Reits ready-to-go in UK but a long way off in Ireland

InvestmentVehicles: The introduction of Reits - real estate investment trusts - in the UK next January will be a landmark event, but a Reits regime for the Irish market is not on the cards, writes Gretchen Friemann

Green Property, which went private four years ago, will consider re-listing on the Irish stock exchange if the Government introduces tax-exempt property investment funds similar to those due to be introduced into the UK next January.

The company chairman, Stephen Vernon, who owns a 32 per cent stake in the business following the management buy-out, said it was only under these conditions that Green would "consider going public again".

However, many industry commentators here believe it could be years before Reits (real estate investment trusts) are available in Ireland.

In the UK, the introduction of these tax-efficient vehicles is expected to be a landmark event for the property industry with many predicting a significant increase in the number of listed real estate companies.

Germany, too, is expected to offer a Reit regime some time next year while property security funds are already available in the Netherlands, France and other central and southern European countries.

So, is Ireland missing out on a potential multi-billion euro industry and will the establishment of Reits in the UK, Germany and France, Europe's largest property markets, draw out yet more Irish money from the domestic economy?

According to Vernon, the chief reason Green Property chose to delist from the ISEQ in 2002 was because the company traded at a massive discount "some 40 per cent" to its net asset value (NAV).

Publicly quoted property companies in the UK and Ireland have long-suffered this problem, partly because of the illiquidity and lack of transparency in the market, but also because they are hit by a double taxation.

Currently, behemoths such as British Land and Hammerson are taxed on the income they earn, as well as that which they distribute to shareholders.

As a result, dividends from these companies are comparatively low. Reits would change all of this by excluding listed property companies from paying corporation tax in return for distributing 90 per cent of their profits to shareholders, who are then taxed according to their personal level.

This greater tax efficiency has led to increased transparency and liquidity in other established Reit markets, such as the US where the industry is worth €283 billion ($360 billion) compared to €1.57 billion ($2 billion) in 1992.

Apart from boosting the balance sheets of large property companies, Vernon argues that a Reit-type regime in Ireland would also open up a sector that is largely dominated by a select group of high-rollers. "Unless you have a substantial six-figure sum to invest, commercial property is an asset class that is enjoyed by and large by a wealthy few. Reits would offer the small investor an easy and low-cost way to invest in this market," he said.

At the moment, unit trusts are the only option most people have of accessing Ireland's gravity-defying commercial property market and they require minimum investment sums. While the blue-chip property acquisitions of the private banking and wealth management syndicates grab the media attention, purchasing a stake in such assets is simply beyond the means of most of the population.

As one property source acknowledged: "The big property players, like Quinlan Private or even Bank of Ireland Private Banking, generally don't want to know you unless you have a minimum of €1 million to play with."

Reits, on the other hand, would enable teenagers through to pensioners and institutions to indirectly invest in a portfolio like Green Property, which owns the Blanchardstown Town Centre, without shelling out massive sums. And the vehicle's liquidity would mean every investor has an open exit strategy.

Another advantage of Reits, according to Vernon, is their potential to become sector-specific. In the US a number of the property investment trusts focus exclusively on sectors, such as hotels, offices or buy-to-let apartments. Vernon points out that the introduction of Reit-type structures in Ireland would allow new companies to be formed, either as private businesses or as property portfolios, owned by retailers, transport companies or other groups.

There has already been much excitement in the UK over the possibility of Tesco placing its €17.5 billion (£12 billion) freehold property portfolio into a Reit, as a way of enhancing shareholder returns. And analysts have also speculated that by setting up a Reit - companies such as Tesco, Kingfisher and Sainsburys have all been mooted as possible recruits to the new tax regime - a retailer can retain control of its properties while raising money.

But regardless of how these vehicles evolve, one thing is clear, the UK's property industry is set for a radical shake-up. A recent report by the rating agency Standard and Poor estimated that the introduction of Reit regimes in the UK and Germany could garner more than €78.6 billion ($100 billion) in additional market capital for these economies over the next five years alone.

For the Irish investor then, accessing two of Europe's largest property markets will become far easier through Reits and, since more than €5 billion was spent on overseas property last year, some industry experts predict the new vehicles in the UK and Germany will prove an even greater cash drain on our domestic economy. So, given the largely positive economic impact of Reits, why does their introduction in Ireland remain a distant prospect?

According to Vernon, the problem is the scale and depth of the Irish market. He argues that, in order for Reits to be sustainable, they must be large-scale and predicts that no more than half a dozen such vehicles would be feasible under the current conditions. But he stresses that Ireland's smaller size is no reason to delay the introduction of Reits. "People always ask me whether I would consider taking Green public again and I always give them the same answer, only if it is under a Reit-type regime."

Vernon also ruled out listing Green Property on a UK stock exchange, stressing that the company was "focused on Ireland". However, Vernon's enthusiasm for Reits is isolated. Many industry experts argue that since there are no ISEQ-listed property companies, there is little point in introducing Reit-type structures.

One fund manager, who preferred to speak anonymously, said: "There is absolutely no urgency or even talk about this subject at Government level as far as I know and the reason is that, unlike the UK or Germany, we don't have any Reit candidates. In the UK the big property companies, like British Land, actively lobbied for Reits. We don't have that pressure here so I think it's highly unlikely the Government will make any moves on this in the foreseeable future."

Other industry sources claimed that those companies large enough to float as a Reit, such as Treasury Holdings or Ballymore Properties, would dislike the vehicle's transparency and the forced distribution of profit earnings.

However, Niall Gaffney, investments director with the Irish Property Unit Trust (IPUT), supports Vernon's view that a Reit regime in Ireland would offer greater accessibility and tax efficiency to a sector that is dominated by a small number of wealthy individuals. And he claims that IPUT, which manages an ungeared single portfolio valued at over €900 million, already operates as a "virtual mirror" image of the proposed Reit legislation in the UK because the fund distributes the bulk of its income to its investors on a quarterly basis.

"We are the closest thing to a Reit in Ireland. We don't pay any capital gains tax and our investors look after their own tax liabilities. That means our investment decisions are based on property fundamentals rather than tax considerations."

At the moment IPUT is only accessible to tax exempt pension funds but under Reit legislation the fund would be open to retail investors. "If we had two or three companies operating in this manner then it would really improve the scale of the property market in Ireland. Look at the way Reits are performing in other countries. Investment levels in property have significantly increased because the asset has become liquid and transparent."