REITs are the new kid in town - so tread carefully
Published 06/07/2014 | 00:00
It's almost a year since the ordinary man-on-the-street has been able to rub shoulders with sophisticated investors and invest in property through the stock market. The first Irish real estate investment trust (REIT) launched on the Irish Stock Exchange last July. Since then, another two REITs - Hibernia REIT and Irish Residential Properties REIT - have also floated here.
REITs are property investment companies which are listed on the stock market. Although they are a relatively new investment phenomenon here, Irish REITs have already raised more than €865m from investors.
Earlier this summer, Zurich Life became the first insurer to offer an investment fund which allows people to invest in Irish REITs. Others could follow suit.
Most of those who invest in REITs are institutional investors and specialised international property investors. However, private investors acting on the advice of their stockbroker or financial adviser have also put money into them.
But are REITs a good idea?
For individuals who don't have the money to buy prime commercial property outright, REITs can offer the opportunity to invest in such property. Hibernia REIT and Green REIT invest largely in commercial property. For example, Hibernian REIT has just bought the Observatory Building on Sir John Rogerson's Quay. It also owns New Century House - a prime office building in Dublin's IFSC which is let to Bank of Ireland.
There have however been a number of developments which suggest that the best pickings could be gone from commercial property. Kennedy Wilson, one of the biggest buyers of commercial property in Ireland since the crash, recently signalled that it is starting to move on from the Irish market because pricing is "moving ahead of itself". Although Kennedy Wilson still has commercial property here and plans to do more deals in Ireland, it has now begun to focus on Spain and Italy.
The sale of a number of prime city centre offices for well over their asking place has also sparked fears that the commercial property market is overheating. For example, Irish Life recently bought an office block in the south Dublin docklands for €121m - more than 50pc above its asking price.
It's important to get the full picture on commercial property before deciding whether or not to invest in such a REIT. Industry insiders believe that it is still possible to buy office blocks in prime locations for a good price - as long as you're prepared to invest in the buildings. Some conservative investors - interested in steady returns rather than a quick buck - are also putting their money into Irish commercial property. All the same, if the commercial property market is overheating, it might not be the best time to put money into an REIT which invests in it.
For those who believe there is money to be made renting residential properties, the Irish Residential Properties REIT is the only REIT in this space. This REIT buys apartments in the greater Dublin area - which are let out. You should have a good understanding of the properties this REIT is investing in - as well as the prospects for the residential investment market - before jumping in here.
The rental market in Dublin has been strong over the last year. Apartment rents in Dublin have increased by an average of 10.3pc over the last year, while house rents are up about 7pc, according to the latest figures from the Private Residential Tenancies Board and the Economic and Social Research Institute.
This momentum might not last however. Rents could fall if a glut of properties hit the market - or if the demand for rented accommodation weakens. Furthermore, house price inflation has moved into double digit territory for the first time since the recession - with Dublin apartment prices up almost 20pc over the last year. This could have repercussions for an REIT buying Dublin apartments in the future as the opportunity to pick up bargain apartments in the capital could now be gone.
REITs have a number of advantages over other property investments, according to Stephen Barry, director of the Cork wealth advisers, City Life.
"If you wanted to access property ten years ago, you would have had to either buy one directly or invest in a property fund," said Barry. "The problem with buying one property directly is that there is no diversification, you have to manage the property. With REITs you could be investing in ten buildings, so if something goes wrong with one of them, you're not in trouble. Neither do you have to manage the property."
One of the problems of using a property fund or syndicate as a way to invest in property is that it can be hard to cash in your investment. "During the recent economic downturn, a lot of people tried to get out of property funds but as those funds didn't have much cash, liquidity was a problem," said Barry. "With REITs however, liquidity isn't an issue because you can buy and sell your shares at any time - though you might not get the price you originally paid for them."
Of course, you could run into problems cashing in your investment in Irish REITs should you decide to go through Zurich Life's Fund of REITs. "While REITs are expected to be more liquid than direct property holdings, there may be times when sentiment towards property markets will impact negatively on the price and liquidity of the REITs themselves, and hence the liquidity of this fund," according to Zurich Life's fact sheet on the fund.
Irish REITs have not been around that long - so it is difficult to gauge how successful they could be.
You are also relying on the REIT and its investment manager to make wise property investments - otherwise, you could lose money.
Bear this in mind if you are seriously considering investing in them.
How to play the REIT investment game wisely
Know exactly what you're getting into before you invest in REITs - and choose your REIT well.
Sunday Indo Business