The listed Dutch real estate funds have had a very good year with a total return of 20% despite the negative developments in the market. The question is whether the rent proceeds will remain high enough to make up for the value of the buildings in the portfolio.
It probably wouldn’t be expected considering all the news from the last year, but Dutch listed real estate funds have had one of the best years ever. The EPRA Netherlands-index, in which all the important Dutch real estate funds are listed, rose last year with 20.9%. Therefore the index ended with a profit for the ninth year in a row.
The high return is remarkable because the news in 2003 was largely dominated by declining rents and increasing empty standing of mostly office buildings. However the investors in real estate funds have been saved by a number of issues. First of all many real estate investment funds have made a switch in their portfolios over the last years from national to international and from offices to shopping centers. Funds like Rodamco Europe, Corio and Wereldhave are now having the benefits from the fact that empty standing and rent yields in shopping centers have remained more at the same level than in the office sector.
Another advantage was that there was a high demand in 2003 for quality retail objects. Especially the financially strong German investment funds, which up until recently hardly invested in retail, have made sure that the value of shopping centers has risen more than it has declined over the last years. Therefore this compensated for the decline in value of offices.
Of course this is not the case for all real estate funds. For example Vastned Offices/Industrial only invests in offices and industrial premises. This fund therefore took a considerable blow in the value of its investments. The intrinsic value (assets minus debts) per share declined last year from € 30,10 to € 26,50. And the end of the decline isn’t in sight.
However also the investors in Vastned O/I didn’t make any losses in the past year. On the contrary. The quotation of shares fell down for the fourth year in a row, after respectable losses in 2001 and 2002, the quotation loss was now almost 5%. But the high dividend of € 3,10 made up for it all and got the total return for 2003 still at almost 10%.
How can a fund make such a high return in such a bad market? Investors anticipated the collapse of the office market and set the quotation of Vastned O/I in the period 2001-2002 € 12 lower at € 21,50, a loss of 36%. The decline of the quotation went much faster then the decline of the value of the office buildings the company owned. Therefore the quotation of Vastned O/I had fallen 20% below its intrinsic value of the share last year.
Because the rents kept coming in, this ‘discount’ was responsible for a very high return on investment over the last year and this situation still maintains. Vastned O/I expects a net annual profit of approx. € 2,80 per share over 2003. Vastned will pay this to its shareholders in the form of dividend later this year. Considering the present quotation of € 20,50 this means a dividend return of more than 10%.
It is feared that such real estate funds (with ‘discounts’) will be hit at two points in the next year. First of all because of a further decline in value of the offices and a starting decline in the value of shops. On the other hand analysts fear that the biggest blows on the part of the net profits are still coming.
Petercam therefore expects a decline in net profit for Vastned O/I in 2004 and 2005 to € 2,22 and € 2,00. With this upcoming decline and a probable further decrease of the intrinsic value, Vastned can now use its present discount of approx. 22% as a buffer.
Source: Financieel Dagblad