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Trust Insider: can German property trusts be rehabilitated?

by James Carthew on Apr 15, 2014 at 00:01

Today SG has a market cap of about €185 million; 79% of it is controlled by a company listed on the Tel Aviv Stock Exchange and Levy has an indirect interest in just under half of SG (48.2%). SG is self-managed, with a team of 50 people based in Berlin and Frankfurt.

It owns 86 properties, covering 647,000 square metres and let to around 500 tenants, with a weighted average lease term of 4.4 years and valued at €500 million. These throw off a yield of about 8% (rental income of circa €39 million).

This seems a lot higher than the average yields on prime office properties of 4.67% that Jones Lang LaSalle was quoting at the end of 2013, and reflects the fact the portfolio is not all in prime city centre locations.

At the end of December 2013, prior to the fund raising, SG had borrowed €312 million of bank debt from RBS and had a loan from Summit, a major Israeli shareholder, of €46.5 million. This equated to a LTV of 62.4%. SG says the plan is to reduce this over time.

The portfolio is spread across Germany. About half (by rental value) comes from Frankfurt, Berlin and Hamburg and three quarters are based in major German cities. The portfolio is a subset of the one SG had in 2009.

It has started exploring opportunities to undertake limited residential development within the portfolio as the residential property market in Germany is more buoyant than the commercial market.

The money raised in February may go towards new acquisitions. SG said it hoped to double the size of the portfolio over time and, in February, it said it was in talks that could have led to the acquisition of about €250 million worth of property.

It raised less than It hoped in February but I would guess it will try again when conditions permit.

SG says it is a good time to be buying commercial property in Germany as banks are still reluctant to lend, there are distressed sellers and portfolios backed by non-performing loans are available.

So is it attractive? Some potential investors might be deterred by the degree of control still exercised by Levy but SG plans ‘over the medium term’, to target a 7% dividend yield. This would certainly be attractive. There is also a chance of capital appreciation in the portfolio – though this is one of those things that has long been hoped for.

James Carthew is a director at Marten & Co

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