Deutsche Konsum REIT locks in profit as food retail continues to shine

Listed German REIT Deutsche Konsum REIT AG (DKR) made its first significant disposal of a partial grocery retail portfolio consisting of seven separate assets which it sold to a German institutional fund for €47.2m, or about 18 times annual rent.

The portfolio with a rental area of 28,000 sqm, generates an annual rent roll of €2.6m, and has a WALT of nine years, with a vacancy rate of 1%.

DKR had bought the properties individually over the years 2015 to 2019 with an average initial yield of 11% and remaining lease term of 4.5 years on average. The vacancy rate was around 3% at the time of acquisition. During the holding period, the properties generated rental income of around €14.4 million, while DKR was reducing vacancies and extending all the portfolio's major leases.

The properties are located across the company's heartland of eastern and northern Germany, at Bad Harzburg, Verden, Bergen and Krempe as well as Niesky, Krakow am See and Altentreptow. Major tenants are E-Center (3X) and Edeka, Penny, REWE and Netto.

DKR said half the capital gain being realised on the sale of the properties will be re-invested in new grocery-anchored retail properties, with the other half being redistributed as an extra dividend for this 2021/22 financial year. The company said it has a well-filled pipeline of new stores, and about €120m plus the net inflows from the sales to re-invest in acquisitions.

CEO Rolf Elgeti said, "These sales underline that price and capital discipline are very important to the company in all directions. This applies to purchases but also to possible sales. Moderate and opportunistic recycling of capital can lead to high increases in shareholder value and will therefore be pursued by us where it seems sensible. The question of whether the current share price adequately reflects the value of the Company may also be discussed in this context. We are continuously reviewing potentially useful measures in this regard."

For business year 2020/21, DKR bought 13 food-anchored properties for more than €120m with a rent roll of about€11m, for an average purchase yield of 9.1%.

It also revitalised projects in Rostock, Drebkau and Hohenmölsen, while extending leases and reducing vacancies, which will lead to higher rental income this year.

On the financing side, the firm is refinancing or prolonging existing debt arrangement of about €100m at "significantly lower interest rates", which will produce savings of up to €1m, and contribute directly to FFO1.

Meanwhile, Berlin-based Deutsche Fachmarkt AG (DEFAMA) has also bought a further asset, a renovated 6,700 sqm Fachmarkt near the main station in Hof, Bavaria, with extra land attached, for €6.7m.

This brings to 45 the number of locations the company now has, generating annual rent of €15.6m across 200,000 sqm, with a 94% occupancy rate. The listed DEFAMA focuses on smaller retail outlets in smaller-sized towns mainly in northern and eastern Germany. Purchase criteria are a rent roll of at least €100,000, no more than 10 tenants and at least two blue-chip retailers as anchor tenants, and a net yield of 10% upwards.

DEFAMA's main tenants are ALDI, EDEKA, Kaufland, LIDL, Netto, NORMA, Penny, REWE, Getränke Hoffmann, Dänisches Bettenlager, Deichmann, KiK, Takko und toom.

The current annualised FFO1 is €7.8m, or €1.76m per share. In line with most of its peers, the company's stock price has been rising steadily over the past three years, currently trading just below a recent high of €25.00.

Also getting active in the Fachmarktzentrum segment is 777 Capital Partners, the Swiss-based property boutique founded by ex-Corestate bosses Ralph Winter and Thomas Landschreiber. The company is developing a new centre, the Oberpfalz-Arcaden, in the Frankonian town of Sulzbach-Rosenberg, and has closed a forward deal to sell the asset to Hamburg-based Captiva Investment Management GmbH for one of its institutional funds. Captiva already owns more than 150 local shopping markets across Germany (as well as a separate division focused on healthcare and medical centres).

The 10,000 sqm project is due for completion in early-2022, and has already secured tenancies from leading retailers EDEKA, Netto, Müller, Fressnapf, Reha Team Nordbayern and NKD.

Separately, there is uncertainty in many European markets about the immediate plans of Russian super-discounter MERE, which is planning a simultaneous roll-out of its ultra-cheap model in several major markets such as France, Belgium, Spain and the UK, having had a number of stores open in German for the last two years. Rumours about store closures and failure to open on fixed opening days are getting louder in volume, with the suspicion growing that PR and hype is running ahead of the company's actual securing of necessary local permits.  

MERE is owned by Russian group Torgservis, headquartered in Krasnojarsk, Siberia, which has several hundred retail outlets in its home market and several countries in Central Asia. It has at least 600 stores in Russia alone, and its last reported turnover was €1.3bn.

MERE kicked off in Germany in January 2029 with its first store in Leipzig, with the prices of most products pitched at about 20% below the highly competitive prices of local matadors ALDI and LIDL. Selling its products directly from pallets, it initially enjoyed similar success to the original German discounters in the Sixties. A few further store openings followed, in Zwickau and in Halle-Neustadt, under the management of Torgservis subsidiary TS Markt GmbH in Berlin-Marzahn. The company website says there are additionally stores in Homburg (Saarland), Schönebeck and Berlin, but other media reports suggest there may be others, maybe up to ten or twelve.

Now it seems the company has put its German expansion on ice, having cancelled an opening in Altenkunstadt, near Lichtenfels in Bavaria, the day before the store was due to open, and after the landlord, a family office, had invested €200,000 in the store on the strength of a signed 10-year contract with TS Markt. The discounter was to have played an important role as anchor tenant in a Fachmarktzentrum there, with the rents and viability of neighbouring stores in the centre contingen upon the succes off the deep discounter.

Attempts to contact the company in Berlin have proved fruitless, apparently, and it would appear as if the team responsible for the German expansion has dissolved into thin air. A report in trade journal Lebensmittel Zeitung suggested that the focus was now on France, the UK and the USA, with Germany being put on the back burner for the moment.

REFIRE: This sounds like a tale with more behind-the-scenes skullduggery yet to dribble out. If it is true that the Russians are learning now what mighty Walmart in its time also had to painfully learn - how nearly impossible it is to beat ALDI, LIDL and Co. on their home turf - then it won't be the first time a food retailer will have had to retreat from Germany, where food prices are the lowest in Europe, and competition the stiffest. Even for a group coming from the icy temperatures of Siberia, the experience of competing in Germany on price alone must be chilling. We'll be staying tuned for updates.