Green Property REIT launch has come at right time
Launch of a real estate investment trust is good news for borrowers, the Government and Nama
But the really important part of the REIT regime is the opening of the Irish commercial property market to long-term equity money from overseas. This has been a huge inhibitor to large-scale development projects because Irish long-term investors, such as life companies and pension funds, were limited to schemes sizes of generally less than €50million for prudential reasons.
Of course this did not stop the banks and others constructing such schemes during the noughties – ignoring such prudential principles – but that is another story and that era is over. The world is awash with equity from sovereign wealth funds and similar money from the likes of oil rich nations and eastern economies looking for a long-term home for their funds.
The yield on bonds is very unattractive and bonds do not give any inflationary protection as does property. Much of that money has gone to property in London, Paris, New York and so on and Ireland has been bypassed because of the absence of liquidity vehicles here enabling portfolio diversity, an easy exit, low transaction costs and regular mark to market valuation.
But why do we need equity funding for property? Worldwide, be it an office block, a shopping centre, or merely a farm, property has been funded mainly by equity finance and not short-term borrowings such as those from a bank.
Short-term borrowing has to be repaid out of taxed income whereas equity does not. Paying back any significant bank borrowing over a short term is impracticable out of the relatively low-income returns from rental property –which is general only in the 6 per cent to 8 per cent range.
It’s fine for high-risk dealers or developers who expect to turn property transactions within the period of the five or so years but for long-term asset holding it’s just not practicable to rely on high short borrowing – as our bank and noughties investors have discovered the hard way.
Hedge funds, such as Kennedy Wilson, that have recently been buying much of the Irish property being sold recently by banks and Nama, will also welcome the opening of the REITs market.
These funds are expecting to exit their acquisitions within a three to seven year timescale. Indeed it would not surprise me if some of these funds decide to join Green and float REITs of their own as a means of exiting Ireland.
The introduction of REITs and the Green announcement is also good news for Nama and the Government as it marks the arrival of long-term overseas equity, it is a conduit to less expensive long-term money and it enables Nama to focus on the long-term repayment of its loans, after Irish values have recovered through the cycle.
This is also good for the taxpayer as Nama might even make a profit if values continue to recover – as they should! I would expect that there will be several more such announcements – such as the one by Green Property – in the not to distant future.
Bill Nowlan is the chairman of the REITs Forum, which advocates REITs.