A new type of fund for investing in Irish property through Dublin Stock Exchange is to be launched in the coming months if it gets Government approval. The unitisation scheme could boost investment in real estate and enable Irish property to be made available to overseas investors.
Bill Nowlan, chairman of the Irish Unitisation Committee (IUC), told a seminar in Dublin last week the IUC believed it had the backing and goodwill of the authorities for what was a workable scheme, one that uses a system of rent charges and gives tax transparency and low dealing costs.
The fund will allow investors to buy into securitised properties in the same way as equities and bonds.
However, a Deptartment of Finance spokesman said premliminary discussions had taken place between 1987 and 1990 but there were no current proposals under examination by the Government. "If such proposals are submitted, they will be eaxmined in the normal course, but the Deptartment would not favour tax aggressive schemes," the spokesman said. Mr Nowlan said the IUC was looking for a suitable Irish property valued at not less than £10 million. The ideal property would be worth between £25 and £50 million. He reminded his audience that the Stock Exchange was now controlled by the Central Bank, which was quite pro-active in encouraging new forms of investment instruments, particularly those which could be sold through companies in the International Financial Services Centre.
Private investors wishing to make a property play in Ireland only have three listed property companies to choose from - Green Property, Dunloe House and McInerney Holidings. These have market capitalisation of about £235 million against a total market capitalisation of £37 billion.
The Financial Times says that if the moves in Ireland are successful, they will create waves in the UK where efforts to obtain Inland Revenue approval for a pooled property vehicle have come to nothing. These type of pooled funds trade through the stock exchanges and are common in Europe. The use also has an exploding market in Real Estate Investment Trusts (REITs). These REITs pay no corporation tax provided that 95 per cent of the net income is passed to investors as dividends. Individual investors are liable for income/ capital gains tax as if they own the property directly themselves. Mr Nowlan says that in Ireland and the UK, ownership of property through a corporate vehicle involves payment of a double incidence of income tax and capital gains tax.
Mr Nowlan says the important point being missed by unitisation critics is that financial institutions and other portfolio investors were fast losing interest in owning property beause it was so different from holding equities or bonds. Property is down to about 5 per cent in the average institutional portfolio - making it a marginal asset class at best. Some were even asking the question: "why bother holding property"?
Indeed, some institutions now hold no direct property as a result of a conscious decision to download this type of investment.
Mr Nowlan said he was concerned to see this trend developing, and to realise that property could cease being a medium of investment for financial institutions and pension funds. He wanted to stop this happening and he believed ways had to be devised to make property as attractive an asset class as equities and bonds.
The structure chosen by the IUC is based on the use of rent charges. "This means," Mr Nowland says "that an investor makes a payment of capital to the original owner of a property and is entitled in return to a share or unit in that property. He is also entitled to a proportion of all rent or other income from that property in relation to a percentage of the net annual income from that property without tax being deducted at source.
"Each rent-charge holder will have his right to charges on the property but be free to deal with his own unit without reference to any other unit holder. The scheme is so structured that if the majority of unit holders decide to dispose of the property they will be able to do so."
The Revenue Commissioners have confirmed in principle a proposal to create a situation where income from rent and capital gains would be taxed in the hand of the individual owner and not by reference to any other owner. Mr Nowlan also said that the discussions with the Revenue to date indicated that the buying or selling of units would be subject only to the ongoing rate of stamp duty for share transfer - one per cent. The valuation of shares or units in a property would be determined by market forces. However, in order to help investors, there would probably be periodic valuations. Sufficient information would be available for shareholders to take a view on the intrinsic value of the entire property.
With the market for unitised property within the structure of the Stock Exchange, Mr Nowlan said indicative prices would be screen-based between stockbrokers and investors. Settlement for property units would be similar to the present arrangements for ordinary shares. This would be a stockbroker-based system and would not involve lawyers any more than the sale of shares currently involves solicitors.
