Property funds extracting value in Western Europe

Liliane Barnard is the CEO of Metope Investment Managers. (Picture: Supplied)
Liliane Barnard is the CEO of Metope Investment Managers. (Picture: Supplied)

Exposure to international markets through JSE-listed property funds has increased significantly for local investors.

Much of that exposure is to the prime and developed markets of Western Europe, which according to Nedbank CIB, is around 42% of the rand value of the listed property sector’s physical assets.

Western Europe is more often than not seen as the go-to region to create sustainable long-term returns for shareholders.

Perhaps not as high yielding as emerging economy markets, developed Western Europe’s lower dividend yields also reflect the lower risk that comes with investment here.

The UK

It is not by chance then that income-focused UK-REIT Redefine International’s assets are located in UK and Germany. These two countries are Europe’s largest economies and most liquid real estate markets. 

Listed on both the Luxembourg bourse and the JSE, at 28 February 2017 Redefine International had a £1.5bn portfolio of 165 properties, 84 in the UK and 81 in Germany.

The bulk of the portfolio – 58% – is retail with commercial assets forming 26% and the hotel portfolio comprising 16%.

Brexit put a spanner in the works for many playing in the UK space, expectations being that acquisitions would be put on hold, assets difficult to dispose of and that asset values would drop. Unsurprisingly, the company’s share price suffered. 

But it has recently made a recovery, trading broadly at net asset value (NAV) or slightly above, its LTV now below 50% also a contributing factor to that. 

Contrary to expectations, disposals for the period to 28 February 2017 were concluded at a 12.4% premium to book value. 

“The valuations coming out of the UK market in particular have probably surprised many people in terms of upside and how stable they have been post-Brexit,” says Stephen Oakenfull, deputy CEO of Redefine International. “There is still strong investment demand for good quality assets.” 

And with occupancy levels increasing by 30bps to 98%, Oakenfull says this is a good indication of the health of the occupier market. The company also signed 40 new leases totalling £2.2m, 2.3% above market rental prices.

Acquisitions are also in play the company looking to increase its stake in the lucrative UK hotel market, having submitting a proposal to International Hotel Properties Limited (IHL) to increase its shareholding from 17.24% to 50%.

The company says it is an opportunistic acquisition that increases the company’s ownership in a high-quality and high-yielding hotel portfolio and increases its exposure to the strong UK hotel market, whilst also increasing exposure to RPI-linked (retail price index) leases.

Following the transaction, hotels are expected to comprise approximately 19% of the company’s gross assets, up from 16% at 28 February 2017.

Redefine International’s investment philosophy is to effectively allocate recycled capital from mature assets into sectors and locations with strong occupier fundamentals and individual assets with realisable upside. 

Germany

In Germany the company says current market conditions there present opportunities to recycle capital, with plans underway to sweat those assets.

The German portfolio with its 5.3% net initial yield has a value of £307m, almost 50% by value contributed by three well-located shopping centres in Berlin, Hamburg and Ingolstadt. 

“German retail has performed well over Redefine International’s investment period, and the location of their shopping centres close to transport hubs appears to make them defensive assets,” says Liliane Barnard, CEO of Metope Investment Managers.

Located in one of Berlin’s prime and most frequented retail locations and in a catchment area of 750 000 people, is the company’s 18 900sqm Schloss-Strassen Center. 

The £77.5m shopping centre has a 100% occupancy figure and annual footfall of 6m, 1m of that driven by the property’s direct access to the U-Bahn station. 

Primark, expected to add €1.5m of additional rental income to Redefine International’s Europe portfolio, is one of the mall’s anchors, contributing 39.9% towards its gross rental income. Supermarket chain REWE’s lease has also been extended for 10 years. 

Forward strategy on the mall includes 270sqm of extensions for existing tenants, an expanded food court and refurbishment of the existing U-Bahn entrance, all expected to further drive footfall and enhance rental rates that are currently below market.

The REITs Bahnhof Altona mall in Hamburg – the area with the highest GDP in Germany – is the focal point of a wider development scheme. The 15 100sqm centre, integrally linked to the Altona train station, has an occupancy figure of 99.7% with key tenants that include MediaMarkt and Lidl.

“The German assets are generally well-established centres which offer stable income. However, as with most of the assets in Redefine International’s portfolio, it appears that income growth opportunities will take considerable time to realise,” says analyst Wessel Badenhorst of 36ONE.

Post-period end, the company also invested £42.2m to acquire a 100% controlling stake in the Leopard portfolio joint venture.

The German supermarket portfolio, 86.4% located in the robust economic locations of Western Germany and Berlin has strong occupier demand, secure, indexed-linked cash flows as well as having scale with opportunities to extend stores and re-gear leases.

MAS Real Estate

Also with a big stake in Europe’s major economies is JSE-listed MAS Real Estate. The bulk of its over €500m portfolio (as at mid-July 2017) is in Western Europe with 37 mostly retail assets in Germany, six in the UK and one in Switzerland. 

Unsurprising perhaps given that Barnard says Western Europe appears to be moving towards the top of the capital value cycle, of MAS’s beefy €1.026bn pipeline, the vast majority of it is development in Eastern Europe (see article in the 27 July edition of finweek). 

The Western European portfolio is allocated 19% of that pipeline, 14% to development and 5% to income generating assets.

MAS has been focusing on four activities in Western Europe; value growth, recycling mature assets for reinvestment, releasing landbank equity for reinvestment, and actively managing income-generating assets.

Phase 1 at New Waverly, MAS’s £200m, 7.5 acre mixed-use scheme in the heart of Edinburgh’s old town in Scotland has exhibited significant value growth in the assets, trading has been strong and all retail spaces are pre-let at strong rental yields, says MAS CEO Lukas Nakos.

Adding significantly more value to the Western Europe portfolio, a 25-year lease with the UK government has been signed on Phase II, while at MAS’s Munich development a six-year lease with increased rentals has been signed with VW.

At Langley Park in the UK, land has been sold, a Travelodge hotel signed and offers on 15 acres of residential land received, while at Lewes in East Sussex, the company has received offers £2m over expected value. Only residential land remains at New Waverly with offers in on southern side land.

The company recycled mature assets, four properties sold at a 14% profit.

Adding further income through management, space at its industrial Chippenham site in the UK has been re-let. Once a site with a 40% vacancy, the figure is now 2%. 

Post asset management activity, MAS will be trading at about a 14% to 18% yield on invested equity, the assets will be mature and will be recycled, says Nakos.

The writer attended a tour of Schloss-Strassen Center with Redefine International.

Please see the related story titled MAS punching above its weight in the 27 July edition of finweekBuy and download the magazine here.

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