Green Property announced the flotation of the first Irish REIT (real estate investment trust) last week. This is great news for the Irish property industry as it marks the continuing re-professionalisation of the commercial property sector following its invasion (and destruction) during the era of loose money from Anglo Bank and so on.
The Green REIT will start off without any actual property – which may be a disadvantage as it does not allow investors to examine the detail of an actual portfolio and the proposed management's actual track record. But then in Ireland we have a "chicken and egg" situation because there are effectively no portfolios dwhich are available here for REITs, and it is extremely difficult to actually assemble a portfolio without having a chunk of money.
To date, Nama and IPUT are the only companies with an existing portfolio suitable for a REIT – and they don’t seem to be rushing into this space. Green is taking a sensible course in the circumstances.
As a proponent of REITS for many years, and as chairman of the REITS Forum (the voluntary group that advocated for the new legislation, at irishreits.ie) I welcome Green’s initiative which uses the new legislation enacted as part of the 2013 budget process.
The stated intention of the Green REIT is to mostly own commercial real estate in Dublin and this should be very attractive to both Irish overseas investors who can expect a dividend yield of over 6 per cent and participation in the anticipated recovery of Irish capital values. Green is projecting an overall capital and income return of 10 per cent to 15 per cent a year, when fully invested.
So what is a REIT? It is a normal limited company that gets a quote for its shares on a stock market. The REIT owns rental property and distributes 85 per cent of its net income to its shareholders but those shareholders only get taxed in the same way as if they owned the property directly (the "T" in REIT refers to the start of REIT in the USA over 40 years ago when they were actual trusts and not companies).
Before REITs, property companies and those owning properties through limited companies were hugely disadvantaged in that they paid tax twice on rental income.
The result of this was that there are no quoted property companies in Ireland and much property was owned directly by individuals which involved huge risks.
REITs are a way of enabling Joe Public to invest in professionally managed Irish property with limited liability just as if they were big guys or pension funds.
REITs are quite unlike the infamous or ubiquitous syndication vehicles that became so popular in Ireland in the noughties as a means of investing in property but which have lost Irish private investors so much of their wealth.
They are safer because REITs must own multiple properties to spread risk, cannot borrow more than 50 per cent of the value of the property, must be managed by competent professional property asset managers, are supervised by a stock exchange and are permitted to only do limited development.
They also must publish annual accounts, giving full disclosure. Had REITs been in existence during the noughties it is arguable that the banking crises might be a lot smaller and the fall in values a lot lower.
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.