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Green REIT – Pros & Cons

By July 25, 2013October 6th, 2021featured articles

Green REIT raised €300 million for investment in the Irish commercial property market in July 2013.

It’s timing is opportune. As I (Rory Gillen – outlined in the recent report posted on last week’s investment newsletter located in GillenMarkets members area and posted in PDF format by email to all subscribers on Thursday last, 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.

My View
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 Friends First Irish Commercial Property Fund is currently priced at a discount of circa 12% to the underlying property values. Elsewhere, Hansteen Holdings, a REIT focused on the northern European and UK industrial property markets, is already fully invested, pays a dividend yield of over 5% and trades at on a more modest 4% premium to net asset value.

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.

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.