On the 4th of September 2017, Sirius Real Estate announced that it had been included in the JSE All Share and Small Cap indices. Its share price reacted immediately and has risen by more than 9% in the days since the announcement.
This is a welcome milestone for a management team that has been creating significant value whilst operating on the backstage. Upon entering the mainstream, the company should find the appeal of a much larger shareholder base.
A simple, yet effective strategy
Listed in London and Johannesburg, Sirius Real Estate (Sirius) owns and operates business parks across Germany, where it provides flexible workspace to the country’s thriving SME market. The company’s strategy is simple: Acquire high-yielding properties, improve their value through redevelopment, and recycle them on maturity.
Sirius’ business strategy
Sirius’ property portfolio is split into two categories, in accordance with this strategy:
- Core mature: 45% of the portfolio is mature, with high occupancy levels and limited redevelopment options. The yield on these assets is lower than the portfolio’s overall net initial yield and Sirius will gradually sell them down, reduce gearing and rotate capital into more value-add opportunities.
- Value-add: 55% of the portfolio has potential for significant rental increases as the redevelopment programme progresses and vacancy rates fall from the current 21% level.
Redevelopment - the driving force
A key differentiator for Sirius and the most important contributor to its success is its redevelopment programme. This strategy to unlock value by upgrading suboptimal space is yielding exceptional results, as small incremental capital investments is leading to significant increases in rental income. Over the past 3 years, Sirius has completed €14.9m of redevelopments, which has resulted in a €8.6m increase in its rent roll at an exceptional 66% yield on cost.
With a further €14.9m to be invested and overall occupancy levels at only 84%, this yield is likely to rise even further as the remaining vacant space becomes fully occupied.
Example of upgraded space by Sirius Real Estate
German economy provides an additional tailwind
The German real estate sector continues to feel the positive impact of strong economic tailwinds with transaction volumes up and pricing across all subsectors of the real estate market reaching levels not seen for many years.
This robust economic environment has also translated into high occupational demand particularly from the SME sector which is a key element of Sirius’ tenant base. Brexit has also seen Germany becoming the market of choice for many property investors as they seek a safe haven outside of Britain.
Share price has rerated in 2017
Sirius’ share price is up 45% so far in 2017, as seen from the following chart:
After showing value for some time (it traded at a discount to Net Asset Value for the past 3 years) it has finally rerated and is currently trading at an approximately 12% premium to its NAV. Given the company’s strong growth rate and returns on capital, it doesn’t look expensive. However, prospective buyers may want to wait for a pullback before entering, given the recent strong run.
Sirius Real Estate is benefiting from the efforts of its entrepreneurial management team, as well as favourable economic conditions in Germany. Its redevelopment programme is driving high returns on capital and strong dividend growth. Not many property companies operating in Europe are generating returns on investment above 20% p.a.
Its inclusion into the JSE ALSI and Small Cap indices makes it suitable for the mandates of a much larger investor audience and, upon entering the mainstream it will benefit from increased visibility and analyst coverage. The share price has run hard though and prospective buyers should be patient before entering.
Sources: Peel Hunt, Sirius Real Estate, Thomson Reuters Eikon
Wim Prinsloo, CFA
Portfolio Manager at True North Capital Management
Wim Prinsloo serves as portfolio manager at True North Capital Management. He holds an honours degree in investment management from the University of Pretoria and is a CFA charter holder.
Wim’s work at True North includes the management of the firm’s equity and property unit trusts, development of its investment processes and ensuring best-in-class service to clients. He benefits from 7 years of experience in the investment industry and is a member of the Investment Analyst Society of South Africa.