Irish Life to invest €300m in office revamps as it ups property outlook

● ILIM upgraded its investment outlook in Europe and Ireland despite concerns around the demand for offices, writes Sean Pollock

Irish Life Investment Managers (ILIM) expects to spend around €300m redeveloping Irish commercial real estate as it upgrades its outlook on property investments.

ILIM expects investment returns in Irish property to grow by 4.5pc a year on average over the next 10 years, as per a recently published yearly update to clients and investors, up from 4pc last year. It also upgraded its outlook for European property to 5.5pc, up from 4.5pc.

The upgrade on Irish and European property comes despite warnings about the outlook for the sector.

Commercial real estate, which includes properties such as offices, is currently adjusting to higher interest rates, rising vacancy levels and a collapse in demand.

The low volume of Irish office transactions has also led to nervousness around valuations, which are down to their lowest level for over a decade.

Last month, the Central Bank warned about the risks of a disorderly price correction in Ireland’s €50bn commercial real estate market, highlighting it as a critical risk for the financial sector.

Bank of Ireland also said it expects a further 15pc decline in the value of commercial property assets over the next two years.

Darragh O’Dowd, head of multi-asset solutions at ILIM, said the company’s upgrade for property was due to more attractive yields. This was particularly the case in Europe.

O’Dowd said that the stabilisation – and potential fall – of interest rates could also support valuations moving forward. Repricing had also mostly happened in the European market.

“All of that has created an attractive entry point. Rental yields are close to 5.5pc on average.

“That is what is underpinning the attractive returns we have on European core real estate assets. The interest rate cuts will be supportive of valuations further.”

O’Dowd said repricing had yet to come to the same degree in Ireland.

ILIM said it had invested around €300m over the last five years in redeveloping Irish commercial real estate. It expects to spend a similar amount in the coming five years.

O’Dowd said its capex strategy in Ireland was focused on increasing the sustainability credentials of existing stock. It has several new projects, including The Frame off Baggot Street..

He added that investments would ensure continued attractiveness to both occupiers and investors.

“We know when we do that, we will start to see some of that rental income increase and deliver returns going forward,” he said.

Despite the more positive outlook on Irish property, two of ILIM’s property funds are down for the year.

ILIM’s larger Exempt Property Fund, valued at €1.3bn, was down 12pc on the year.

The smaller €340.8m Irish Property Fund was down just over 9pc in the year to the end of February. Both funds are mostly made up of office developments.

O’Dowd said the best-performing part of the property market had been the industrial sector, driven by low vacancy rates, demand from e-commerce, and corporate re-shoring.

He added that ILIM was looking for opportunities to deploy more capital in the space.