Farewell to Irish real estate investment trusts. You won’t be missed

The impending departure of Ires Reit from the Irish Stock Exchange will bring the curtain down on a failed experiment in harnessing private capital for public good. The other three real estate investment trusts (Reits) have already gone after being sold: Green Reit left in 2019 and Yew Grove Reit and Hibernia Reit departed in 2022. The only surprise is that Ires took so long and that anybody thought the idea would work in the first place. One of them was Michael Noonan, the finance minister who introduced Reits in the 2013 budget. The idea was simple: use a tax-efficient stock market vehicle to entice Irish investors – particularly small investors – into the property market by allowing them to participate in large-scale projects at a time when capital for property investment was in short supply. READ MOREThe incentive was that the Reit paid no corporation tax, although the investors were hit for tax on dividends and on capital gains when they exited. According to the 2013 budget day slide deck, there would be a win-win. The move would create a new class of buyers for the properties that the National Asset Management Agency (Nama) was about to start unloading on to the market. It would also attract professional long-term institutional landlords into the market and this would benefit tenants by bringing greater stability and professionalism to the rental sector and greater security. What Noonan didn’t mention – or, in fairness, did not foresee – was the extent to which institutional landlords would capitalise on the housing shortage to drive up rents. As a result, what we actually got was the financialisation of housing, with homes treated as just another asset to be sweated by mobile international capital. Reits can’t take all the blame, but they played their part in creating the mess that endures to this day as the Government tries to juggle the competing interests of large-scale build-to-let landlords and tenants facing higher rents and no prospect of owning their own home. New rent rules that came into force in March and extended rent control across the country allowed landlords to reset rents to market rates between tenancies. This is just the latest effort to square this circle.Hindsight is of course a wonderful thing; it is easy to forget 13 years later just how daunting was the task that faced Nama and the consequences for the State if it failed to unload the 60,000 properties that were on its books and pay off its €32 billion debt. Enticing investors into the market was crucial and Reits were just one of number of wheezes that the Government came up with. Hindsight also allows us to conclude Irish Reits were doomed to failure because the Irish capital market simply was not deep or liquid enough to support them. Domestic investor appetite turned out to be limited, which was not unsurprising given the background: a massive property and banking crash that wiped out many people’s savings.The fundamental problems Reits quickly encountered was that the underlying assets they invested in were more liquid than their shares. It was easier for investors to buy and sell an office block directly than hold an interest through a Reit. Consequently, Reits all traded well below their net asset value (NAV) – the difference between the value of what they owned and what they owed. In some cases by more than 25 per cent. There was no premium in the share price for further growth. The various home-grown problems, including a dysfunctional rental market and anaemic capital market, were compounded by more global factors such as high interest rates.The problem was not the property market. It was Reits. But they all achieved NAV (net asset value) or slightly better when they were sold. The current offer for Ires from UK investment firm Barings Investment values it at €729 million, which is its NAV (there or thereabouts). It is also a 31-per-cent premium on its closing share price last Friday. The inability of the Irish capital market to support Reits once again raises the question about the Irish stock market’s long-term viability as a home for listed companies. At this point it is very much the tail wagging the Euronext Dublin dog, as most of its business comes from listing international funds.The issue – which predated the big beasts such as Smurfit and CRH decamping to overseas markets – is rapidly coming to a head. PTSB, DCC Energy and Irish Continental Group (ICG) are all in the process of leaving in deals funded by private capital.There is an economic cost to this, but thankfully any suggestion that the Government’s latest brainchild – the Saving and Investment Accounts – be required to hold Irish stocks seems to have been knocked on the head. The lessons of the Reits debacle appear to have been learned.