Deutsche Konsum REIT (DKR) owns some 186 retail properties all over Germany. The properties themselves are likely to have two non-cyclical anchor tenants that are relatively insulated from e-commerce. These include grocery stores, drugstores, DIY stores and supermarkets.
The acquisition price and valuations of these properties start from EUR1 million to EUR25 million, which is too big for retail investors but too small for real estate investment funds (REIFs), a sector that could potentially be stressed in Europe.
The REIT’s strategy is to buy these small properties, restructure them and raise their yields, bundle them in a portfolio, and at some point, divest the portfolio. As a strategy, DKR invests in retail properties in established, stable, micro-locations.
In 1QFY2023 ended February, DKR’s portfolio comprised 66% of non-cyclical tenants. These non-cyclical tenants rise to 80% of the portfolio if DIY stores are included as DIY is popular in Germany.
At its current price of EUR7.66 ($11.20), DKR is trading at a significant discount to its NAV of EUR14.6 and EPRA NTA of EUR11.14 when the dilution of DKR’s convertible bonds is included.
DKR’s unit price has been declining since the onset of the pandemic. The REIT is externally managed, which could be one of the reasons for its unusually large discount. Nonetheless, it can monetise its balance sheet and has done so in the past. Although DKR is unlikely to trade at a premium to EPRA NTA, it has the potential to narrow its P/NTA discount.
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The European Central Bank (ECB) has warned that REIFs could exacerbate a downturn in Eurozone commercial real estate (CRE). “There are clear signs of vulnerability in real estate markets, including declining market liquidity and price corrections, driven largely by uncertainty in the macro-financial outlook and by monetary tightening,” says an ECB research paper dated April 3.
“REIFs are exposed to liquidity risk when they offer frequent redemptions, which could affect the stability of CRE markets. REIFs should therefore be subject to a common and comprehensive policy framework to reduce the liquidity mismatch and risks to financial stability,” the research paper suggests.
On the other hand, countries such as Austria, Germany, France and the Netherlands have already “seen particularly large substantial valuation corrections” in 2022, the ECB research paper notes.
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Investing in Eurozone CRE, therefore, carries a risk, with the main one being redemption by REIF investors. However, DKR is a listed REIT and hence not subject to the pressures REIFs face. In addition, its portfolio is somewhat niche, with retail assets which tend to be shunned by REIF investors whose focus is logistics, data centres and possibly offices. As at Dec 31, 2022, DKR’s portfolio was valued at EUR1.1 billion. After a theoretical writedown of Konsium REIT’s assets, its Revalued assets/Total liabilities is 1.048x.
Its current dividend per share of EUR0.40 translates to a yield of 5.5%. As a REIT, DKR benefits from tax transparency. However, foreign investors may need to check whether they are subject to any withholding tax.
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