REITS Real Estate Investment Trusts

You can now own shares in companies that invest in Prime Commercial and Residential properties in Ireland. Minimum investment are very low with some stockbrokers taking as little as €500. Growth is projected on two such companies this year alone between 20% + 30%. If you would like to discuss it further please do not hesitate to contact me on eoin@prosperous.ie

Below is a blog on Irish REITS and here is a link to an interview I did on Newstalk this morning regarding REITS and their introduction to Ireland. the interview starts at 11 mins 40 secs and you need to press the little play button to the right of the picture.

Alternatively if you are listening from an ipod or other such device this link may work better.

http://www.newstalk.ie/player/listen_back/5/9314/22nd_April_2014_-_Breakfast_Part_1

REITS

Real estate Investment trusts known as REITs have been around in the US since the 1960’s. The “trust” bit no longer has any relevance but the name nonetheless has stuck.

A REIT is basically a property investment company. The shares of that company are traded on a public stock exchange and so are very liquid.

To qualify as a REIT there are several rules that must be adhered to. The main one relates to distribution of rental profits. In Ireland 85% of net rental income must be distributed back to shareholders in the form of a dividend.

There are also rules around minimum property numbers (3) and no one property can represent more than 40% of the fund.

The tax advantages you can gain from structuring a property investment company as a REIT are that the rental income and capital gains within a REIT are not taxed within the company.

A property company usually has to pay corporation tax on rental income and then when the money is paid out to the shareholders it is also taxable. With a REIT the funds are only taxed when being paid out to shareholders.

There is no tax advantage per se with a REIT it simply brings the taxation of a property company in line with the same taxation that would be incurred had the properties been held privately by an individual.

REITS are now available in 35 countries worldwide and were introduced in Ireland by the Minister for Finance Michael Noonan in his 2013 budget speech. The first two REITS were launched in the summer of 2013 and they were called the Hibernian and Green REIT.

One of the reasons the Minister introduced REITS was to try and bring international investors to Ireland. So far this has certainly been the case, the majority of the Green and Hibernian REIT €1 billion investment came from overseas investors.

There is a new Residential Investment Property REIT funded by a Canadian company with €200million in it currently buying up apartment blocks here. The company has a very strong track record back in Canada for this type of investment and so therefore is expected to do well.

There are lots of other REITS believed to be in the pipeline and we could very quickly see total funds breaking the €2 billion mark. With an ability to borrow the same amount again that is a serious amount of cash hitting the Irish central business district looking for property.

To put this in perspective last year saw €3.5 billion transacted in commercial property in Ireland and this was the highest level in 15 years, given the 60% depression in prices recent years volume was very high.

My concern for the REIT money flowing in would be that we just haven’t the stock of decent property to continue to attract this type of international cash flows. Banks have not leant for half a decade now to fund top end development projects and a lot of the good stuff has been eaten up.

It is believed that 36% of the Aviva Irish property fund is sitting in cash as they can’t get good properties and they have now had to close it to new investors.

This really is a catch 22, the Irish banks and NAMA need this money coming in to loosen up their balance sheets so they can get back to lending but the REITS need good quality modern efficient properties in which to invest. All the top end properties that were built at the end of the boom fell in value so much the likes of Google bought them up rather than pay rent.

REITS are limited as to how much of the funds can be spent on development so the development will not come from them it will have to come from the banks or NAMA. On a positive note if NAMA and the banks were to release all of their stock you could be looking at upwards of €50 billion of assets but of course not all of this will be prime, which could still be problematic.

It comes down to this, if you’re a large international investor and you are looking around the world and you can pick up a good quality newly built efficient property with a top class tenant and you are hearing prices are expected to rise in Dublin by 15% per annum for the next 3 years you will buy.

But if you can’t find a good quality newly built efficient property with a top class tenant because the tenant has already bought their own building or somebody has beaten you to it, you are not going to risk looking at secondary properties just to chase the 15%. The world is too big a place.

REITS have done a lot to bring us on to the international investor’s stage but if we want to continue to get the inflows in, somebody is going to have to turn on the development lending taps in the banks. The 15% per annum growth forecasts certainly suggest the demand in there.

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