Investing in Irish commercial property - Green REIT plc

R

Rory Gillen

Registered User
Messages
248
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
 
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
 
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.
 
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 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.
Click to expand...

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!
 
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.
 
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.
Click to expand...

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

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

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.
 
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.
Click to expand...

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.
 
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
 
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?
 
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.
 
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.
Click to expand...
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.
 
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
 
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.
 
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%.
Click to expand...
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.
 
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
 
You must log in or register to reply here.
Back
Top