The Company
Background
Invista European Real Estate Trust SICAF is a closed-ended, Luxembourg registered investment company with fixed capital which is managed by Invista Real Estate Investment Management Limited. The Company invests in a diversified portfolio of commercial real estate across Continental Europe. The Company has an indefinite life.
Investment Objective
The Company's investment objective is to provide shareholder returns through investing in a diversified commercial real estate portfolio in Continental Europe with the potential for income and capital growth. The geographical focus of the Group remains the Western European countries due to the relative stability, transparency and liquidity of these markets.
Investment Strategy
The Board believes that in order to maximise the stability of the Group's income, the optimal strategy for the Group is to be invested in a portfolio of assets which is (a) diversified by location, sector, asset size and tenant industry and (b) has low vacancy rates and creditworthy tenants.
The Investment Manager has targeted assets for acquisition which it believes exhibit some or all of the following characteristics:
- well-located for its purpose;
- modern or recently refurbished;
- let to tenants of good creditworthiness on market standard leases;
- freehold or long leasehold;
- low vacancy;
- net initial yields higher than those available on prime properties and
- opportunity to enhance value through active asset management; and
- opportunity to enhance value through active asset management.
The degree to which the Group's current or future properties exhibit some or all of these characteristics depends on conditions in the local real estate market and the specific property.
The strategy for ownership of the Group's properties is to actively manage investment performance through lease re-negotiation, maximising the net rental income receivable from tenants, extending lease duration to preserve income security, leasing current vacancy, stabilising rents and, amongst other initiatives, developing surplus or ancillary land reserves.
The Investment Manager will continue to manage the Group's portfolio based on a research led investment strategy to identify relative outperforming or underperforming property markets over the medium to long term in different countries, regions and sectors with a view to recycling capital where appropriate to do so.
Property portfolio
As at 30 June 2010, the Company's property portfolio was valued at €510.4 million and comprised 43 assets (excluding one asset conditionally committed to acquire in Girona, Spain). This compares with the property portfolio as at 31 March 2010, which comprised 44 assets valued at €514.8 million. The like-for-like increase in the property valuation over the quarter (excluding the committed asset and disposals over the three month period to 30 June 2010) was 0.7%, an increase of €3.6 million. The Company sold one office property in Brussels, Belgium for €7.7 million during the quarter, with net proceeds from the sale used to pay down senior debt.
As at 30 June 2010, the Group's portfolio generated gross income of €42.5 million per annum, representing a Gross Income Yield ("GIY") of 8.20% and a Net Initial Yield ("NIY") of 7.56%. This excludes vacant accommodation which, as at 30 June, stood at 7.79% by income. Should this vacancy be leased the NIY would rise to 8.26%.
The portfolio's credit rating as measured by Experian in December 2009 was 61 out of 100, which is classified as "normal creditworthiness".
The European Market
The recovery of the Euro zone economy continued in Q2 2010, but with annualised GDP growth at only 0.6%, it remains below trend and fragile. Indicators of future economic activity have weakened suggesting that economic growth could decelerate again in the short-term. Following the turbulence in sovereign debt markets caused by Greece's unstable public finances, European governments are committing to increasingly severe austerity packages aimed at reducing fiscal deficits.
Despite concerns about the economic outlook, Continental European property capital values now appear to be stabilising and in some segments rising. Prime assets in the most liquid markets such as Paris are leading in the capital growth cycle and, while secondary markets and assets are generally stable, there is some evidence that 'near-prime' assets are now also attracting increased investor interest. Outside the 'core Euro zone' of Benelux, France and Germany, investor activity is far more patchy and, as a result, property values are in some cases still falling. Ongoing structural debt issues in Greece, Ireland, Portugal and Spain are also weighing heavily on property investor sentiment in these markets; although to an extent investors are encouraged by record low swap rates and relatively attractive returns on equity.
We expect property total returns to increase in 2010 as a result of improved investor demand and in spite of continuing weakness in rents across most segments of the market. Income returns are expected to be the principal driver of performance in the short to medium, placing increased emphasis on the capable and active asset management of portfolios and meaning that higher-yielding markets such as France and Netherlands, and the logistics sector generally, may outperform the wider market.
Finance
As at 30 June 2010, the Company had drawn down a total of €345.6 million of senior debt in respect of its €359.3 million facility with the Bank of Scotland and its €12.0 million facility with Credit Foncier. In addition, the Company had cash balances of €56.1 million (excluding tenant deposits of €4.4 million) at that date, giving a net debt position of €289.5 million.
The Company's gross Loan To Value ("LTV") ratio as at 30 June 2010 was 67.7%. The Company's gross LTV under the Finance Documents with the Bank of Scotland was 67.9% against an LTV covenant of 85% in 2010. The Company's net debt LTV was 56.7% as at 30 June 2010.
All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.58% per annum (at current LTV levels).
Dividend Policy
Although market conditions have begun to improve the Board does not yet consider it appropriate to reinstate the ordinary share dividend. The situation is reviewed continually in light of the Company's performance, the outlook for the wider economy and, in particular, its impact on the occupational markets (and therefore earnings) in our key markets.