With the commercial property market continuing to slow down, there are strong indications that many of the institutions will not be chasing property investments this autumn because their portfolios are already overweight.
Although the institutions once held between 15 and 20 per cent of their funds in property, the parameters have been steadily whittled back to 7 to 10 per cent in the past decade because of the cyclical nature of property and its traditional illiquidity.
In the past year property has been climbing again as a proportion of the overall individual funds, largely because of the poor performances of other asset classes. The trend is expected to result in not only fewer purchases by the institutions later this year but a range of sales to rebalance their portfolios.
Adrian Trueick, head of investments at DTZ Sherry FitzGerald, says that with only seven institutional acquisitions reported in the first six months of this year, the majority of the funds have been relatively inactive, opting to sit it out while the current uncertainty persists.
A number of institutions' property funds, he said, were still open with inflows reported to be at a reasonably strong level. Although much of this money was being used to restore liquidity levels after last year's high level of spending, this should result in greater institutional activity towards year end.
"Ironically however, given property's out-performance of other asset classes, a number of institutions are now overweight in property and may be forced to sell to rebalance their portfolios."
He said the inactivity in the institutional market had benefited those funds that were still active, allowing them to pick up a number of prime assets relatively uncontested.
Jim McMahon of Bank of Ireland Asset Management said there was a wait-and-see attitude among the institutions at the moment following the fall in equity values and the strong performance by property. Institutions were likely to review their strategy at the end of the summer and a lot would depend on the general economic outlook and particularly the prospects of recovery in the US. They would also be looking at the prospects of a resumption of inward investment which has been such an important factor in the property market.
Caroline O'Shea, head of property at AIB Investment Managers, said most of the managed pension funds were unlikely to have significant funds for new property investments unless the equity market recovered in the near term. Life assurance companies with a big inflow of funds should, however, continue to play the property market, she said.
Bill Nowlan, property consultant and former property investment director with Irish Life, said institutions buying properties to meet demand form property bond investors tended to be inundated with money approaching the top to the market and were then faced with surrenders once the market peaked. This created an element of volatility in the demand for investment property.
On the other hand, many of the life assurance companies now had minimum surrender periods preventing encashment.
Adrian Trueick says interest rates were a key factor for the private market. If, as predicted, rates were cut a further 0.25 per cent, we were likely to see a significant flow of private money into property. At a base lending rate of 4.25 per cent, the average IPD equivalent yield of 6.05 per cent would again bring property investment close to self financing.
Ian French, head of investments at Hamiliton Osborne King, describes as "an interesting development" Irish Life's decision off part of newly acquired properties to private investors in a unit trust. The formula was used recently by the institution when it paid £103 million (€130.78m) for a 75 per cent stake in St Stephen's Green Shopping Centre and subsequently offered £30m (€38.09m) to individual investors. "This enables the small investor to get exposure to a large prestige investment which would otherwise be beyond his or her reach," he says.
