Interest in REITs and unit trusts investments on the rise

An increasing appetite among Irish investors for property is not confined to blocks of bargain flats and offices but is also reflected in the premium which they are willing to pay in order to invest in various types of property funds.

These include real estate investment trusts, such as the Green REIT, as well as some traditional unit trusts which invest in prime UK and European commercial property.

Green REIT achieved a 30pc premium on its launch price within weeks of being floated on the Irish stock market and investment firm Willett plans to launch a second Irish REIT before the end of the year.

The trend is gathering momentum at a time when Irish Life reported gains of up to 24pc in some, though not all, of their unit-linked property funds in the year to mid September.

Those Irish Life fund performances contrast with average growth of only 3pc in the first nine months of this year for most unit-linked property funds on the Irish market.

Unlike unit funds or unit trusts, REITs offer the advantage that investors can sell them anytime, as they acquire and sell REITs through the stock market and their value is determined by the price which purchasers are willing to pay.

So even though the Green REIT does not own any property, nevertheless its shares were trading yesterday at €1.19 each – 19 cents above their launch price.

In contrast, the value of units in unit-linked funds or trusts is usually dependent on the value of the assets in which the funds invest but this also creates the drawback that if the owners of a sizeable portion of units want to cash in their chips, the unit fund managers may need to sell off properties in order to pay off investors.

Such encashments prove problematic when property prices are falling and as a result investors may have to wait months to get out of unit investments.

To address this problem some investment brokers operate a secondary market and at present this secondary market appears to be quite active as some investors try to buy on the prospect of a recovery in certain property values.

So with fund managers currently reluctant to launch new property funds, both those investors seeking to exit and those seeking to enter are beginning to trade units on the secondary market.

According to David Clarke, head of property in Goodbody stockbrokers, some of these units are sold on at a premium such as those which are invested in prime UK and European commercial property and those which have a good track record.

However, other units are being sold at a discount to the official price which the fund manager charges.

“The discount can be as low as 20pc and the premium could be 10pc depending on the type and location of the properties,” he says.

But units have some disadvantages and, for instance, some life assurance firms are slow to disclose details of the properties in which particular funds are invested and many of their customers will get only an annual statement saying what their units are worth.

For instance, Irish Life could not offer any comment in the last three days as to how their funds increased 24pc in the year to date.

In contrast, REITs are obliged by the stock markets to issue shareholders with six- monthly statements on their activities and are also more likely to have their performance scrutinised by stockbrokers and reported on by the media.

REITs can also have a tax advantage compared to investors who own a commercial property.

In order to remove a layer of double taxation, the REIT company itself is exempted from corporation tax by the Irish Revenue (provided it meets Irish legislative requirements) but distributions and gains for underlying investors are taxable.

For ordinary investors REIT distributions are taxed at an individual’s marginal tax rate.

Gains or losses from holding REIT shares are treated in the same way as gains or losses from holding shares in any other quoted company.

Thus, if a person wishes to sell their shares at a profit that profit will be liable to capital gains tax at 33pc.

However, ordinary investors in life assurance wrapped unit funds are subject to a 36pc exit tax. When the units are cashed by pension funds they are not taxed but the pensioners are taxed at an individual’s marginal tax rate when they receive income from the pension fund.

Most, though not all, unit funds avoid borrowing and this conservative approach means their investors are better protected from the volatility of the markets.

But, some will argue that this approach prevents them from exploiting the extra profits that can be achieved from gearing.

Irish REITs, on the other hand, can borrow but they are limited to borrowing less than 50pc of the market value of the properties.

While most unit funds do not distribute any income to investors, REITs must distribute a high percentage of their rental income and Irish REITs must distribute 85pc of property related income. Source: The Irish Independent.