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IREIT Global Has A 8.3% Distribution Yield Now: Here Are 2 Risks Investors Should Know

IREIT Global (SGX: UD1U) is the first Singapore-listed real estate investment trust that focuses on investing in commercial properties in Europe. Right now, IREIT Global’s portfolio consists of five freehold properties in Germany that are located in Berlin, Bonn, Darmstadt, Münster and Munich.

The trust has a high distribution yield of 8.3% at the moment and this may have caused IREIT Global to be noticed by some investors.

But just like every other stock or REIT there is out there, IREIT Global has its risk factors. In this article, I want to explore two important risks associated with the REIT.

Customer concentration risk

One important aspect investors should look at when assessing the sustainability of a REIT’s rental income is the diversity of its customer base. Generally speaking, the higher the level of diversification, the better it could be.

The chart below shows IREIT Global’s customer base for its last reported quarter (the three months ended 30 September 2016):

IREIT Global customer concentration
Source: IREIT Global third quarter 2016 earnings presentation

You can see that 97.2% of the REIT’s rental income currently comes from just five tenants. What’s more, Deutsche Telekom, on its own, accounts for over half of the REIT’s total rental income.

The impact to IREIT Global would be huge if it loses Deutsche Telekom as a tenant. That’s something investors should take into consideration when analysing the REIT.

Currency risk

As I already mentioned, IREIT Global invests primarily in Germany. As such, its business is conducted with the euro, but its distributions are doled out in the Singapore dollar. There is thus currency risk for investors to consider.

Now, IREIT Global has hedged the currency risks associated with its distributions through the use of financial contracts.

But, the risk of a decline in the REIT’s asset value as a result of a depreciating euro remains unhedged. With increasing political risk in Europe – due to events such as Brexit and other countries’ potential exits from the Eurozone – there has been pressure on the euro.

In fact, since 2014, the euro has depreciated by around 14% against the Singapore dollar. There is no guarantee that such depreciation will not continue in the future.

A Foolish conclusion

IREIT Global is currently trading at a high distribution yield. But, there are also important risks to consider with the REIT, such as its high customer concentration and the presence of currency risk.

In any case, things may also change with IREIT Global in the future. The trust’s manager was acquired by Tikehau Capital on 11 November 2016 and the new manager “expects to contribute to the growth of IREIT with its pan-European network combined with strong local operational expertise and existing pipeline of real estate transactions in Europe.”

The new manager also has the intention of widening the REIT’s investment mandate to include retail and industrial properties, alongside the current commercial focus.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.