Riding on the German upswing

  • Tapping into the upturn in German office rents
  • Organic growth driven by CPI adjustments in its lease structure
  • Exposure to blue chip tenants including Allianz, Deutsche Telekom and ST Microelectronics
  • Initiate with BUY call, TP of S$0.95

Exposure to recovering German real estate market.

With an initial portfolio of four German office properties located in key cities of Bonn, Darmstadt, Münster and Munich, IREIT offers investors exposure to the most robust economy in the Eurozone and a market that is on the cusp of recovery. With an improvement in business activities, moving forward we expect an upturn in rents with the potential for further cap rate compression.

Inbuilt growth pegged to CPI. More than 95% of IREIT's leases (by gross rental income for March-2014) have rental adjustment clauses that are pegged to German CPI. We estimate that 25% of portfolio NLA is likely to be re-indexed to the CPI in FY14 and a further 33% could hit the watermark in FY15, translating to a steady 2.9% CAGR in distributions over FYP14F – 16F.

Visibility over the group's income base is also underpinned by a long WALE of 7.6 years and a tenant base consisting of blue chip firms as Allianz, Deutsche Telekom and ST Microelectronics. Furthermore, execution of IREIT's 'ABBA' investment strategy, which is to invest in 'A' assets in second tier cities and to invest in 'B' assets in first tier cities, should deliver additional upside to DPU.

Initiate with BUY, TP of S$0.95. We initiate with a BUY recommendation with a DCF-based TP of S$0.95 (implied target yield of 7.1%). We believe IREIT offers a cyclical recovery story with German office rents and property values at the start of an upcycle. Key risks include a global economic slowdow and depreciation of the Euro.