Strong German rental market lifts Canada’s Dundee

Canadian-listed Dundee International REIT, which is exclusively invested in German office and commercial properties, saw its FFO funds from operations surge from €10.5m to €16.1m in the first quarter (year on year), based primarily on very buoyant demand for lettings in its properties, the highest in the company’s history.

Dundee, which is now changing its name to Dream Global REIT, said that its occupancy rate rose to 87.7% at the end of the quarter from 86.4% last year, due to positive absorption. According to CEO Jane Gavan, "Our leasing team in Germany is seeing higher levels of activity compared to prior years which is translating into more people touring our space and driving our leasing performance. The strength of the German economy helped reduce the vacancy in the Big 7 office markets by 15 bps in Q1 over Q4 2013 to 8.1%.”

The company also managed to further diversify its tenant profile, reducing its dependence on its largest tenant Deutsche Post to 35% from 43% at the same time last year. In-place rents also increased €7.87 per square foot in Q1 2013 to €8.72 in Q1 2014, largely due to high-quality acquisitions, said the company. Overall, at €8.85 per square foot, average market rents in the portfolio remain about 1.5% above in-place rents, and about 11% above in-place rents on the assets the company initially bought when it initially launched by buying a major Deutsche Post portfolio, so these are seen as offering high upside potential.

Dundee also bought two further office assets in Munich and Hamburg for about €75m, financing them with Can$69m of mortgage financing, made up of $13.2m at a fixed rate of 1.98% for a five-year term, and $55.8m at a fixed rate of 2.33% for a seven-year term. The company says, “These acquisitions, which were completed on average at a 400 bps spread between cap rates and mortgage interest rates, with an average occupancy rate of 98%, added approximately 286,000 square feet of high quality office space in two of the most desirable markets in Germany to our portfolio.”

CFO Rene Gulliver commented, "Mortgage rates in Germany are among the lowest in the Trust's history, as increased competition in the German lending market has put pressure on credit spreads. Coupled with our success in building strong relationships with German lenders, we continue to achieve highly attractive rates for new acquisitions." Dundee also sold five properties for €13.1m, or 120% of book value, in the period.

The company now manages €1.7bn of assets in Germany, up from €1.2bn a year ago. It has a debt-to-book value of 56%, a weighted average interest rate of 3.35% on its debt, and an interest coverage ratio of 3.41 times.