Investing in property has always been a popular way to accumulate wealth. In Ireland we have a high interest (borderline obsession!) with property. Over long timeframes and when done in a sensible way it can prove very successful. In short, using the same principles that we apply to stock market investing. A REIT (Real Estate Investment Trust) is a vehicle for property investment that is becoming increasingly popular. Were you to imagine a conversation between an auctioneer and their client about a REIT, it could well go something like this:
” I have a new Buy-to-Let that you won’t be able to refuse! You can view the exact price before you agree to buy it, and you start accumulating rent from day one. If you decide to sell it, you can see the price that various buyers are willing to pay for it and if you agree a sale, the funds are in your account 5 days later.”
“Sounds fantastic, surely it must be very risky to get those great terms and complex to exit?”
“Not at all, it is not even restricted to one location; you can get access to multiple locations and even mix residential and commercial property if you wish. Your rental payments are announced and paid regularly, and you have a professional team managing the properties to get the maximum value from them.”
“I like the sound of that, but how can I afford a commercial and a residential property?”
“You own part of the assets so you can sell or add partial holdings at any stage, giving you flexibility and access to your money.”
“But how do I know I am getting a good deal?”
“The value of the properties is published publicly, determined by professional auctioneers and signed off by auditors. This is calculated per share, known as the Net Asset Value (NAV) per share, so you can compare the price you pay to the official valuation of the buildings. You also know the amount of borrowings that are used to buy the buildings.”
So, what could possibly go wrong with property investment? Well anyone older than 10 years old can answer that one!
On a more serious note, property can be a great investment and is widely perceived to be only second to the stock market in terms of growing your assets. It is hard to get accurate data on returns, mainly as property prices and rents/leases are not always officially recorded and vary dramatically across geographies.
The problems with traditional investment properties are simple:
- Illiquid – you cannot sell easily and especially not when everyone else is trying to!
- Concentration – you are often exposed to one building, one tenant and one location
- “All duck or no dinner!” – Usually you either own the property entirely or not at all (unless you form a syndicate of like-minded investors, who all agree to buy and sell at exactly the same time and price)
As an ever more popular alternative to direct property, REITs allow individual investors access to a far more diverse property portfolio with much quicker access to your money than a traditional property investment.
But what exactly is a REIT? A REIT is a company that invests solely in property and is compelled by law to pay out a high percentage of the rents as dividends to shareholders (set at 85% in Ireland). It is listed and trades on a stock exchange and must disclose its debt levels and recent valuations of the properties owned.
The REIT market only entered Ireland in 2013, but they have been operating globally for decades, and can be bought in exactly the same way as international shares such as Microsoft, Nestle or Diageo.
As part of our Advisory and Discretionary services, we construct & manage portfolios of Global REITs for clients giving them exposure to property in various regions. A typical REIT portfolio will own property in Ireland, Germany, France, the Netherlands, US and even the UK, which is proving very popular for those wishing to take the long term view that sterling is historically cheap and that the discounts available in the UK won’t exist post Brexit, regardless of hard or soft!
Take Great Portland Estates, a London only specialist, which reported an EPRA (European Public Real Estate Association) NAV (Net asset Value) of £8.53 per share in late May. What does this mean? It is the value of the properties they hold as per European standard valuations. Despite all of the issues with Brexit, the NAV (property values) increased 1% on last year. You can buy this company on the stock market at £6.60 at time of writing (early August), a 22.5% discount to the value of the buildings!
The yields are attractive too, British Land gives a handsome 5.7% dividend, which has grown an average of 2.9% per annum for the last 10 years.
REITs can stubbornly trade at a discount to their underlying values. This year we have seen Irish based Green REIT announcing its intention to liquidate the company’s assets, with management citing frustration with the shares permanently trading at discount to the NAV. The shares jumped 7% overnight and added a total of 19% over the 3 months from the announcement. Patience pays off!
Direct property can give you a higher return if you are managing it yourself, willing to take the significant extra risk of single location exposure, and content to lock up your money. But for those of you who do not like the idea of broken washing machines on a Sunday night; or problem tenants leaving without notice and using their deposit as the last month’s rent; then REITS are a transparent, diversified, liquid alternative that give exposure to a proven asset class.
“Buy Land, they ain’t making any more of it.” (Mark Twain)
Gareth Walsh is Senior Portfolio Manager with Cantor Fitzgerald.
To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.
Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.