The establishment of Real Estate Investment Trusts (Reits) is seen as a way of achieving two important things – allowing ordinary Irish investors to get a slice of the action through regulated, professional property companies and also reducing the sector’s dependence on a coterie of personal property fiefdoms capable of practically sinking the banking system.
That is why we have three stock market-listed Reits which have floated in the last 14 months. Together all three of them (Green Property Reit, Hibernia Reit plc and Irish Residential Properties Reit, have raised a total of €1.56bn in equity and debt. And they are spending it.
You only have to read the financial results of one of these Reits to see that they tend to be very transparent, accountable and open to providing lots of information.
They each have an investment manager, which is a small company that charges the main company management fees running the show.
The idea is that ordinary punters can make a few quid by investing in the expertise of experienced property professionals, instead of perhaps putting their money into a couple of buy-to-let apartments when they actually know nothing about it.
However, the Irish commercial property market recovery has been a Goldrush. Comparing the financial performance of the Reits so far, shows the importance of speed to market. What a difference even six months can make when it comes to bottom feeding.
Earlier in the week Green Reit reported its full year results to the end of June. It made four property acquisitions in the last three months of 2013, and two more this year. The group reported a profit of €43m having re-valued upwards its portfolio by 14.2pc or €49.9m.
Interestingly, 97pc of that uplift came from the properties bought at the end of last year and just €2.1m of the uplift came from the Central Park development, which was acquired in March 2014.
In the results announcement, Green Reit chairman Stephen Vernon talks about how the yields on various property types have been coming down or “compressing” as prices rise. This is likely to continue.
But it doesn’t mean Reits have missed the boat. These investment trusts are set up as longer term investment plays that will hope to extract good value from assets over a long period of time.
They are not meant to be a “get rich quick” scheme. But by being first to float Vernon and his team, including managing director Pat Gunne, have got off to a better start. Without the uplift in property values the business still would have made a pre-tax profit of €7.2m in its first year of trading.
Vernon, Gunne and the team have already done well out of putting the whole thing together. Green Property Reit Ventures Ltd, which manages the portfolio, is owned by Vernon, Gunne and other executives. It charged fees of €3.4m in the year.
Separately, Green Property Holdings, which is 62pc owned by Vernon, spent €10m buying shares in the Reit when it floated. They are now worth €13m as the share price has risen from €1 to €1.30 since the IPO in July 2013.
While Green Reit was snapping up properties at the end of last year, Hibernia Reit was preparing to float. Backed by property veteran Kevin Nowlan and a number of international investment funds, it has invested €220m of the €385m it raised in its IPO in December.
It has also raised a €100m debt facility. Chaired by former Irish Nationwide Building Society chairman, Danny Kitchen, it paid its managaement company fees of just over €1m. The management company is owned by Nowlan and other property colleagues.
A slightly later start means it is too early to get a handle on where the financial performance of Hibernia Reit sits. Its first set of accounts did not include many revenue-generating properties. But the shares are up from €1 to €1.14.
Irish Residential Properties Reit (IRES) was the third to float and is backed by Capreit, one of Canada’s biggest residential landlords. It raised €200m in equity and has arranged debt facilities of €130m. Shares have risen from €1 at flotation in April to €1.04.
Key issues for potential Reit investors are:
l Does the Reit have a clear focus in what it wants to buy? Hibernia has bought both residential and commercial property. Green is more focused on commercial – primarily in Dublin. IRES is focused on residential only.
l What is their risk appetite through borrowing? Interest rates are low and the economy is growing, so it may not be that risky to borrow. However, Green has been the most conservative with just a €75m loan facility having raised €750m in capital. Hibernia has a €100m debt facility having raised €365m. IRES has a €130m loan facility having raised €200m.
l What do I want from my investment? Under the rules all Reits have to pay out 85pc of profits from the rental business in dividends each year. Investors can practically work out in advance roughly what that will be. If they want to sell their shares quickly at a handsome profit, they may have their money in the wrong place.
l Reits are a huge improvement on what was there before. They are well-managed professional operators with strategies, checks and balances.
The risk is that they end up paying top prices for properties already purchased by vulture funds at the bottom of the market.
Masding between a Rock and a hard place
Head of Permanent TSB Jeremy Masding is trying to expunge the Northern Rock accounts his bank took over in 2011 by slashing the interest rates on these to as low as 0.01pc. The bank acquired 17,000 of these accounts in 2011 when the building society went to the wall.
Mr Masding’s bank said this week it is cutting interest paid on a range of savings accounts.
One of the biggest reductions in savings interest being imposed by Permanent TSB is on an account called the Former Northern Rock Savings Incentive Account. The rate is going from 0.75pc to 0.01pc from November.
Mr Masding clearly wants rid of these legacy Northern Rock accounts, hoping account holders will transfer to a Permanent TSB saver account instead.
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