F&C and Setanta vehicles hit by change in sentiment

Irish property funds struggled in the first quarter of 2008, in a further sign that the Irish property market is starting to come under significant pressure.

Institutional and pension funds produced a negative total return for the first time in six years, as funds started to experience redemptions.

The news comes on the back of bearish research on the Irish retail and office sectors and worries in the banking sector about Irish lenders, which are heavily exposed to Irish and UK commercial property.

Much of Ireland’s private wealth is tied up in the property market after an extended boom that began in the mid-1990s and a downturn could have a detrimental effect on the country’s consumer economy.

Funds worth €4.5bn (£3.6bn) produced an average total return for the first quarter of 2008 of -5.6%, according to investment consultant Mercer. It is the first time the sector has produced a negative return since the first quarter of 2002.

Mercer said the performance was affected by the fact that two funds had changed from higher-offer price to lower-bid price, which caused them to produce negative returns.

One fund managed by F&C Investments produced a total return of -12%.

They switched to bid pricing after experiencing periods of net outflows of cash. In UK funds, the switch was the first sign of the heavy outflows and sharp drop in values that occurred in the second half of 2007.

But Graham Brooks, director at F&C, said he did not expect this pattern to be repeated in the domestic Irish market. ‘Redemptions are now static and we don’t expect many more,’ he said. ‘Because the costs of selling property in Ireland are so high the spread between the bid and offer price is about 12%.

‘That’s a very high exit cost and it is unlikely people will take their money out unless they have a very bleak view on the Irish market.’

He said F&C anticipated returns of 5%-6% for the year, driven by income returns, and did not expect a sharp price correction. ‘There is not a lot of leverage on Irish property like there is in the UK, as it is very tightly held. All the leverage in Ireland is against UK property.’

Anthony Corrigan, an investment consultant at Mercer, said people were taking their money out of funds to diversify into pan-European vehicles, and there were worries about the domestic market.

‘This is a trend we would expect to continue,’ he said.

Research released this week by CB Richard Ellis showed the Dublin office investment market slowed in the first quarter because of a lack of finance available to fund deals. Prime yields moved out to 4%.

Figures from the Society of Chartered Surveyors and Investment Property Databank showed that total returns dropped from 3.3% to 1% in the last quarter of 2007.