Loss of three out of four Reits jars with narrative of tax-free riches

Jon Ihle

Unfavourable conditions suggest the end of an era for the commercial property investment vehicle

Kevin Nowlan, CEO of Hibernia Reit which has spent the last six years trading at a discount to its net asset value

June 21 2022 02:30 AM

With Hibernia the latest Reit to delist from the Irish stock market, it looks like it could be the end of the road for Reits in Ireland, at least those focused on commercial property.

But the reasons may have less to do with a failure of the investment vehicle than with a combination of unfavourable market conditions.

A combination of the turning economic cycle, post-pandemic changes in occupancy and the troubling “de-equitisation” of the Irish stock market have changed the dynamic that gave birth to Reits in the first place.

Reits were introduced after the financial crisis when there were a lot of buying opportunities in Irish commercial property but not a lot of capital or liquidity. They solved both problems – with generous tax breaks thrown in.

Hibernia hit the market in 2013, raising an initial €365m, and produced strong returns for investors in its early years, including CEO Kevin Nowlan.

Shares at one point traded 43pc above listing price in 2016, but thereafter were available at a discount to net tangible asset value for six years, making it an attractive takeover target. When Brookfield Asset Management made its offer in March, it was at a 36pc premium to share price.

Arguably, the market didn’t appropriately recognise the value in the company, leaving shareholders with little choice but to take an offer.

Reits track equity markets moreso than property markets, so when markets are down, a gap will open between price and the value of assets, spurring transactions.

The exits of Irish Reits indicate shareholders didn’t see that gap closing any time soon.

Why? Well, vacancy is edging up as many occupiers settle into some form of long-term remote working following the Covid lockdowns. Simply put, more space is being delivered than is being consumed.

According to BNP Paribas Real Estate, more office space is being delivered than at any time since 2008 yet market activity declined 50pc between Q4 2021 and Q1 2022 as tenants remained cautious in an uncertain environment.

Finally, apart from what is happening with commercial property, companies in general are abandoning the Irish Stock Exchange at an alarming rate. Hibernia Reit is part of a broader trend of market take-outs that has including Applegreen, CPL and housebuilder Abbey all taking offers and delisting.

Meanwhile, very few new companies have been coming to market with initial public offerings, with just small cap stocks Corre Energy and Healthbeacon listing in the last year.

Nonetheless, this might not be the end for Reits in Ireland.

Canada’s Reit sector got off to a similarly inauspicious start in the 1990s when initial enthusiasm dimmed beneath the bright lights of the dotcom boom and the property shares traded at deep discounts.

In the last 20 years the segment has exploded with almost 40 listed on the Toronto Stock Exchange, including Capreit, the largest and the initial funder of Ires, the last of the Irish Reits.