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Two Things You Need To Know About IREIT Global
Corporate Digest, Featured | 11 September 2014
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By: Peter Ng
Articles (81) Profile

IREIT Global is a real estate investment trust (REIT) that owns an initial portfolio of four office properties in Europe. More specifically, these properties are located in four cities, namely Munster, Bonn, Darmstadt and Munich in Germany.

Concentration Advantage Or Risk

A glance at the tenant profile of IREIT revealed that 98.9 percent of its gross rental income as at March 2014 is contributed by five key tenants (GMG Generalmietgesellschaft, subsidiary of Deutsche Telekom: 79.5 percent, ST Microelectronics: 6.8 percent, Allianz: 5.5 percent, Ebase: 5 percent and Yamaichi: 2.1 percent).

While someone could accredit strength as a selling point from IREIT’s tenant base since these properties are leased to mature companies who have a strong ability to fulfill their rental obligations, however, one should be reminded on the premise that nothing can be guaranteed.

As such, it is more important to consider the impact should one of its key tenants such as GMG happens to re-locate.

However, considering the switching costs involved since GMG occupies 74.3 percent of the net leasable area (NLA) under IREIT’s initial portfolio, it is unlikely for the company to make such a bold move, barring any unforeseen circumstances.

In addition, Deutsche Telekom has entered into a profit and loss transfer agreement with GMG. This allows IREIT to claim against Deutsche Telekom, providing IREIT with an added line of defense should GMG be unable to cover their rental expenses.

IREIT Global's Initial Portfolio

The initial properties of IREIT Global

Underlying Portfolio

The concentration of tenants has also partly helped IREIT to achieve a full occupancy rate at all four of its properties.

Furthermore, according to statistics collated by Colliers International, the vacancy rate of office properties in Germany in 1H14 is currently standing at 7.3 percent. On this front, this is definitely a plus for the trust since all of its NLA has been utilised leaving none avail.

Apart from its occupancy rates, IREIT’s portfolio monthly rental per square metres is EUR12.2. Refering to the same report published by Colliers International, this pales in comparison to Germany’s average of EUR15.2, representing a difference of 19.7 percent.

Noting that the trust’s policy is to trigger rental reversion by a change in the consumer price index (CPI), that is, if CPI is to increase by one percent from the CPI as published by the Federal Statistical Office of Germany, rental rates will be adjusted upwards by one percent.

On hindsight, this could be a hedge against inflation for the trust as well as its unitholders. However, the CPI of Germany has been on a downtrend since 2011 (2011: 2.1 percent, 2012: 1.9 percent, 2013: 1.9 percent, 1H14: 0.8 percent).

This is because the Eurozone (countries that have joined the European Union) has been in recession since 2009 and since CPI is an indication of inflation and subsequently a representation of the state of an economy, it is unlikely for a positive rental reversion to occur anytime soon.

Investment Merits

  • An opportunity to participate in the European office property sector
  • Distribution yield (based on projection for 2015) ranks IREIT as the highest yielding office REIT listed on the SGX coupled with a stable lease expiry profile
  • An acceptable gearing level of 33.4 percent compared to the average of 36.2 percent among the office REITs listed on the SGX

Investment Risk

  • Concentration risk of tenants
  • Rental reversions could be muted until the European economy picks up pace
  • Foreign exchange risk since rental contributions are made in Euros

SI Research Takeaway

Apart from the concentration risks and expected soft rental reversions, however, for an investor seeking for stability, IREIT is one which fits the bill.

With a weighted average lease expiry by gross rental income of 7.6 years as at 31 March 2014 where more than 80 percent of its leases will only expire in FY19 and beyond, rental stability can be expected for the next five years until FY19, translating into stable distributions for an investor.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

IREIT Global  0.735 -0.015 -2.00%   
Business: Real estate investment trust with a portfolio in Germany used primarily for office purposes.

Insight: Nov-18, 9M18 revenue dipped 1.7% arising from the ... Read More


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