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7% direct or 4.5% REIT

  • 01-06-2021 11:19pm
    #1
    Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    i already have a fair bit in the Hibernia commercial REIT which yields 4.5% , probably have to pull out of a residential property purchase for complicated reasons but a similar priced commercial property with a tenant eighteen months into a ten year lease has come to my attention , yield would be 7%

    while the office would produce a higher annual income , the REIT has obviously good diversification , plus no risk of a tenant up and leaving and a resulting zero income , on the other hand the REIT,s have performed quite poorly since their introduction and with the residential ones having such a horrible rep in the public eye right now , one could easily imagine that entire space suffering due to government meddling in the next few years which might cause foreign money to dump

    both to me look like relatively decent options but the REIT seems the safest in spite of the above mentioned potential threats ?


Comments

  • Registered Users Posts: 1,147 ✭✭✭ daithi7


    Mad_maxx wrote: »
    i already have a fair bit in the Hibernia commercial REIT which yields 4.5% , probably have to pull out of a residential property purchase for complicated reasons but a similar priced commercial property with a tenant eighteen months into a ten year lease has come to my attention , yield would be 7%

    while the office would produce a higher annual income , the REIT has obviously good diversification , plus no risk of a tenant up and leaving and a resulting zero income , on the other hand the REIT,s have performed quite poorly since their introduction and with the residential ones having such a horrible rep in the public eye right now , one could easily imagine that entire space suffering due to government meddling in the next few years which might cause foreign money to dump

    both to me look like relatively decent options but the REIT seems the safest in spite of the above mentioned potential threats ?

    Good options. It obviously depends on your risk profile and your reading of that risk and the market options.

    Reading your post & thinking of your conundrum, I think I'd go for the Reit. Why?

    - diversification
    - property & property type diversification (offices may not be a good place to be for next ~5 years, who knows? , but the reits professional investor managers should justify their investment management,
    administration & marketing fees in this market)
    - liquidity risk
    Etc

    By investing in an office now yourself, you are making a concentrated bet in a very uncertain market. Are you being paid for that risk at 7% gross yield versus a Reit at 4.5% yield , I don't think so tbh. Buy the REIT ideally at a good discount to NAV, so that there may be scope for a capital gain also.
    (Bv)


  • Registered Users Posts: 59 ✭✭ bankboucy


    Would you not be able to add some leverage (& risk of course) to the office opportunity by seeking a mortgage on it.....this would increase your return on equity and juice your returns

    If no mortgage available and therefore no way to leverage your return vs. diversified REIT.......I wouldn't be crossing the street for the 2.5% extra if i was you........I've mentioned Glenveagh Properties on these boards before and just given their growth trajectory and scaling of the business (with little downside risk covered by NAV) you could see some capital gains in it over the next 12 months which could juice your return if you split some equity from Hibernia


  • Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    bankboucy wrote: »
    Would you not be able to add some leverage (& risk of course) to the office opportunity by seeking a mortgage on it.....this would increase your return on equity and juice your returns

    If no mortgage available and therefore no way to leverage your return vs. diversified REIT.......I wouldn't be crossing the street for the 2.5% extra if i was you........I've mentioned Glenveagh Properties on these boards before and just given their growth trajectory and scaling of the business (with little downside risk covered by NAV) you could see some capital gains in it over the next 12 months which could juice your return if you split some equity from Hibernia

    I put that to the EA , he said its a cash sale, I asked was it a receivership sale and he said No , the vendor just wants " swift sale " ,says there is no debt on property at all

    The tenant appears very solid from reading their credit report but obviously anything can happen

    Only fear I'd have of REIT is government meddling might spook entire space and foreign money bails ,causing share price to fall , I think Hibernia offers terrific yield and value were it not for the fact you have zero control over it's future prospects


  • Registered Users Posts: 2,232 ✭✭✭ massdebater


    Is all that hassle and extra risk worth the extra 2.5%? Only you can answer that for your situation but, for me, it wouldn't


  • Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    Is all that hassle and extra risk worth the extra 2.5%? Only you can answer that for your situation but, for me, it wouldn't

    well the tenant is in place eighteen months and cover all costs associated so there is no real hassle like you might expect with a residential property , its all about the concentration , then again perhaps im over estimating the benefits of the REIT ?


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  • Registered Users Posts: 2,232 ✭✭✭ massdebater


    Mad_maxx wrote: »
    well the tenant is in place eighteen months and cover all costs associated so there is no real hassle like you might expect with a residential property , its all about the concentration , then again perhaps im over estimating the benefits of the REIT ?

    I meant hassle in the sense that the REIT is probably just a button click to buy and sell whereas the physical property is a lot more than that, but it seems like it's pretty minimal effort to buy. Your advice to yourself in your opening post was pretty spot on, just depends on how risky you feel it is. The seller looking for a "swift sale" would give me caution


  • Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    I meant hassle in the sense that the REIT is probably just a button click to buy and sell whereas the physical property is a lot more than that, but it seems like it's pretty minimal effort to buy. Your advice to yourself in your opening post was pretty spot on, just depends on how risky you feel it is. The seller looking for a "swift sale" would give me caution

    ah yes , I misunderstood , we are in agreement


  • Registered Users Posts: 59 ✭✭ bankboucy


    Buy for cash for quick sale........mortgage property after.........leave 20% equity in the property.........put 80% equity back into stock market Hibernia etc.


  • Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    bankboucy wrote: »
    Buy for cash for quick sale........mortgage property after.........leave 20% equity in the property.........put 80% equity back into stock market Hibernia etc.

    Intetest rates on commercial property are even higher than on BTL residential, you are talking 5.8% so not really worth it IMO

    I've all but decided to go with Hibernia REIT, it's an idiot proof option within the context of risk assets in the property space


  • Registered Users Posts: 689 ✭✭✭ jams100


    Mad_maxx wrote: »
    i already have a fair bit in the Hibernia commercial REIT which yields 4.5% , probably have to pull out of a residential property purchase for complicated reasons but a similar priced commercial property with a tenant eighteen months into a ten year lease has come to my attention , yield would be 7%

    while the office would produce a higher annual income , the REIT has obviously good diversification , plus no risk of a tenant up and leaving and a resulting zero income , on the other hand the REIT,s have performed quite poorly since their introduction and with the residential ones having such a horrible rep in the public eye right now , one could easily imagine that entire space suffering due to government meddling in the next few years which might cause foreign money to dump

    both to me look like relatively decent options but the REIT seems the safest in spite of the above mentioned potential threats ?

    Many companies downsizing offices over the coming years so you'd need to factor in that you probably won't be seeing anywhere close to the 7% after the 10 years. (Presuming the tenant actually sees out the current lease too). I know SAP, spotify, twitter, Workday etc. Are all going for some sort of hybrid or full working from home option so theres going to be an oversupply of office space for some time I think

    Personally I'd be going for the 4.5% in this situation.


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  • Registered Users Posts: 12,289 ✭✭✭✭ Mad_maxx


    jams100 wrote: »
    Many companies downsizing offices over the coming years so you'd need to factor in that you probably won't be seeing anywhere close to the 7% after the 10 years. (Presuming the tenant actually sees out the current lease too). I know SAP, spotify, twitter, Workday etc. Are all going for some sort of hybrid or full working from home option so theres going to be an oversupply of office space for some time I think

    Personally I'd be going for the 4.5% in this situation.

    4.5% is a pretty good yield on a passive investment , even you saw no real capital appreciation , its unlikely dividends would be cut and if they are , that would mean the commercial sector was slowing down across the board


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