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Trust Insider: is deep discount European property worth a punt?

by James Carthew on Jun 17, 2014 at 00:01

Contrarian play

As a long-term contrarian investment, DU might be quite interesting. I think the political and economic situation will have to settle down before it can make any meaningful disposals and the price of Arricano might fall sharply if there was any selling pressure. However, I think, the £33 million market cap seems at odds with its existing cash balances – although, to be fair, DU says it wants to retain some cash to keep its options open in case the existing portfolio needs further investment before it is realisable.

What might put some people off is the incentive structure DU adopted when it implemented its realisation strategy. Under this the manager gets $9.2 million in management fees spread over the period from January 2014 and December 2018 and front-end loaded plus 3.5% of the first $50 million returned to shareholders, 7% on the next $25 million and 10% on the rest (these threshold figures are adjusted upwards if the NAV rises and over time) and the directors get 0.35% of cash returns. This looks pretty generous to me, and you would have to factor this in if you were thinking about investing in the fund.

SPD’s largest investment is a 50,000 square metre logistics park outside Kiev, Terminal Brovary.

It also owns a 22-hectare site that it intends to build a logistics park on outside Odessa, and a plot of land in Kiev for residential development with planning for 40 units – all well away from the current trouble – plus a 26-hectare site in Balabino. This is in the east of the country on the main road to Simferopol in Crimea. Development works might be held up by the political situation, therefore.

SPD intends to expand and branch out into Romanian and Bulgarian property. It believes there is money to be made by acquiring property in markets that have been hit quite badly by the credit crunch. That process has begun and it has just completed the acquisition of a logistics park outside Bucharest using funds it raised from investors in 2012.

There is a pure play on Romanian property however, Globalworth Real Estate . It has a market cap of £240 million, is trading on a discount of about 18% and is focused on commercial property in and around Romania. I’ll look at it next week.

Globalworth stands out because it is a relatively recent fund, listing in July 2013.

James Carthew is a director at Marten & Co

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