Could it be the REIT time to invest in property?
REITs are bought and sold, like shares, via a stockbroker, with dividend income subject to tax at your marginal rate. Any gains made on a REIT will be subject to capital gains tax at 33 per cent.
“Buying a REIT will be exactly the same as buying shares in Ryanair or Diageo,” says Bill Nowlan, managing partner of property asset managers WK Nowlan Associates, adding that just as shareholders own a public company, so too will investors in a REIT own the properties it manages.
What are the other beneficial attributes of REITs?
REITs are often used as a tool to diversify a portfolio, as they tend to have a low correlation with other asset classes, and some would see them as a defensive investment. Opting to invest in a REIT, rather than an individual property, also helps diversify an investment in property, as a REIT will typically hold investments in a number of properties.
In addition, REITs can offer property investors some much needed liquidity. Unlike property funds, where encashment penalties might apply should you wish to cash in your investment early, shares in REITs can be bought or sold on stock exchanges. However, the smaller the REIT the lower the liquidity might be.
As they are publicly quoted, REITs also offer investors transparency on how their money is invested.
As with other investment products, when evaluating REITs investors should consider the management team behind the REIT, and its external funding source.
“It depends on the quality of the property and the quality of the management. You will be looking at the location, the bricks and mortar, and the leases,” says Nowlan.
Globally, REITs are performing strongly at present. For example, the MSCI US REIT, which represents approximately 85 per cent of the US REIT universe, is up an average of 19 per cent per year for the past three years when dividends are included, while the Dow Jones Equity All REIT Index, which tracks 136 REITs, delivered a total return of nearly 20 per cent for 2012, more than double the 7.5 per cent gains in 2011 and the fourth consecutive year that REITs outperformed the Standard Poor’s 500 stock index.
How will an Irish REIT work?
EPRA, the European Public Real Estate Association, has put the potential for an Irish REIT market at about €5 billion, and experts have suggested that a minimum market capitalisation of about €250 million per REIT will be needed.
However, the difficulty in getting an Irish REIT off the ground remains the lack of property managers of sufficient scale. In the UK, companies such as British Land transferred to a REIT structure once legislation was introduced in 2007, but the collapse of the Irish property market has also meant the collapse of many property companies.
As a result, there is only a handful – at best – of property businesses that could put together a portfolio of sufficient scale to sell as a REIT.
Nama is one candidate, with other contenders including IPUT, which has a portfolio of 56 primarily freehold properties in Dublin and Cork.
So far, Nama has been pursuing another option for selling off some of its properties via a qualifying investor fund or QIF. However, this structure is targeted at sophisticated investors, and opting for a REIT might broaden the range of investors it can target.