It looks like perfect timing for REITs to enter Irish market
Published 01/12/2013 | 14:30
AS we approach the end of 2013 it seems hard to believe that only 12 months ago, Ireland didn't have REIT legislation.
Having been formally announced in Budget 2012, the Government introduced Ireland's first Real Estate Investment Trust (REIT) enabling legislation in this year's Finance Act in April.
It was widely believed that it would be some time before Ireland's first REIT emerged but only three months later, the country's first REIT (Green REIT) indicated its intention to list on the Irish stock exchange.
The promoters of this REIT and their advisers went on a fundraising trip where they raised over €310m during the summer.
The fundraising was remarkably successful considering the promoters were launching what was effectively a blind fund for commercial real estate in a jurisdiction that was only starting to emerge from one of the worst economic and property market crashes ever experienced.
A second Irish REIT vehicle (Hibernia REIT) has this week indicated an intention to float on the Irish stock exchange, having undertaken fundraising over recent months.
So what exactly are REITs, how have they fared in other jurisdictions and what are the prospects for such vehicles in the Irish market over the coming years?
REITs are globally recognised publicly listed real estate companies that invest in property assets. They are low risk, liquid investment vehicles that give exposure to real estate to investors who might not want to or be able to invest directly.
REITs are essentially listed companies and their shares can be bought and sold in the same way as shares in any other company. REITs now exist in over 30 countries worldwide and are accepted as a mainstream investment sector.
For many years now, there has been significant lobbying of the Irish Government to introduce these vehicles on the basis that having such tax efficient vehicles in place would entice increased volumes of international capital to invest in Irish real estate and would add a layer of professionalism to property investment.
The timing of the establishment of REITs in Ireland appears to have been perfect on the basis that it is coinciding with the beginning of a recovery in the Irish economy and in turn the commercial real estate market as opposed to when REITs were first introduced in the UK in January 2007, immediately prior to a severe property market downturn.
Just as was the case in Ireland, REITs were introduced in the UK following significant lobbying over a 10-year period urging the UK government to introduce them. The rationale for introducing REITs in the UK was to create a level playing field and ensure that investors in listed property companies were taxed in the same manner as investors in direct real estate.
REITs had existed in other jurisdictions such as the US, France and Germany and there was a fear that global flows of investment capital would bypass countries that didn't have tax efficient REIT structures.
In the UK, there is a general acceptance that REIT legislation enabled an increased proportion of international investors to invest in the commercial real estate that might not otherwise have occurred and there is no doubt but that this will also be the case with Irish REITs. There is already evidence of hedge fund and trader investors in the Irish REIT vehicles that heretofore have not invested in Irish commercial real estate, either directly or indirectly.
Although there is a lot of Irish commercial property to be sold over the coming decade as financial institutions continue deleveraging, many larger investors have no desire to buy direct real estate.
They don't have the local market knowledge or manpower on the ground to assemble and manage commercial property portfolios but will be quite happy to gain exposure to the Irish economy and improving CRE market indirectly through the form of a well-managed REIT.
Regardless of the quality of property assets purchased by the REIT, which is obviously the main driver of returns for investors, the experience of the promoter is obviously very significant.
The fact that domestic economic conditions are showing signs of improvement, coupled with an improving commercial real estate market will also have been important in encouraging investors to invest in these Irish REIT vehicles.
The emergence of rental and capital growth in key occupier markets such as the Dublin office market will be hugely significant. I believe that the need to provide detailed statistical market information will increase further as institutional investors increase their exposure to the Irish CRE market via REITs and other funds over the next few years.
Over the course of the next 12 months, we may see a small number of existing Irish vehicles converting to REIT status.
We could also see some new Irish REITs being established. However, the size of the Irish market will obviously limit the total number of REIT vehicles that will be established in Ireland.
We could also see more specialised REIT vehicles emerging that focus on one specific market sector such as student housing or healthcare as opposed to more general funds.
The Green REIT is now 58 per cent invested having acquired a portfolio of 12 assets over recent months. Ten of the assets formed part of Project Arc – a mixed-use portfolio of properties that was brought to the market in the autumn by Danske Bank while the REIT also purchased two other properties off-market. To date, the REIT has invested €178.3m in Irish assets and is expected to complete other transactions over the coming months.
The Hibernia REIT have raised a fund of some €350m and intend to focus on acquiring institutional quality assets over the course of the next few months.
With several assets, portfolios of assets and loan sales expected to be formally released for sale during 2014, there will certainly be no shortage of assets for these vehicles to target.
However, as well as competing directly with one another, these REITs will be competing with a range of private and well-respected international funds and institutional investors who are also targeting Irish property assets at this point in the cycle.
Marie Hunt is Executive Director at Savills