Could it be the REIT time to invest in property?

The collapse in values means that property is a potentially attractive option for investors, particularly on the commercial side

For some investors, the mere mention of a real estate investment is enough to set off a panic attack. For others, however, the collapse in values over the past five or six years means that property is now looking potentially attractive once more, particularly on the commercial side.

So if you’re looking to satisfy your appetite for property – be it for a shopping centre, office block or hospital – a new structure introduced in the Finance Act might be for you. But what are real estate investment trusts (REITs), how do they work and how big might the Irish market actually be?

What is a REIT?

In simple terms, REITs provide a similar structure for investment in real estate as funds provide for investment in shares. REITs are quoted companies that own or operate property, such as office blocks and shopping centres, and are now the primary way of listing commercial property around the globe. They enable investors to indirectly access the residential and commercial property markets, by buying shares in property companies, which are either listed on a stock exchange or sold privately. These companies invest in a variety of types of property, which may include shopping centres, office buildings, apartments, warehouses and hotels.

Are they a completely new invention?

While the Finance Act may introduce REITs into Ireland for the first time later this year, they can actually be traced back to the 1960s in the US, when the government introduced the products to enable the investing public to benefit from investments in large-scale real estate enterprises.

In 2001, REITs were included in the Standard & Poor’s 500 Index, and since then the market has grown substantially. REITs have been introduced in more than 20 other countries worldwide, including Australia, France and Japan, while in January 2007 the UK introduced its own REIT product. Today, the global REIT market is valued at about €500 billion, with the typical REIT having a market capitalisation of about €1 billion.

How do they compare with bonds and equities?

A REIT sits somewhere between a high- growth stock and a bond. In a recent commentary, Barclays described REITs as being like “a total return vehicle”, in that they combine both attractive income and solid growth/appreciation potential.

REITs typically offer above-average dividend growth as they have to distribute a certain proportion of the rental income they receive – 85 per cent in the case of Irish REITs. In 2012, for example, US REITs had an average dividend yield of about 3 per cent, compared with 1.7 per cent on 10-year Treasury bonds and an average 2.2 per cent for the SP 500. In the UK, dividend yields are running at about 3.5-4 per cent on REITs.

“A REIT should be a dividend machine,” says Alan Carter, property analyst with Investec in London, with rents, and therefore dividends, growing in line with inflation.

Investors can also benefit from a surge in capital values which will push the price of units in a REIT upwards, while the structure also offers an opportunity for retail investors to access types of property such as shopping centres and office blocks, that may previously have been out of their reach.