Wednesday, 17 April 2013

Aviva's predictions about Irish commercial property

I participated in an Aviva webinar earlier this week about "The Case for Irish Commercial Real Estate" as an investment.  One of the quotable quotes from the end was

"We believe the prospects for the Irish real estate market for the five-year period from the start of 2013 look attractive; indeed we are forecasting an overall annualised total return of over 12% pa, supported by robust income returns and capital growth.  In short, although risks remain – including economic uncertainty in the euro zone, ongoing weakness in the banking sector and a lack of clarity from NAMA – we believe that now is an opportune time to reappraise the merits of Irish commercial real estate as part of a diversified investment portfolio."
With respect to the clever people at Aviva, I'm very sceptical about forecasts of growth rates for an asset class too far into the future.  Although such forecasts are presumably based on sound scientific research and methodology, there are far too many utterly unpredictable variables than affect the movements of any real asset class, property included, to enable anyone to come up with a reliable figure of "over 12% per annum". 

There's also a risk that, taken out of context, people could base important financial decisions around an expectation of "over 12% growth" per year for the next 5 years.  In fairness to Aviva, the webinar offering this prediction was for investment professionals only, so I'd hope that none of the participants would give their clients this expectation. 

On the positive side, I have a certain level of admiration for an investment analyst who is willing to come off the fence and make such a specific growth forecast, in this era when electronic diaries make it so easy to set up a reminder for 5 years' time to check how the forecast turned out. 

Despite all my misgivings, I do agree with Aviva on the important point - that the fundamentals for Irish Commercial Property would suggest that 2013 is indeed a good time to consider investing in this asset class again.  I'm just too long in the tooth to start making predictions about future growth rates. 

Saturday, 9 March 2013

Enda's million-euro pension in just two years

I generally steer clear of commenting on politicians on the grounds that I don't believe I could do better myself, so therefore I won't criticise someone else's attempts.  I don't have any connection to any political party either.  But I couldn't resist crunching the numbers from this article from The published online today.

After two years in Government, ministers receive an entitlement to a pension.  The current Government is two years in office today, so that triggers this entitlement. 

According to the article, Enda Kenny's entitlement is a pension of €21,466 per year if he was to retire today.  Let's be clear - that €21,466 is an entitlement that has accrued solely from his two years in Government.  It's in addition to any other pensions he has accrued over the rest of his career. 

For those of you who don't know - Public Service (including Government) pensions are not pre-funded - they're paid out of current Exchequer resources.  In other words, the taxes that you and I pay today go towards paying the pensions of retired Public Servants.  This is a different system to the Private Sector, where pension contributions are used over a person's career to build up a fund from which their pension is paid when they retire. 

But how much would a Private Sector individual need to put into a pension fund in order to provide a pension of €21,466 per year for life?  Mr Kenny is 61 years old and his wife Fionnuala is 6 years younger.  Public service pensions provide for increases in payment and a widow's pension of 50% to be paid for the rest of the spouse's life in the event that the pensioner dies before their spouse. 

A Private Sector individual would need to accumulate a fund of over €989,000 in oder to provide them with a pension of €21,466 per year for life on the same terms, using current annuity rates. 

Let me repeat - that entitlement has been accrued solely in the last two years.  Mr Kenny's total pension when he retires will be a multiple of this, adding in the pensions from the rest of his career. 

Not bad for two years' work!