Irish investors once again turn to property – Have we learned any lessons?

If you are thinking of investing in property, what are your options?

Given the increased demand for property funds over the past few months, I thought it might be a good idea to do a high level review of some of the property funds available on the market.
This article does not offer advice on which property investment to select, it just gives a brief overview of some of the options available. We would strongly recommend seeking professional advice before entering into any property investment.

Overview

With deposit rates falling, DIRT increasing to 41% and equity markets looking slightly overbought, it is not a surprise that Irish investors are looking to property for a portion of their investment and pension reserves. This is not necessarily a healthy development as many of these investors have missed out on the very strong equity market returns from 2009-2013 and this regret is now leading some to take risks in a small focused property market again. I hope we have learned some lessons from 2000-2008 when considering investment allocation and the importance of diversification.

In saying that, I still feel most commentators see value in the commercial property sector in Ireland. The easy money has already been made, mostly by astute international investors and property funds who bought up some high quality assets in 2011 and 2012 at rock bottom prices. Property funds have had a very strong year. The chart below shows performance from a sample of property funds offered by the life assurance companies going back to April 2006. All have shown a reasonable recovery over the time frame, but most are still well below their 2007 highs.

** Standard Life Property Fund invests in UK Commercial Property. The Irish Life Property Portfolio Fund has a combination of Irish, European and UK Properties.

So if you are considering a property investment what are the options?

Direct Property

The obvious option, and one I get asked about every day, is a direct investment in bricks and mortar. This might be possible for residential property but is out of the reach of most investors for commercial property. There is the added risk of exposure to a single property and the on-going management, maintenance and tax costs of managing your own property.

Life Assurance Company Unit Linked Funds

All of the life assurance and pension companies have some form of property fund in their suite of investments. These funds hold a range of commercial properties across regions and hold these properties for the long term. For example, the Irish Life Property Fund owns the St. Stephens Green and Pavilions Shopping Centres and the Friends First Property Fund own the Hibernian Way and Elm Park Office Development on the Merrion Road. Most of these funds have a basic management fee of between 1% and 1.5%. If the investment is done on a nil commission basis they have a 6 month notice period to withdraw funds, but are priced at least monthly. They are suitable for smaller investors as many have a minimum premium of €5,000 or will allow regular monthly premiums. Unless in a pension contract, the investment grows gross of tax, and gains are only taxed at the point of drawdown (or after 8 years, whichever comes first) at a rate of 41%. All rents and income are kept within the fund so there are usually no distributions paid out.

REIT’s and Unit Trusts

The Irish Market saw the launch of two new Real Estate Investment Trusts in 2013, following legislation introduced by the Government to support investment in commercial property. These REITS are listed companies with the sole aim of investment in property. Investors can buy shares in the company through the Irish Stock Exchange and they are priced daily. The first REIT was launched in June 2013, called the Green REIT, and it has been very active over the past 6 months as it starts to invest the funds it has raised to date. The Hibernia REIT listed in December 2013 has recently also started to become active in the market. More will follow. These funds don’t have any property ‘baggage’ and are more liquid than the life assurance company alternatives. Gains on a REIT investment are taxed under capital gains tax rules rather than the ‘Gross Roll Up’ rules of a life assurance company property fund. Annual dividends from a REIT are taxed under the investor’s marginal rate of income tax. When launching, these investments typically had a minimum subscription of €100,000 and were significantly oversubscribed.

The Irish Property Unit Trust (IPUT) was established in 1990 and is currently undergoing significant changes to its legal structure which will change to a Qualifying Investor Fund. Currently the fund is partially closed to new investors, with periodic rounds of fundraising and a subscription level of €100k+. Once the structural changes have been approved, non-pension investors will be able to get access, along with more liquidity and lower initial investment levels being accepted. The fund has been very active, recently purchasing high-profile buildings on Grand Canal Square and in the IFSC.

For more information on property funds, relative performance and the advantages and disadvantages of each type of property investment, please contact us.