Pension funds hit the acquisition trail

Two major pension property funds have abandoned last year's wait and see strategy, and are looking for new investments. Gretchen Friemann reports.

Competition is set to increase in the commercial property sector this year with two of the largest pension property funds committing new cash for acquisitions following a robust set of annual returns and a series of upbeat forecasts for sustained economic growth.

Irish Life and Hibernian Life have both said they are abandoning last year's "wait and see" strategy and are now actively looking for "appropriate acquisitions" in the belief that the prevailing low inflation and low short-term interest rates have created ideal conditions for purchasing property.

As the two funds between the institutions total over €1 billion, with Irish Life's Irish pension property fund worth €600 million and Hibernia Life's fund valued at €500 million, competition for quality buys, such as city centre retail and office blocks, is likely to intensify throughout the year.

The renewed optimism comes as most institutional funds, buoyed by the surge in rental values on retail property and declining office vacancy rates, post double-digit annual returns for the end of 2003.

According to the latest figures released by Mercer Investment Consulting, the average unitised pension property fund rose by 15.7 per cent at the end of last year, an 8.2 per cent increase over the average performance for the last three years.

However these high averages reflect a price restructuring in the Friends First and Canada Life funds where the increases were 31.1 per cent and 28.2 per cent respectively.

Earlier this month, CB Richard Ellis Gunne's head of research, Ms Marie Hunt, claimed the office sector hit a trough in 2003 and forecast a "gradual recovery . . . on the back of improving global and domestic economic conditions".

The emerging growth trend has convinced Irish Life and Hibernian Life, who were both content to sit on the sidelines for most of last year, to begin offloading excess cash and bid against the private equity interests that now dominate the market.

Growing cash reserves is also why the €9.5 billion National Pension Reserve Fund (NPRF) will pump 6 per cent of the fund - or €600 million on current valuations - in any one year into retail, office and industrial properties, which is expected to further boost market liquidity.

The change in the institutions' strategy comes as most financial experts predict another bullish year for global equities which will automatically dilute some of the over-weight property holdings most pension funds have built up after three years of one of the worst bear markets on record.

However, Mr Hugh Linehan, head of property investments at HIM, claims any gains on equities will have to be locked in early to offset increasing concerns in the market of another stockmarket bubble and argues that any weakening in property weighting will be marginal, as investors shirk persistently low yields on bonds and deposits.

He said: "Equities are probably going to outperform property this year, but property looks like it will do better than either bonds or deposits, neither of which offer much value to investors at the moment."

His comments are echoed by Ms Caroline O'Shea, head of property at Allied Irish Banks' Investment Managers (AIBIM), who explained the bank will not be committing new cash this year to increase the weighting in its €326 million property fund.

"We won't be buying property to increase our weightings at this point in time although weightings may increase because of the change in value of other assets," she said. "If our view of equities is correct, then the weighting of property will gradually reduce over the year. The recovery in the US economy, the apparent recovery in Europe and the relatively low level of inflation and short-term interest rates all create an environment where equities tend to perform very well."

However, Mr Gus MacAmhlaigh, chief executive of the Irish Pension Fund Property Unit Trust (IPFPUT), which manages €649 million and ranks as the largest pension property fund in the state, points out "equities have a long way to go before they regain the values seen at the end of the 1990s and beginning of 2000".

He claims IPFPUT, which acquired €47 million worth of new property last year, is well poised to increase its funds by another €25m to €50m in the first half of the year by attracting more unit holders.

But he warns the penal rate of stamp duty has made the organisation's task of convincing fund managers to buy into property "that much harder".

He said: "Effectively, the Government has added 50 per cent to the cost of holding property in pension funds and asset managers don't like that."

Ms O'Shea also claims the high transactions costs explain the recent lack of activity in the property market by institutional investors.

She points out the cost of buying and selling property is now 13.4 per cent, a level which means any possible gains from a disposal or acquisition are likely to be decimated by hefty transaction fees.

She said: "Institutional investors are being hamstrung by these charges. UK institutions are far more active in their market than Irish funds are here and that's not because we're not interested in buying or selling property but because the high transaction costs limit turnover."