# Investing in Irish commercial property - Green REIT plc



## Rory Gillen (22 Jul 2013)

_For those interested in the recently listed Green REIT plc, the following is my own analysis of the company (fund) which I posted on my own website for subscribers last week._

Green REIT raised €300 million for investment in the Irish commercial property market in July 2013. It's timing is opportune. As I outlined in a recent report, the Irish commercial property market suffered a peak-to-trough decline in capital values of well over 60% from 2008 to 2011 inclusive. However, rents and capital values have stabilised and the triple drivers of positive returns over the medium to long-term now appear to be finally aligned.

The Green REIT share price closed at €1.15 on Friday up from the listing price of €1. However, the company still has to invest its cash and the current net asset value per share remains at €0.97. Hence, the initial excitement has taken the shares to an 18% premium over the underlying net asset value. I'd be inclined to wait and look for the shares drift back closer to NAV. After all, you can invest in any of the three unit-linked funds outlined in my report (Aviva, Friends First, Irish Life) and not pay a premium to assets.

*The Background*
Green REIT plc is a real estate investment trust and listed on the ISEQ and London Stock Exchanges in July 2013. 310 million shares were issued at €1 each at that time to raise €300 million after costs from a range of Irish and international institutions.

The fund manager is Green Property Ventures and led by Stephen Vernon of Green Property who has an excellent track record of managing the property cycle, and Pat Gunne, previously of Gunne Estate Agents. The company aims to invest in the Irish commercial property market and across all three sub-sectors of retail, office and industrial commercial property.

The annual investment management fee is 1% and the fund manager can earn an outperformance fee of 20% of NAV growth greater than 10%. The management contract is for an initial 5-year term and for a rolling 3-year term thereafter. There is a continuance vote at the AGM following the publication of the Annual Report in late 2019.

As a REIT, the company can borrow up to a maximum 50% loan-to-value, must derive 75% of aggregate income from its property rental business and development expenditure should not exceed 15% of net assets. Subject to having sufficient distributable reserves the company must pay out a minimum of 85% of its net property rental income by way of dividend.

*Taxation*
Interestingly, the prospectus outlines the likely tax implications for Irish investors in the shares. Dividend income is taxed at the marginal rate as you might expect. Gains are to be taxed at the capital gains tax rate just any other share. Presumably, this means that loss relief is available.
There is undoubtedly a strong read over to how the Irish Revenue should tax investment trusts in general. As long-standing subscribers know, the taxation of investment trusts has been a grey area. However, I feel a good deal more confident now that gains are taxed at the CGT rate and loss relief is available. In that regard, investment trusts, as a fund vehicle, have a significant advantage over unit-linked funds and exchange-traded funds which offer no offset of gains and losses.

*Rory Gillen
Founder
GillenMarkets.com*


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## Jim2007 (23 Jul 2013)

So I took a little look at this....

*Management Team:*

This team has no experience of running a fund of any kind let alone a REIT.
The team intend put about 10m into it for 3 years - in my mind this is meaningless because it will take a lot longer to get a view on how well the fund is actually doing...

*Fees:*

So it seems that they are gettging 1% of the NAV from the get-go, despite the fact that the fund is not fully invested and will not be for some time.
Then if it does perform they're going to get a second bit of the cherry if performance hits about 10%, But here is the thing the  'FTSE EPRA/NAREIT Developed Europe ex UK Dividend' did about: 1Yr 12%, 3Yr 27%, 5Yr 34%, so for me the bar is set way too low

*The Fund Itself:*

Highly concentrated in a small market
Promises and expectations versus performance history
Could turn out to be highly geared...
It is a small fund
Where is the benchmark???
Already over valued, despite the fact that most REITs are normally undervalued versus the assets...


To my mind this is speculative which might add a bit of spice to live, but given the large number of REITs available to Euroland investors it should not form the property component for anyone seeking to build a well diversified portfolio.

I have a separate thread here:  Investing in Irish commercial property is not diversified enough


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## Jim2007 (24 Jul 2013)

Had another thought on this over night... these kind of vehicles are toted as a means by which investors can easily add a property element to their portfolio, but this one is not the product of an asset management type organisation!

It is actually being promoted an estate agent and a property developer of some kind... which makes me wonder if it is not in fact being used as an alternative source of finance for the property industry as opposed to an investment product.


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## Rory Gillen (26 Jul 2013)

REITs are not funds although they act like funds. They are often property companies that convert to REIT status for tax reasons. Hence, they are not fund managers but businessmen. In this case, Stephen Vernon, Chairman, is well qualified having navigated the Irish property cycle exceptionally well from the late 1990s to mid-2000s.


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## Jim2007 (26 Jul 2013)

Rory Gillen said:


> REITs are not funds although they act like funds. They are often property companies that convert to REIT status for tax reasons. Hence, they are not fund managers but businessmen. In this case, Stephen Vernon, Chairman, is well qualified having navigated the Irish property cycle exceptionally well from the late 1990s to mid-2000s.



Rory, after 25 year I know exactly what REITs are and are not, and have met many of the people who manage and operate them! It is a fact that these gentlemen have no experience in this game and let's be frank it was not exactly rocket science to do well in the period you mention - a rising tide lifts all boats as they say!


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## Marc (26 Jul 2013)

The REIT fund we have been recommending to our clients since 2009 has total assets on excess of 2.5 billion, an annual charge of 0.59%pa and invests in 259 Reits globally.

A better option by far for many people.


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## Jim2007 (26 Jul 2013)

Marc said:


> The REIT fund we have been recommending to our clients since 2009 has total assets on excess of 2.5 billion, an annual charge of 0.59%pa and invests in 259 Reits globally.
> 
> A better option by far for many people.



Yes there are definitely several better options available to the average investor than this one.


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## jimmeboy (27 Jul 2013)

Hi Marc,

Would you mind sharing what this fund/REIT you have mentioned is?

Appreciate the opportunity of some further research into the various options available.

Thanks!


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## dam099 (27 Jul 2013)

Marc said:


> The REIT fund we have been recommending to our clients since 2009 has total assets on excess of 2.5 billion, *an annual charge of 0.59%pa and invests in 259 Reits globally.
> *
> A better option by far for many people.


 
 So its the equivalent of a fund of funds? Does the 0.59% include the management fees in those underlying REITs?


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## mercman (28 Jul 2013)

Marc said:


> The REIT fund we have been recommending to our clients since 2009 has total assets on excess of 2.5 billion, an annual charge of 0.59%pa and invests in 259 Reits .



Just as a point of note, the annual charge of this REIT might be low, but it is invested in 259 Reits, so there  are 259 sets of charges as well.


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## Jim2007 (28 Jul 2013)

mercman said:


> Just as a point of note, the annual charge of this REIT might be low, but it is invested in 259 Reits, so there  are 259 sets of charges as well.



True, but there also products/ETFs based on Eurpean propery indexes that have TERs of around 0.40% and offer a better risk profile than this one.


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## Brendan Burgess (28 Jul 2013)

Rory 

Thanks for your analysis. 

Although the  charges of the Green REIT are high, it does give one a pure play on the Irish commercial property market, if that is what one wants. 

Stephen Vernon has a good record in the Irish and UK commercial property market. I would trust him with a part of my money.

I don't know enough about Gunne. I have a general distrust of auctioneers and ex-auctioneers. 

Brendan


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## Marc (28 Jul 2013)

What gets us into trouble investing isn't what we don't know, it's what we know for sure that just ain't so.

If I add securities to a portfolio I reduce the risk of the default of any one security hitting my returns. By contrast, if I exclude securities  i will hold a more concentrated portfolio and therefore the risk of downside loss has to be greater.

Equally if i hold a market cap index weighted index of securities I benefit from the combined wisdom of all market participants about where my capital should be allocated. If I select a more narrow sub-set of an index say only European Reits or just one Irish REIT then I am betting against the market. I have to believe that I have more information about the prospects for this investment compared to all other investment opportunities or that everyone else has screwed up and left money on the table neither of which are really credible. 

A more concentrated investment has to be more risky (more chance of default hurting returns and more volatile) but these risks can be reduced through diversification so there is no reason to expect the market to reward you for failing to diversify. The research literature is full of examples of the ways in which Investors in general are overconfident about their ability to identify investment opportunities and these behavioural biases lead to persistent underperformance for a typical investor.

Of course, it might turn out that you will do better than a more diversified index but you should have reason to expect to do better since you are just as likely to do worse. Do you feel lucky?


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## Rory Gillen (9 Aug 2013)

Marc -* "What gets us into trouble investing isn't what we don't know, it's what we know for sure that just ain't so"*

Who's quote is that - I can't recall? Also, I guess quotes should be displayed in inverted commas and italics.


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## Brendan Burgess (14 Aug 2013)

> After all, you can invest in any of the three unit-linked funds outlined  in my report (Aviva, Friends First, Irish Life) and not pay a premium  to assets.


Hi Rory

I think that these are probably much more attractive than the Green Reit 



No premium on assets
Friends First and New Ireland fund priced on a Bid Basis, giving a potential once-off return of 10%, when they are repriced to offer basis.
Lower charges - no 20% performance fee
Already fully invested - not paying a management charge for putting money in cash.
The advantage of the Green REIT is that they may be able to buy prime  properties which are being sold at distressed prices, whereas presumably  the invstment funds  value their property at market rates rather than  distressed rates. 



*Taxation 
*
If you have unused capital gains losses, the Green REIT, may be more attractive than a unit-linked fund.  

But if you don't, would the unit-linked fund not be more attractive? The dividends will be rolled up and taxed on exit at 35%(?) instead of the marginal rate of up to 54%? 


*Anyone considering investing in commercial property should buy Rory's report 
*[broken link removed]

It's only €99 and goes through the funds in detail.


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## Brendan Burgess (14 Aug 2013)

Looking at the Friends First fund in detail 

Here is the [broken link removed]

The annual management charge is 0.75%. (This can probably be reduced by buying it through a discount broker) 

Is this 0.75% directly comparable to the 1% from the Green Reit? Presumably this is a fund managment charge on top of the actual property management costs. 

It has 5.75% in cash at the moment so that should be enough for fund withdrawals. 

53% in retail is high. 

17 properties is reasonably diversified. 

The rental yield is 8.5%.   That could well fall as leases expire. 


Brendan


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## Gary (14 Aug 2013)

Brendan - to your point "Friends First and New Ireland fund priced on a Bid Basis, giving a potential once-off return of 10%, when they are repriced to offer basis."

I'm not sure that this is the case.

Difference between acquisitions and disposals basis of pricing is much smaller now given the significant reduction to stamp in the 2011 budget. As a reference, the Aviva fund recently changed its basis of pricing and the uplift was in the order of 5%. The change in pricing basis will ultimately be made by the appointed actuary, so you are in there hands really. 

Also, I think the New Ireland fund is an Irish and UK fund (it may have an Ireland only fund that I am not aware of), so difficult to make the comparison with Irish only funds.


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## Brendan Burgess (14 Aug 2013)

Hi Gary

I had not realised (or I had forgotten) that the stamp duty on commercial property had been reduced from 6% to 2%. Thanks for that. 



> the Aviva fund recently changed its basis of pricing and the uplift was in the order of 5%.


Would you have the figure for the Irish Life fund? 

New Ireland doesn't have an Irish only property fund. It's about 30% in Irish property.


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## Brendan Burgess (15 Aug 2013)

Jim2007 has argued that Investing in Irish commercial property is not diversified enough

This is an important argument and I have moved it to a separate thread. 

This thread can continue the discussion about the mechanics of investing in Irish property.

Brendan


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## Brendan Burgess (15 Aug 2013)

Investors should also consider buying a commercial property directly. 

*Downsides are big 
*

Much riskier - as you can probably only afford one property
Much riskier - single tenant risk
Much riskier - it will form a higher proportion of your overall portfolio
A lot of work and hassle - tenants and property management
Not liquid - property can take months to sell -  you can usually sell a fund investment immediately
You must sell all or none - you can part encash a fund
*Upsides are bigger still
*


No CGT if bought before the end of 2013 and kept for 7 years
No management charges or performance fees which you would have to pay on a unit linked fund - but you have to do the work yourself


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## PMU (15 Aug 2013)

Gary said:


> B As a reference, the Aviva fund recently changed its basis of pricing and the uplift was in the order of 5%.


 Are we certain on this?  My records show EOM unit prices for the Aviva Irish Commercial Property fund  (gross) since last December as 0.98; 0.98; 0.98; 0.98; 0.96; 0.95; 1.0; 1.0 and 1.0 (latest price). The unit price dipped in May to 0.95 and then increased to 1.0.  If the change in the basis of pricing caused the uplift to 1.0, what caused the drop to 0.95?  If the price dropped just before the uplift occurred it’s not really a 5% increase; Aviva’s latest fund factsheet show the YTD increase as 1.7%, a figure with which I would not disagree.


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## Rory Gillen (15 Aug 2013)

This is the information I have from Aviva. The unit price has recently moved from €2.12 to €2.23 removing the final 5% discount.

What would assist investors in unit-linked funds is better fact sheets on the insurance company websites. In my own analysis piece - which Brendan provided a link to earlier (for those who are willing to part with a modest sum) - I had to go to the insurance companies and ask many questions as the information required to make an informed decision was simply not available online. 

In contrast, information on investment trusts and ETFs, which are listed on markets, is freely available online. And no one is charging you entry or exit fees for listed funds (because they require no one to sell them). 

In my most recent weekly bulletin to subscribers of GillenMarkets, I provided an in-depth analysis of the Standard Life GARS Fund. It is a complex fund and it appears to me that while many Irish people have an investment in it their understanding of what they are invested in and why is very low.


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## Brendan Burgess (16 Aug 2013)

Rory Gillen said:


> This is the information I have from Aviva. The unit price has recently moved from €2.12 to €2.23 removing the final 5% discount.
> 
> .



Hi Rory

You refer to the "final" 5%. Was there an earlier 5%?   I thought that they were valued on either a bid basis or an offer basis. Is there an option to value them midway?


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## Rory Gillen (16 Aug 2013)

Brendan Burgess said:


> Hi Rory
> 
> You refer to the "final" 5%. Was there an earlier 5%? I thought that they were valued on either a bid basis or an offer basis. Is there an option to value them midway?


 
In 2010, when property prices were still falling and investors were trying to redeem and the funds could not sell property they had to price the property portfolio on the assumption they were sellers and generally revalued their own properties down at a discount to reflect that. Seems logical.

When I spoke with Aviva in 2010, the discount applied then was circa 12%. In mid-2012, Aviva sold the AIB head office building and went net cash so that their was no longer any pressure on the fund to sell property even if policy holders wanted to redeem. With the recent firming of the market they eliminated the final discount.

I don't believe this have anything to do with the bid-offer spread. That's my understanding, but I'm fairly new to unit-linked funds so I can't say it for definite.

On Friends First's Irish Commercial Property Fund, it remains at a circa 12% discount and I have assumed that this reflects the greater proportion of retail property in the portfolio - as you know the retail sector has yet to show the same signs of recovery as is evident in the office market.

Irish Life did not have the good grace to clarify the issue on their Irish commercial property fund for me despite repeated calls on my part. As you will see in my note, the Irish Life Irish property fund is up 20% year to date. As the IPD Index of Irish commercial property was up only 3.5% YTD at the time of my note, I have assumed that a portion of the YTD gain has been the unwinding of a previous discount applied to the underlying property portfolio. Irish Life did confirm that the fund was not priced at a discount which again makes sense since the fund has a much bigger weighting in office property. But it would have been nice to understand where the 20% unit price gain YTD came from!

*Rory*


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## Brendan Burgess (16 Aug 2013)

Thanks Rory 

This is how I understood how it works.

In an active fund they buy €100 worth of properties and acquisition costs were around 8% including 6% stamp duty, so the value of the fund was €106.

So I buy or sell units at €106. 

If there are more sellers and they have to sell properties - assuming  the value of the properties has not changed - they will get  only €98 after selling costs, so the value on a sell basis is €98. 

If prices fall, but there is no switch of basis, they just mark down the values of the units to reflect the lower value of the properties, but this would be a gradual reduction. 


Brendan


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## DK123 (1 Feb 2014)

would it be possible to get a record 

of several reit annual net gains over a five or ten year period.Thanks.


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## Monksfield (2 Feb 2014)

*Irish Life property fund*

I too have spent a good deal of time trying to understand what has been driving performance.

Last November they changed the basis of pricing resulting in a gain of c 5.5%. The major part of recent gains has simply been an unwinding of previous heavy write downs - I got some jargon about moving from one basis of valuing the  properties to another.


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