SMART ABOUT SPACE - JSE MAGAZINE

SMART ABOUT SPACE

Sirius is well positioned in the attractive German real estate market to deliver strong returns on investment

Sirius Real Estate Limited invests in and operates business parks, providing conventional and flexible workspace predominantly to SMEs and blue-chip corporations in Germany.

Sirius is one of the largest branded providers of mixed-use flexible workspace in Germany, and it is listed on the main markets of the London Stock Exchange (LSE) and the JSE. It represents an opportunity for investors to gain exposure to the attractive German light industrial and office real-estate sector through a market-leading owner and operator that has a track record of active management and significant value creation.

The history
Established in February 2007, Sirius listed on the LSE’s Alternative Investment Market (AIM) three
months later with 20 business parks. In December 2014, it was one of the first companies to use the JSE’s fast-track listing mechanism. It successfully raised 40 million and listed on the JSE’s AltX, giving the group a secondary listing alongside the original AIM listing. Following the successful JSE listing, Sirius embarked on further capital raising, enabling it to acquire 14 additional business parks on attractive yields, supported by the refinancing of the existing debt facilities at significantly improved rates and on much longer terms than previously available. In March 2017 Sirius listed on the main markets of the LSE and JSE, and in December 2017 it was included in the FTSE/JSE SA Listed Property Index (SAPY), which comprises the top 20 (by market cap) property companies in the SA real estate sector, with a primary listing on the JSE.

Attractive fundamentals
Sirius invests in business parks in or near Germany’s major cities, where it has identified the potential to generate higher income and asset-value growth by subdividing and improving the existing space so that it can be marketed directly to occupiers under the Sirius range of products.

Currently, Sirius owns and manages a portfolio of 58 assets located around the ‘big seven’ German markets, valued at in excess of 1 billion. The assets represent a total of about 1.4 million m² of industrial, production and office space, with a well-diversified tenant base acquired at attractive yields and at capital values well below replacement cost.

Within the group’s property portfolio, which is suited to a broad range of clients, Sirius has three main offerings, namely:

  • Large-scale mixed-use workspaces suited to international blue-chip corporations (such as Siemens, GKN and MAN) requiring sizeable production spaces. These are available on long-term leases
  • Conventional workspaces aimed at German SMEs
  • Flexible workspace for micro SMEs and start-up customers requiring serviced offices, workshops and/or self-storage on more flexible leases.

The stability provided by long-term blue-chip anchor tenants is complemented by Sirius’ higher-margin conventional and flexible workspace offerings.

The strategy
The group’s core strategy is the acquisition of business parks at attractive yields and/or with value-added potential, which are transformed through investment and asset management to become higher quality real-estate assets.

This transformation includes the reconfiguration and upgrade of existing and vacant space to appeal to the local market, branding of the site and extensive asset management, which covers extending anchor tenants, letting up vacancy and significantly improving service-charge cost recovery.

The group continues to focus on growing both organically and acquisitively as well as recycling mature and non-core assets to free up capital to acquire assets that it can transform, and to which it can add greater value.

The returns
Sirius has consistently delivered a total share-holder accounting return of more than 15% over the past three years.

Its policy of distributing 65% of funds from operations (FFO) as dividends ensures it maintains a well-covered dividend and provides head room to be flexible with pay-out ratios if required.

The dividend yield is about 5% and the defensive gross valuation yield is 8.1%, with gains mainly resulting from improvements in income.

Sirius believes there is further value and income enhancement to come from a combination of asset recycling, filling of vacant space in recently acquired assets, implementation and completion of accretive capex investment programmes and reductions in service-charge leakage.

The future
Sirius has a proven ability to transform assets by improving tenant mix, occupancy levels and rents. It differentiates itself by controlling key functions that enhance the tenant’s experience and delivers results over and above outsourced alternatives. In-house teams for letting, marketing, service-charge recovery, property management and acquisitions drive top-line growth and margin improvement across all the company’s assets.

Sirius’ SmartSpace solutions are a key element of the business model. Around 7% of the total lettable area within the portfolio is dedicated to Smartspace products. These products are designed to make innovative use of sub-optimal space that would normally be mothballed by other operators.

While Smartspace products represent about 7% of the total lettable area today, these products have the potential to account for up to 15% of the total lettable area.

The Smartspace range differs from the rest of the portfolio in that customers pay a fixed-sum rent at the start of each month. With Sirius’ range of conventional products, customers pay a fixed rent and then pay service charges and utility costs separately on a consumption basis.

Smartspace products provide Sirius’ tenants with more certainty about cost from day one of their occupation. The products break down into three offerings – Smartspace office, Smartspace storage and Smartspace Workbox.

The first two are serviced offices in a business park and self-storage in a business park – essentially out-of-town office and storage products. Smartspace Workbox is effectively a serviced factory space – an office concept applied to a small industrial space with multiple different industrial uses.

Not only do Smartspace products open up new local tenant markets to Sirius, they also give much greater flexibility to the company in terms of deploying capital into business parks, to deliver attractive returns on investment and increasingly strong rental yields.

This range of products has been developed by Sirius over the past 10 years. It was initially borne out of the financial crisis, when Sirius had to look further than its traditional products to fill business parks. Smartspace makes up only 7% of Sirius’ products, so that when the next downturn arrives, Sirius can flex up the mix of Smartspace.

From experience, the company knows that demand for these smaller, more flexible products increases in a downturn. It is, therefore, important to be able to balance the mix of conventional products with Smartspace products in order to maintain and improve net operating incomes throughout the entire cycle.

Germany provides a unique market opportunity, because of the volume of light-industrial property across the country and, in particular, the size and scale of individual business parks, which tend to be larger than in many other European countries.

With an estimated 3.6 million mid-sized businesses, the Mittelstand, or German SMEs, which are relatively evenly distributed across the country, make an ideal customer base for Sirius’ products. As a result, Germany provides Sirius with a large, well-spread market opportunity and a potentially broad client base of long-term, stable tenants.

‘Sirius has grown over the last five years from a small AIM-listed company to a Main Market, EPRA/NAREIT/MSCI Small Cap Index and SAPY index participant with aspirations to enter into the FTSE 250,’ says Andrew Coombs, Sirius CEO.

‘The company has delivered outstanding relative income and capital returns in a considered and low-risk manner, and our vision is to continue doing so to the benefit of all shareholders.’

Germany is the growth engine of Europe and Sirius is well positioned within the German market to continue to deliver strong total returns in the future fuelled by asset recycling, filling vacancies and improvements in service-charge cost recovery.

Sirius’ executive management would like to extend its thanks to the company’s shareholders throughout South Africa for their continued support, and it looks forward to presenting its interim results at the end of November during the company’s Cape Town and Johannesburg investor roadshows. The company’s sponsor in SA is PSG Capital.

LinkedIn: www.linkedin.com/company/siriusrealestate/
Twitter: @SiriusRE
www.sirius-real-estate.com/