In an April 7 note, Natarajan is banking on a German real estate recovery, keeping “buy” on IREIT with a 34-cent target price. The target price includes a 2% ESG premium, based on RHB’s proprietary methodology.
Looking back five years, RHB’s target price on IREIT has gradually sunk from 83 cents in April 2020.
Berlin campus redevelopment
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IREIT is redeveloping a Berlin campus into a mixed-use asset. This is making steady progress, says Natarajan, with the signing of two hospitality operators taking up around 24% of net lettable area (NLA) on 20-year master leases at nearly double the previous rental income.
The remaining mixed-use space will comprise of office space (70% of NLA) and a retail podium (5%).
The office space is receiving good leasing enquiries with interest from two large prospective tenants that could result in full committed occupancy, says Natarajan. “This is on the back of continued flight-to-quality and its strategic location in Central Berlin, [at] 500m from the main railway station and a 20-minute drive to the airport.”
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The total projected capex is EUR165 million to EUR180 million, including the earlier announced EUR82 million capex for two hospitality leases.
Capex will be funded in stages with a corresponding increase in asset value expected, thereby reducing gearing pressure. IREIT will also explore monetisation of a partial stake post securing leases, which could reduce funding needs and unlock value.
The proposed redevelopment is subject to unitholders’ approvals at its EGM on April 24. “We recommend that unitholders vote in favour of the transaction,” writes Natarajan.
Portfolio, operational updates
Leasing interest is slowly picking up across IREIT’s other assets with the signing of four long-term leases totalling some 5,350 sqm at its Darmstadt campus, bringing committed occupancy to 45%.
This is expected to rise to 60%-70% by end FY2025.
The Munster campus saw two major leases for 6,110 sqm of office space in FY2024. In Spain, seven lettings were signed for 19,100 sqm.
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IREIT’s gearing stands at 37.6%, providing debt headroom, says Natarajan. It is currently in negotiations to refinance its German and Spanish portfolio borrowings of some EUR270 million, which is expected to result in higher overall financing costs, partly mitigated by debt hedges (97%) via interest rate swaps and caps that will only start to progressively roll off from next year.
IREIT’s near-term DPU will take a hit, says Natarajan, but healthy recovery is anticipated from FY2027. “We expect FY2025 DPU to fall 31% on the back of the Berlin campus vacancy and associated operational and funding costs,” he writes.
As at 9.20am, units in IREIT are trading 1 cent lower, or 4.08% down, at 23.5 cents.
