Understanding Irish Real Estate Investment Trusts. For Financial Advisor Use Only

Transcription

1 Understanding Irish Real Estate Investment Trusts For Financial Advisor Use Only

2 What is a Real Estate Investment Trust (REIT)? A REIT is a public listed company which has as its main activity the ownership and management of property-related assets *. These properties include, but are not limited to, offices, shopping centres, warehouses as well as commercial sites for development opportunities. Because REITs are publicly traded companies, their shares can be bought and sold in the same way as other shares. Real Estate Investment Trusts (REITs) were first established in the US in 1960^. They were designed to make investments into large-scale, income-producing property available to the ordinary investor, without the need to invest in physical bricks and mortar. REITs paved the way for the average investor to gain access to the commercial property market in the same way they gain access to other industries through the purchase of equity shares in a company. In Ireland, the Finance Act 2013 introduced the relevant legislative changes to enable the introduction of REITs into the Irish market. REITs are designed to generate investment returns in two ways: firstly, through exposure to the value of the property assets that the REIT owns and the accompanying capital growth; and secondly, through rental income. * Source: Irish Stock Exchange, May ^ Source: PcW Worldwide Real Estate Investment Trust Regimes, What are the main features of an Irish REIT*? To qualify as a REIT in Ireland, a company must: be resident in Ireland and not resident elsewhere; be incorporated under the Irish Companies Act; be quoted on a main Stock Exchange in an EU member state; have a loan to market value of less than or equal to 50%, i.e. the level of borrowings within the company cannot exceed more than 50% of the market value of the properties held; distribute at least 85% of its property related income (e.g. rental income), net of management charges, by way of dividends to its shareholders; generate at least 75% of income from property rental; invest at least 75% of its assets, by market value, in property; hold at least 3 properties in their portfolio within 3 years of listing, and no one property can be greater than or equal to 40% of the overall portfolio. * Source: Finance Act 2013.

3 How do REIT s differ from other property stocks? Due to the defined legal framework of a REIT, REITs, unlike other property companies, distribute their income in a highly tax efficient manner. The dividend payout ratio of a REIT has to be at least 85% of its property related income; whereas the dividend policy of a property company is entirely discretionary. A REIT may only borrow up to 50% of the gross value of its assets, while a property company can be highly geared. REITs aim to manage their investments to generate sustainable income. Other property companies can engage in more speculative activities. How do REIT s differ from Unit-Linked Property Funds that invest directly in property? Unit-linked property funds that invest directly in property are pooled funds that buy and sell commercial property and collect rents from the properties owned by the fund. They benefit from rental yields as well as increases in the value of the underlying property. However, unlike REITs, they are not required by law to distribute at least 85% of their net property related income to shareholders. Another significant difference between the two is the availability of liquidity. A unit-linked fund that invests directly in property facilities redemption requests from other policyholder inflows, from existing cash within the fund or from property sales. During periods of property market stress, a unit-linked property fund may find it extremely difficult to meet investors redemption requests, often resulting in a deferral period being imposed. This potentially exposes investors to further falls in property valuations. While REITs are more liquid than direct property holdings, there may be times when sentiment towards property markets will impact negatively on the price and liquidity of the REITs themselves, and hence the liquidity of this fund. For any fund managed by Zurich, where liquidity in the underlying assets of a fund becomes restricted due to market conditions, Zurich reserves the right not to publish a unit price until liquidity is restored.

4 Characteristics of REIT investments Improved Liquidity Investment in property has historically been viewed as an illiquid asset. However, as REITs are listed on a stock exchange, it is easier for the ordinary investor to move in and out of their property investments. High dividend payout ratio The dividend payout obligation on REITs means that a much larger share of total returns come from dividends when compared with other equity investments. All dividends are reinvested into Fund of REITs by Zurich Life. Diversification Investment in REITs can provide asset class diversification to an investment portfolio, through exposure to property, without having to invest in physical bricks and mortar. Risks associated with investing in REITs While property is typically illiquid, REITs are more easily traded. However, because of their status as listed companies, REITs also leave the investor exposed to stock market volatility. Investors need to remember that they are investing in property shares, not bricks and mortar. Performance of the property market - A fall in the value of the underlying properties will negatively impact on the returns to investors; - A high vacancy rate will affect overall rental income, as will a drop in rents. Short tenancy agreements can lead to unstable rental income. Dividends may not be paid by the REIT if the REIT reports an operating loss. Access to high quality projects REITs can provide investors with access to high quality properties which would generally tend to be out of reach to the ordinary investor. Inflation hedge REITs can provide a natural hedge against inflation. Commercial real estate rents and values have tended to increase when in line with inflation over the long-term.

5 This Understanding Irish Real Estate Investment Trusts brochure should be read in conjunction with the Opportunities to invest in Irish Property: The Zurich Life Fund of REITs presentation that is available on zurichlife.ie. Alternatively, please contact your Broker Consultant for further information. Warning: If you invest in this product you may lose some or all of the money you invest.

6 Print Ref:ZURL IB Zurich Life Assurance plc Zurich House, Frascati Road, Blackrock, Co. Dublin, Ireland. Telephone: Fax: Website: Zurich Life Assurance plc is regulated by the Central Bank of Ireland. Intended for distribution within the Republic of Ireland.