Outlook for Irish Commercial Property Fund - November 2023

Fund Manager Outlook

The Aviva Irish Commercial Property Fund continues to perform well – it is the best performing Irish property unit linked fund over a one-, three-, five- and 10-year period. The Fund returned -3.75% for the 12 months to the end of September 20231. The properties continue to be valued on a monthly basis, by independent valuers. Income returns have proven to be resilient, supporting total returns. Our rent collection rate is running at 99.5% year-to-date. The income yield was 5.6% at the end of September and the weighted average unexpired lease term was 6.7 years.

The Fund is underweight in the office sector, and this has contributed to the relative outperformance. While vacancy in the overall office market is increasing, we have successfully completed some positive lettings in the past number of months with some more underway. Lettings are progressing at 18 Lower Leeson Street, 7 Grand Canal and at 24 Suffolk Street, Dublin 2. At Blackrock Village Centre, new retail and office lettings are also taking place. A lease for a floor of office space above the retail mall was signed in early September to Irish-owned asset manager, Dunport Capital.

Redevelopment works on 57 South William Street and 1 Coppinger Row reached practical completion in mid-June, increasing lettable space at the site. A lease for the restaurant has concluded and separately lease terms for the entire of 57 South William Street have been agreed. This gave rise to an increase in the capital value of the property of over 17% in the first half of 2023. Further redevelopment projects are underway and will continue to drive value for the Fund.

There are a number of strategic disposals ongoing which are progressing well, including the sale of the Grafton Port Collection which comprises 44-47 Nassau Street & 4/5 Grafton Street. These sales are driven by our desire to remain underweight in the office sector, ESG considerations and whether there is any remaining potential for value-add initiatives therein.

Outlook

Negative media coverage in recent weeks regarding the current interest rate environment and its impact on the commercial property market has given rise to a significant increase in redemption requests from the Fund, which in turn has led to the need to impose a moratorium.

Over the past 15 months, the ECB has introduced several interest rate hikes in an effort to curb inflation. The ECB has signalled that the latest rate hike could be the final increase. While property yields are predicted to trend weaker over the coming months, based on valuers’ sentiment, which will impact capital values, I am confident that by mid-2024 we should see stabilisation in yields. Resilient income and active asset management will continue to support performance and can help offset the downward pressure on yield shifts and related capital returns. We continue to allocate a part of our portfolio to ‘value add’ where we undertake strategic asset management initiatives to improve the asset value and endeavour to alleviate the current negative market movements. Property is a long-term investment. Property performance is uncorrelated with equities and is therefore an important asset class in a diversified portfolio.

1 Source: : Financial Express 30 September 2023, net of 0.75% Annual Management Charge

Suzie Nolan,
Head of Property
Aviva Life & Pensions Ireland DAC

Warnings

Warning: If you invest in this fund you may lose some or all of the money you invest.
Warning: Past performance is not a reliable guide to future performance.
Warning: The value of your investment may go down as well as up.

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