin office market. The next two years will see about 2 million square feet of new supply. These numbers are fairly solid, as most developments are underway. Forecasts for 2018 are for further significant supply but the actual number will be influenced significantly by NAMA’s approach with its portfolio.

Not all current developments have been pre-let so there is some degree of speculative activity but not to levels that would have sounded alarm bells in the past.

Demand has remained well-spread with both international and domestic buyers, and institutional investors are still a key component. Underlying a lot of final demand will be the need for large global companies to set up or expand operations here, and in this regard, IDA Ireland targets out to 2019 are supportive for foreign direct investment (‘FDI’) flows, but it is important to keep an eye on these.

We should also keep an eye on bond yields and interest rates. Property yields are very attractive relative to sovereign bond yields and it would take a significant upward shift in bond yields to erode that valuation case. Near term this isn’t likely given how aggressive the European Central Bank has been in seeking to depress yields with its bond buying programme. Our base forecast is that ultimately bond yields will drift up but it will be gradual, and top out at lower levels than we experienced in previous cycles.

Our investment view is that while the “opportunity” phase of the Irish commercial property market may be behind us (which we fully captured within our Appian Value Fund) and that returns of 25% p.a. may not be repeated, current underlying dynamics are still positive and that yields close to current levels, even with more modest capital upside, will be an attractive investment option. But selectivity may come more to the fore. Among the differing areas within the property market, we are likely to see greater differentiation in terms of return as some lagging sectors look to catch up.
 
[1] Source: SCSI/IPD Ireland Quarterly Property Index Dec 2015
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at RCPI, No 6 Kildare Street on Thursday, 28 April 2016 at 5.30pm
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The information contained in this material is not financial advice. Nor does it constitute an offer for the purchase or sale of any financial instruments, trading strategy, product or service. No one receiving this material should treat any of its contents as constituting advice. It does not take into account the investment objectives, knowledge, experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to investing or taking out any product from your own independent adviser.
 
This material has been prepared and issued by Appian Asset Management Limited on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been given to the preparation of the information, no warranties or representation, express or implied are given or liability accepted by Appian Asset Management Limited or its affiliates or any directors or employees in relation to the accuracy, fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. 

If you decide to invest in the Appian Unit Trust, further information in relation to all risks is provided in the Fund Prospectus and supplements. This material is available from Appian Asset Management Limited, 42 Fitzwilliam Place, Dublin 2. If you invest in the Appian Unit Trust, you may lose some or all of the money you invest. The value of your investment may go down as well as up. This investment may be affected by changes in currency rates. 

References to past performance are for illustrative purposes only and are not a reliable guide to future performance. Projected returns are estimates only. Forecasted returns depend on assumptions that involve subjective judgement and on analysis that may or may not be correct. 

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Appian Unit Fund Prices  
1 April 2016 
Appian Value Fund
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Appian Ethical Value Fund
136.51  
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179.92
106.38   
95.04

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Patrick J Lawless
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