Listed in August 2014, IREIT Global (SGX: UD1U) is a real estate investment trust (REIT) that owns five freehold properties in Germany. The REIT gave investors something to smile about when it announced that its distribution per unit (DPU) increased by 1.1% for the six months ended 30 June 2019.
Can this growth continue? I think so; here’s why.
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A decent balance sheet with low cost of debt
Acquisitions are by far the fastest and easiest way for a REIT to increase its DPU. IREIT is in a great position to make more debt-funded acquisitions that can be yield-accretive. As of 30 June 2019, its aggregate leverage was 36.2%, still some way below the 45% regulatory ceiling.
What’s more, the REIT has one of the lowest effective interest rates per annum at just 1.5%, giving it a high interest coverage ratio of 11.1 times.
IREIT’s strong financial position will enable it to take advantage of acquisition opportunities in the future.
Long lease expiries
IREIT’s existing portfolio also looks to be relatively stable. None of its key tenants, which contribute 97.7% of its gross rental income, have leases that expire until 2022 and beyond.
Its two key tenants — Deutsche Telekom and Deutsche Rentenversicherung Bund — are both established companies with a credit rating of BBB+ and AAAA, respectively.
As such, despite the two customers contributing a whopping 85.5% of the REIT’s gross rental income, investors can be confident that there is a limited credit risk.
Longer-term outlook remains solid
The European office market continues to benefit from strong demand and muted new supply. As such, there has been a downward trend in vacancy rates and rising office rents.
In addition, the prime office net yield spread over 10-year government bond is relatively higher in Europe, compared to the rest of the world.
This should provide IREIT with investment opportunities. The pink bars in the chart below represent the major cities in Europe compared to the rest of the world.
Source: IREIT Global Investor Presentation
The relatively high yield for prime office properties in Europe will also continue to support investment demand in secondary locations and support commercial property prices in Europe.
The Foolish bottom line
While there remains some near-term uncertainty regarding Brexit, European office properties remain an attractive investment. Its relatively high yield compared to local 10-year government bond yields will also support current property valuations and may boost property prices there. IREIT, with its five properties in German, sound financial position, and access to cheap debt, stands to benefit from the positive outlook in Europe.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.