‘How to Invest’ is a series of articles guiding readers through the basics of investing in different assets. See also: The risks of leaving money on deposit, How to Invest in Shares, How to Invest in a Fund, How to Invest in Bonds and How to Invest in Commodities. Next week: higher risk investments.
It may no longer be the stalwart it once was in an Irish person’s investment portfolio back in the days of the Celtic Tiger, but property still has its attractions, and can play an important role in offering diversification.
But how best to invest? Here are some options.
Buy a property fund
If you’d rather hedge your bets and get exposure to a number of properties, you can do it via the stock market by investing in one or more of a property-related exchange-traded fund (ETF), a life-wrapped property fund, an investment fund, a real estate investment trust (Reit) or property-related stocks.
For example, to get exposure to UK properties, you could invest in an ETF, such as the iShares UK property fund, or through an investment trust such as TR Property, which offers exposure to the UK and European commercial property market.
Many of the life companies, including Irish Life, Aviva and Zurich Life, run their own property funds. These life-wrapped funds allow investors to pool their money together, to buy and manage physical properties, typically across the commercial property spectrum.
Most such funds are priced daily but, as you can see below, at times of market stress, there can be a delay in getting back your money.
These funds offer potential for growth on two fronts: income from rents, and capital gains on the (hopefully) rising value of the underlying property. Typically, the funds are accumulating, which means income is reinvested in the fund rather than distributed to investors on a continuing basis. You can invest in such funds from as little as €100 a month.
These funds will have a spread of assets.
Carina Galavan, property funds specialist with Aviva Ireland, says Aviva’s fund has about 40 per cent of its assets in the office sector. Holdings include Zurich House in Blackrock, as well as the Blackrock Village Centre, in south county Dublin.
Given uncertainty in the market since Covid, most of the return in the Aviva fund of late has been income-related, rather than a capital gain, she notes.
When it comes to risk, Galavan says a property fund would typically be deemed medium risk, slightly lower than equity funds, because of the rental income coming in.
“This makes the returns smoother and less volatile than equities,” she says.
If a fund has gearing or borrowing, you can add another risk point to the fund – although this may also enhance a fund’s return. Aviva’s fund currently has no gearing, Galavan says.
For a broader spread, you could consider Irish Life’s indexed European property shares fund, which invests in shares of European property companies and reits.
Another option is to buy shares in a reit yourself. There is only one such product on the Irish Stock Exchange – Ireland’s biggest private landlord, Irish Residential Properties Reit (Ires) – but you can also invest on exchanges in other countries, such as the Schroder European Real Estate Investment Trust, which targets growth regions in continental Europe.
[ Avoiding ETF taxes may leave Irish investors missing outOpens in new window ]
Reits are companies that own or operate income-generating property and allow investors to get exposure to these properties. They can specialise in residential property, commercial, retail, offices or a mix of the various categories. They are traded on the stock market like a share.
So why would an investor choose an ETF over a reit over a property fund?
“They serve different purposes,” says Galavan, noting that a reit might have strong correlation with the stock market, whereas a property fund wouldn’t. With an ETF, an investor might be buying exposure to property, while a property fund will hold tangible property, and thus can tend to be less volatile.
“It depends on what you’re looking for in an investment,” she says.
Buy a commercial property
For those who like to see what they own, commercial property can be an attractive option for private investors. Back in March, for example, one investor paid €1.35 million for a property on Upper Baggot Street in Dublin 2. Let to Mexican-style restaurant Tula, the property brings in total rental income of €95,000 a year, securing for the private investor a net initial yield – the return on his investment – of 6.4 per cent.
These days it’s “generally people doing it on their own, or through couples”, says Brian Gaffney, a director in Murphy Mulhall. “We’re not seeing many syndicated purchases.”
Generally, a private investor will have between €1 million and €5 million to spend. Above €5 million, it’s typically family offices and, above €10 million, it’s institutional investors.
“It all comes down to where the property is, what the yield is like, how good the tenant is and is there potential to improve the value,” says Gaffney.
But investors are not just competing with themselves in this space: Gaffney notes that French funds, known as sociétés civiles de placement immobilier (SCPIs), are also active at this level of the market.
“They’re bidding against Irish investors,” he says, although he notes that such funds “have a certain yield profile they need to hit”. That means that if yields are below 7 per cent or so, they may not pursue.
“Private investors are more fluid in their thinking and are willing to accept keener yields for certain properties,” says Gaffney.
“There is a huge amount of cash in the market,” he adds, noting that, last year, the company brought a medical investment to market with a guide price of just under €2 million. With five active bidders, all private Irish investors, and all cash purchasers, the property sold for in excess of €2 million.
[ Investment in Irish commercial property reaches €443m in first quarterOpens in new window ]
“None of them was relying on third-party finance,” he says. However, finance for commercial property deals is available, with non-bank lenders such as CapitalFlow and Finance Ireland understood to be active in the market. Others might buy through their pension fund.
The appeal is varied. On the one hand, investors appreciate that it is tangible, so they can say “I own the SuperValu” in town X, for example.
And yields (annual rental income as a percentage of total cost) can be attractive, in the fives for institutional grade properties, going up to about 10 per cent for a riskier proposition, says Gaffney.
And what type of property? Gaffney cites medical investments, creches, dentists, retail units with a Londis or Spar in situ, in areas with good footfall.
“You need to look at the tenant: if they were to go, how quick would it be to replace them?”
Some investors look for a mixed-use development, with residential opportunity overhead a retail outlet, which can spread the risk. “You’re not reliant on a single occupier,” says Gaffney.
More risk-averse investors will look for a property that might have a keener yield, but with a stable tenant and requiring very little hands-on asset management. Those looking for more of an upside will look at a building that needs a bit of work. They will improve it and increase rents.
Buy a residential property
Residential investment can also be attractive, given the continuing strong growth in rents. However, as has been reported elsewhere, the potential for Government intervention and new rent-control rules means that many investors, particularly smaller ones, have opted to exit the market.
Residential investment is now not as popular, given the potential for Government intervention, says Gaffney. So investing now may mean going against the tide, but it may make sense for you.
You can get funding typically of about 70 per cent from a lender for a buy-to-let investment, but you will need to factor in higher costs than with an owner-occupier mortgage, with interest rates of about 5-6 per cent.
The risks here, as many boom-time buyers will attest, are a sharp drop in values, which can leave you stuck with a property that is in negative equity and which you cannot sell. A further risk is difficulty with finding and keeping tenants.
How do I exit my investment?
The relative illiquidity of a property investment – depending on how you decide to invest – has to be borne in mind when making a decision on it. Unless you invest via the stock market, such as through an ETF, a reit or company shares, liquidating your property investment can be tricky.
When it comes to funds, investors can find themselves locked in to a property fund when market downturns put a squeeze on fund withdrawals, and fund managers impose withdrawal periods, a process known as “gating”. It is a feature of such funds. It doesn’t always mean that you should panic but it can make it tricky to get your money out at a particular time.
“Sometimes you can get a temporary delay or pause on withdrawals,” says Galavan, adding that the purpose of such temporary lock-ins is that “it avoids forced sales of buildings at unfavourable prices”.
For reasons such as this, a property fund investment should be considered only for the medium to long term.
Aviva, for example, put in place a moratorium on its Irish property fund back in 2023 which is still in place, while Zurich Life has stopped investments both in and out of its fund.
Similarly, Greenman Investments, a German supermarket property fund, temporarily blocked its mainly Irish investors from withdrawing their investments for up to 18 months amid a wave of redemption requests late last year.
If you buy a physical property yourself, there are obvious delays if you try to sell up, such as marketing the property, going through the bidding process, waiting for the sale to close etc.
As Gaffney notes of commercial property, “Nothing closes quickly in the market – everything takes ages to close out.”
Taxation
What tax you pay on any gains you make will depend on how you invest in property.
For example, physical property – be it commercial or residential – will be subject to capital gains tax on the difference between your purchase price and the subsequent sale price, allowing for certain expenses at 33 per cent.
In addition, you will also need to factor in stamp duty costs – 1 per cent on residential property up to €1 million; 2 per cent on any amount between €1 million and €1.5 million; and 6 per cent on the amount over €1.5 million. For commercial property, duty is levied at a rate of 7.5 per cent.
An ETF, a fund, or a life-wrapped fund will be subject to exit tax of 38 per cent on gains, deducted under deemed disposal every eight years even if you hold on to the investment. Losses on one investment in this category cannot be offset against profits on another – unlike the position with capital gains tax.
Property stocks and investment trusts will also be liable to capital gains tax. When it comes to a reit, you’ll pay income tax plus PRSI and USC on dividends, and capital gains tax on gains in the underlying value of the investment.
