READY FOR TAKE-OFF... THE FIRM SET TO GAIN FROM EU MOVES
Property firm is well placed if firms head to Germany
PRIME Minister Theresa May is expected to invoke Article 50 this week, triggering the UK’s formal exit from the European Union. The process is likely to create considerable uncertainty for businesses of every hue, but one firm that should benefit is Sirius Real Estate.
Sirius owns and manages 44 large business parks in Germany, with rentable space of 1.5 million square metres – equivalent to more than 200 football pitches.
The company has just moved from AIM to the Official List of the London Stock Exchange and renowned investor Neil Woodford then spent about £13 million acquiring a 3 per cent stake.
At 51½p, the shares offer good, long-term value.
The Sirius approach is relatively straightforward. It buys cheap sites, upgrades them and increases the returns they generate by renegotiating terms with existing tenants and bringing in new customers. The strategy enables Sirius to pay out generous dividends and steadily increase the value of its assets over the years.
Germany is well known for its industrial prowess, and is home to thousands of manufacturing firms. Over the years, numerous business parks have sprung up to accommodate factories, warehouses and offices, and today there is an oversupply of ageing, neglected sites, many of which have not been renovated in far too long.
As a result, there are some choice bargains to be had, for those who know where to look. And Sirius certainly knows where to look.
Half the company’s business parks are clustered around the country’s three main cities – Frankfurt, Munich and Berlin, all of which are likely to benefit if international businesses begin to shift staff and subsidiaries from London to Germany. Sirius is already seeing increased demand from financial, IT and telecoms firms and this may well accelerate as the move towards Brexit gathers pace.
Large existing tenants include car maker Daimler, industrial conglomerate Siemens and GKN, the Lon- don- l i st ed engineering group. However, Sirius has a diverse array of tenants so its sites include offices, meeting rooms, self-storage centres and even gyms and cafeterias.
Renovation is cleverly done, too. In one Munich- based park, for example, GKN is the main tenant, making carbon-fibre wings for Airbus, but on the edge of the site, Sirius discovered an old and damp underground bunker. The group converted it into a bright red, selfstorage space and the units were sold out within three weeks of their launch.
Sirius is run by Andrew Coombs, who has spent his professional life in sales and management, including more than a decade in the property sector.
Coombs joined Sirius in 2010, when it was struggling under the weight of the financial crisis and some ill-advised business decisions. The company has been turned around under his leadership and over the past four years, the value of its properties has doubled to € 800 million (£ 690 million). The increase reflects organic growth, acquisitions and so-called ‘valuation uplifts’, when sites increase in value following renovation work.
Over the next few years, Coombs is eager to increase asset values to € 1.2 billion by continuing in the same vein. The more business parks he acquires, the more profitable the company becomes, because costs remain relatively constant, even as the group expands.
Coombs’s target is ambitious but there are good grounds for believing that he will achieve it. The company has been operating in Germany for years, so it has a wide network of contacts to provide updates about new sites coming on to the market. There is also a team of 200 people on the ground, responsible for generating interest from tenants, converting that interest into leases and providing on-site management services, too.
Sirius also has an interesting dividend model. Many UK property firms pay out 90 per cent of their income as dividends. Sirius pays out 65 per cent and keeps the rest to invest in organic growth. Yet, even though it retains that cash, the group still offers shareholders decent payouts, with a dividend of 2.47p forecast for this year, giving a yield of just under 5 per cent.
Brokers expect rental income to increase by 26 per cent to €50.4 million this year, rising to €55 million in 2018. Net asset value per share (calculated by dividing the value of Sirius’s net assets by the number of shares in issue) is expected to rise by 11 per cent to €0.57, increasing to €0.625 in 2018.
Midas verdict: The German property market is considered the most promising in Europe and its lustre is likely to increase over the next couple of years. Sirius offers exposure to a rewarding part of this market and the company benefits from sterling weakness, too. The shares, at 51½p, should deliver capital growth and income. Buy.