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Property v Equities: which scores better?

{con_title} September 10 2003

Asking a property fund manager whether equities offer greater value than property is like asking a Liverpool supporter whether Manchester United is going to snag the FA cup this year. In both cases, the answer is likely to depend more on selective reasoning than objective analysis.

Over the last two to three years, equity market falls and increased volatility has pushed institutional investors towards fixed income products, but as the first green shoots of economic recovery emerge from the US and bullish economists forecast interest rates rises, property fund managers are once more giving the hard sell on why property is a safer bet than equities.

The arguments are simple. Property in the Republic has outperformed every other asset class over the last 10 years, yields are around six percent compared to equity dividend payouts of around 3 per cent, and there is little or no volatility.

When the stock market crash decimated portfolio values, property’s stability and its relative appreciation against equities pushed its weighting to between 7 and 8 per cent compared to the 5 per cent average three years ago.

Property fund managers are anxious to see this level increased but claim investment consultants, whose advice helps determine fund allocations, are unreasonably biased towards equities.

Mr Niall Gaffney, an investment manager with Irish Pension Fund Property Unit Trust (IPFPUT), the largest property fund in the Republic with a portfolio valued at over €650 million, argues “investment consultants don’t properly appreciate property as an asset class because it doesn’t fit into capital rating models”. He said: “When actuaries can’t tick all those boxes, consultants assign property a minimum weighting, but the fact is that over the last number years, property has yielded double digit returns and it’s one of the most reliable investments you can make. It guarantees you an income for 15 to 20 years and that’s something equities can’t do”.

IPFPUT is concerned that despite forecast returns of around 10 percent on its fund by the end of this year, consultants dominating the pension market are continuing to “push people towards equities and bonds”. Mr Gaffney added that in a period of low capital growth, property’s weighting in portfolios could be increased from 8 per cent to almost 15 per cent, which would give property almost the same prominence as bonds.

Unsurprisingly, IPFPUT’s arguments cut little ice with the influential consultancy firm Mercer, where property is rated as an alternative asset due to its high transaction costs, illiquidity and poor visibility. Mr Tom Murphy, head of investment consulting at Mercer, engages in this age-old debate with a tone of weary familiarity.

He said: “I think some property fund managers don’t realize that Mercer is not anti-property, we just don’t view it as a mainstay asset like equities and bonds, chiefly because the transaction costs make property illiquid and there is no short-term visibility. Unlike equities and bonds, it’s only once you go to sell a property that you know its exact worth”.

Pointing out that disposal costs on a property fund can soar as high as 15 percent, Mr Murphy argues that fund managers can ill afford to carry such a hit when pension portfolios are still recovering from the crash in equities. And he added that IPFPUTs bullish stance on property contrasts with fund managers around the country who are talking down yield growth. He said: “All the property managers I’ve spoken to believe there is little growth left in the Irish market and that yields are unlikely to go outside the three to five per cent range over the next few years.”

Independent property consultant, Mr Bill Nowlan agrees that returns on European and UK property are likely to be more exciting in the short-term than those on the Irish property. He said: “I think it’s pretty clear that the Irish property market has become overheated. We used to have a supply problem and that’s no longer the case.”

Investment portfolio managers don’t have to look far for confirmation of this view. Royal Liver is selling off part of its property assets while Royal Sun & Alliance recently announced it was exiting the Irish property market altogether.

It’s a move Standard Life made three years ago when its Irish property fund, worth over €100 million, was 100 per cent converted to UK property. But Mr Gaffney claims IPFPUT’s fund offers guaranteed high returns because of its prime real estate locations and quality tenants. However, given that this debate is as old as the markets themselves, Mr Gaffney is unlikely to make any headway with equity-biased consultants in the short-term. A safer bet would be to back Manchester United for this year’s FA Cup.