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. 

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