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Tom Clinch |
The third quarter of 2024 looks like a watershed moment for the European commercial property market. For the first time in over two years, all the major institutional commercial property funds produced a positive return.
UK commercial property funds started falling in early 2022 and Irish and Eurozone funds followed in early 2023, as interest rates rose and post-Covid working-from-home trends began to affect retail and office property demand. The Dublin office market was also particularly hard hit by the retrenchment of big tech sector occupiers who had shown a seemingly insatiable appetite for new Grade A office space in the preceding years. Despite all these negative factors, and the doom-laden predictions of some commentators, the dip in the value of the institutional commercial property funds that we use for our clients at Clinch has been very shallow. For example, the Aviva Irish Commercial Property fund is down 1.6% since Jan 2023 and the Standard Life UK Property fund is down 3.8%.
Since 01 July 2024, the Aviva Irish Commercial Property fund is up 0.87%, the Standard Life UK Commercial Property fund is up 0.39% and the New Ireland Property fund managed by State Street, which is a mix of Irish, UK & Eurozone Property, is up 0.74%. The IPUT Irish Property fund also produced a shareholder return of 0.48% for Q3 2024.
So, what is causing this stabilisation and, why does our Investment Committee believe it is the start of a recovery if the broader economic trends continue?
Over the medium term, commercial property tends to produce rental income of c. 5% per annum and capital growth of c. 2%. The asset class does require capital reinvestment and tends to be less liquid than equities, but it is also less volatile. So, it is a very useful diversifier and, if it can produce typical long-term net returns of 5% per annum over the next 3-5 years, then it is definitely worth consideration. Your portfolio manager will be happy to discuss all of the suitable options with you.
Tom Clinch
MD & Head of Investment Strategy