Thursday 22 March 2018

REITs are the new kid in town - so tread carefully

Illustration by Tom Halliday.
Illustration by Tom Halliday.
Louise McBride

Louise McBride

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.

Ensure that the REIT is investing in quality properties - which have good quality tenants. Bear in mind the condition and location of these properties when assessing how good they are. An apartment block in central Dublin will find it easier to secure tenants than one in the Midlands.

Even if an REIT owns properties which have good tenants, remember that it could lose these tenants if competition heats up in the property market - and the REIT finds it hard to secure tenants for reasonable rates as a result. You could lose money if this happens.

Check the length of the leases on the properties owned by the REIT - particularly for commercial property. "The longer the lease, the better - as long as it's on reasonable terms," said Stephen Barry of City Life.

Find out who is managing the properties in a REIT's portfolio. "Ensure they are experienced," said Barry.

Don't pour all of your money into REITs - you risk losing it if you do so. City Life believes you should not have more than a tenth of your investment portfolio in REITs.

Bear the costs of investing in mind. You will pay stockbroker commissions and fees if you buy and sell shares in an REIT on the stock market. There is no minimum investment when buying shares in REITs - however, if you only buy a small number of shares, the costs of investing in the stock market could gobble up most of your investment.

Should you decide to invest in REITs through Zurich Life's Fund of REITs, you will be hit with an annual fund management charge. This is typically 1pc.

Like any company, REITs have a raft of fees to pay. These include investment manager fees and audit fees - and these costs will ultimately eat into the income paid out to shareholders - and the money that can be made.

Read the prospectus of any REIT you are considering so that you understand all of the risks you are taking on.

Bitcoin promoters warned not to play cat and mouse

The Central Bank last week urged promoters of the Bitcoin virtual currency to avoid playing cat and mouse with regulators.

"I would urge this industry to actively address the concerns of financial authorities rather than 'playing cat and mouse' and eventually, and inevitably, being drawn into the regulatory net," said the Central Bank's director of markets supervision, Gareth Murphy, in an address to a conference on digital money held in the RDS last week.

The Central Bank does not regulate crypto-currencies such as Bitcoin.

It has previously warned consumers who invest in Bitcoin that they are not entitled to get their money back should any company that is holding the currency go bust.

In his conference address, Murphy warned that any loss in consumer confidence in currencies could cause uncertainty - and trigger a drop in economic activity.

"Consumers expect currencies to be a predictable and stable store of value - free from surprises, if you wish," said Murphy.

Earlier this year, the German central bank issued a warning about what it felt were the dangers of Bitcoin, citing the crypto-currency's "highly speculative" and "volatile" nature.

"Financial regulators are always attentive to innovations in financial services and are mindful of the risks that consumers may rely on products or technologies that they do not fully understand," added Murphy.

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