Sdic Power Discussion Threads

[scburbs] 11/3/2010 16:13

Refurbished old properties being sold for a book gain, illustrating that there is value in older buildings.

"About 17 percent of the entire Berlin portfolio – a total of 937 residential and 79 commercial units – was sold during the third quarter to a consortium composed of Conwert Immobilien Invest SE and Kronberg RE Deutschland GmbH, at a book profit. The transfer of rights and responsibilities took place at the end of the third quarter, and the purchase price was received on schedule. These residential portfolios are renovated and partially renovated Berlin residences, most of which were built in the first decades of the 20th century."

[scburbs] 11/3/2010 16:11

I must commend the German companies on the English language reports available on their websites.

This one (Colonia Real Estate AG) includes a very interesting illustration of how the refurbishment business model is actually supposed to work!!

"Leasing results for the Hamburg and Aachen portfolios were distinctly positive in the first nine months of 2009. With 381 new rentals in these two portfolios, the new rental rate was nearly 30 percent, an outstanding result.
Full occupancy had already been achieved by mid-year at the Morthorststrasse subportfolio in Hamburg. The rent on new rentals has also performed well in modernized portfolios, at an average of EUR 5.64 per m2 (EUR 4.50 per m2 prior to renovation). This shows that the rental market continues to welcome our extensive energy upgrades, our "Blue Living" product, and our sustainable asset management approach.

On the cost side, rigorous cost controls meant that we did not have to fully utilize budgets, especially for capital expenditure (capex) projects and residential updates, and we remained well within the our strict internal
limits. We continued to concentrate on limiting costs to absolutely necessary investments, and conducting only individual projects focused on important points of emphasis."

[scburbs] 11/3/2010 16:04

GAGFAH 2009 results out yesterday. Rental growth was 1.3% and NAV fall held to just 2%. Vacancy much lower than SDIC at around 5%.

[scburbs] 11/3/2010 15:59

February monitor is now on the website. Key points include a 0.3% increase in prices in January

[lagosboy] 11/3/2010 13:34

nickcduk

I think you are there, this is a management issue, and in crude terms looks to me that in their rush to buy they must have bought some real duff properties. The cash spent has not been reflected in the Estate Valuation.

This stock is now trading at a 80% discount to its 30/6/09 NAV with the SWAP or a 85% discount without the SWAP. It is also now
in potential breach of a banking covenant despite all the positive guidance in the last full set of accounts.. Looks like a rapid detioration to me all round.

Schrubs I take your point about the SWAP which will reverse most likey and there will be a mark up, but the market knows about that, so thats priced in.
It is all over the accounts and almost every announcement makes note that there is no cash effect. Indeed it is excluded from European NAV calculations anyway.

There is a huge opportunity cost in cash lost of course by hedgeing at 4.7%, probably around €20 million pa. Maybe hyper inflation pre 2015 is the concern and will it look like a great decision.


Points about heating costs, whether or not a property is old or very old whilst in my view are relevant to a degree they are on the fringe.

It is like to worrying about varnishing the decking as the Titanic goes down.

There are some excellent posts and some very knowledgeable posters using this board, yet it is difficult for me to see beyond a management issue covering all aspects of how the company should be being run. Unfortuantely that includes the initial property selection and criteria used, if they got that wrong, and I don't know, SDIC may simply have a poor quality portfolio and some real duff properties. That maybe a difficult mistake to rectify.

As dividosh says this would also cause SDIC to underperform on all metrics. Poor property selection equals high churn rates, high vacanacy rates, high bad debts, high maintenance cost.

There is obvioulsy a lot more risk than I first thought when I looked at SDIC.

I thought it would rise nice and steadily, year on year as the refurb program completed and property prices recovered, even in Germany, post credit crunch times. Better tenants, updated properties and higher rental income....does not seem to be on that path at the moment. Selling simply realises the current low valuation on the properties.

[nickcduk] 11/3/2010 12:50

Have a gander over at Shore Cap results yesterday to see how a German property fund should have been run. They have grown income, slashed vacancy rates and obviously picked up a much better quality of portfolio around the same time that SDIC were buying.

[davidosh] 11/3/2010 12:49

I did ask a few weeks ago how SDIC performed on all metrics compared with other similar funds and property companies. It looks to me like there is significant underperformance and there may lie the answer to many of our questions. Why such significant underperformance and if costs are reduced and performance improved can this deliver something significant for shareholders ?

[scburbs] 11/3/2010 12:34

Conwert Immobilien also reporting reduction in vacancies in Germany. SDIC does seem to be underperforming despite the high fees!

Interesting that on P6 growth in German households is expected in the next 10 years. This also shows the new build volumes in Germany. These are very low. Market rents in all of the cities covered are showing low growth.

Conwert also has a high vacancy and is also doing significant refurbs. The vacancy rate is falling and they are predicting a further sharp fall in 2010.

[scburbs] 11/3/2010 12:20

Interesting to see Deutsche Wohnen vacancy rate (down to 2.8%!!!). Core rents in their portfolio also performing well.

[scburbs] 11/3/2010 12:17

Rental growth is slightly positive as flagged in the last monitor. New builds are doing slightly better, but not that big a gap.

[scburbs] 11/3/2010 12:11

"German property prices rose 0.93% on a quarterly basis in Q3, according to the global house price index recently released by the Global Property Guide. The annual picture is not so bright however, with prices down 2.78% on last year, which is only a moderate slow from the contraction of 2.93% in the 12 months ending Q3 last year.

...

German property is perfect for the current wave of investors, who are looking for solid rental income. In Germany only 46% of people own their own homes; less than in many developing nations, so demand for rental property is constantly solid."

[davidosh] 11/3/2010 12:00

ydderf.....In the flats within your folio in Germany what is the average increase in cost for the tenant due to heating bills etc ie. additional running cost as percentage of the rent. How does that compare to average new build ratio ? If new build costs are 40% higher and rents have to be much higher to produce a decent return for investors it suggests heating bills are a huge proportion of the rentals outlay.

Here in the UK the average one bed rental is say £7000 per annum and all variable bills (water, gas ,elec) probably equal no more than £1200 per year. A very fuel efficient flat here in UK would probably only cut that by £300 max so no huge saving compared to the rent values. Do you have comparable savings showing why the tenants will pay much higher rents for new build ?

[envirovision] 11/3/2010 11:44

theres hardly going to be significant new build now is there, you might get the odd in vogue hot spot, but this is not the SE south of MK East of Stevenage or W Cambridge now is it jeez

[scburbs] 11/3/2010 11:39

ydderF,

I know there is no housing shortage as Germany has a stable (or shrinking) population, it is not at all difficult for my UK mind to get around this simple fact! (after all it is a very simple fact that is very easy to understand).

My question is whether there is any significant new build? In reality are we talking about the different between old and very old? What is the average age of the SDIC properties.

[ydderf] 11/3/2010 11:30

Although there are some pockets of imbalance, by and large there is not a housing shortage in Germany. It is very difficult for UK minds to get themselves around this simple fact.

A number of cities even have a whole city stock vacancy rate of 5-10%, Where there is choice, and there is nearly everywhere, tenants will prefer new over old at the same rent because costs are lower. There is absolutely no incentive to buy when rental apartments are so plentiful and cheap. Rents only increase at a snails pace and often the trend is negative instead.

After the wall fell, there were enhanced inventives to developers to build new apartments, this produced a boom and increased the crude surplus, new building has only recently revived a little

Its another world!

[scburbs] 11/3/2010 11:19

ydderF,

Lots of people including yourself have made comments on old vs new apartments. Is there much new build going on in Germany? I thought that the construction cost vs completion value made new build uneconomic. As a result I am surprised by the number of people referring to the issues compared to new build. Is there a point I have missed in relation to new build volumes?

[ydderf] 11/3/2010 11:12

bisiboy and scburbs

a few points about german res:

Aquisition costs are high, typically they add 5-7% to the cost. The main reason is a 3.5% property transfer tax. This means that you buy a block for 100, + 6% = 106, but the value is still 100. It is possible to buy a propco with props to avoid some costs, but other problems can arise - see TRV for an example of this.

Blocks are saleable at a much lower price when there are apartments, even one, unlet. This means in a worse case scenario, that you pay 107, then get an obstinate vacancy which means the actual selling value will be, say 90 or less.

Refurbs. In my experience, the market is essentially between new and old apartments. Tenants decide how much they want to pay - this is always per sq metre, new is the most expensive but has big running cost savings, rent is always quoted as 'cold' ie without running costs. Tenants always ask what the running costs per sq m are projected to be before deciding. Most apartments are let unfurnished, little more than 'shells'. There is little or no market for an anhanced rent for a new kitchen, it merely facilitates letting. Remember the key metric for tenants is hot and cold sq m rents.

Problem with refurbs is that it is still an 'old' apartment, with competition from new apartments. I don't see how this is economic unless there is a hidden agenda to sell the modernised apartments later, rather than rent. Many have secretly cherished this ambition, but the market is obstinate and the culture is firmly against owning apartments rather than renting.

None of this seems to be reflected in the SDIC accounts. Either the prop stock is worht what it says in the accounts, in which case sell it and pay down debt, or it isn't in which case dog help you!

[scburbs] 11/3/2010 11:01

Vacancy rate stable in the last quarter of 2009. However, the fact that they have made that comment in a 6m trading statement does seem odd and implies that Q3 2009 may have been seen an increase in vacancy.

"The vacancies in the property portfolio remained broadly stable over the final quarter of 2009 as the Company continued its refurbishment programme."

[bisiboy] 11/3/2010 09:19

asset value this half year is difficult to call because of the increase vacancy rates.
i was once told that empty flats were attributed a value of zero.
on a like for like basis asset values must of increased looking at the movement in the market of which their properties are representive.
i also believe they are not in any great rush to sell properties at any price
but can not go onto further detail on this.

[scburbs] 11/3/2010 08:46

Lagosboy,

I am not sure whether the Estate value is still being marked down. If it has moved in line with the German residential market I believe it should be flat or slightly up in the 6m to 31 December (if they are adding any value at all with the refurbs then it definitely should be up, but I am certainly not clear whether they are or not).

The difficult question on valuation depends on whether the board is going to remember their fidiciary duties to the shareholders and force through disposals or changes to the fee arrangements. However, in a flat or slightly rising German residential market with a reversing swap liability the downside asset protection is significant (clearly this protection would go away if the market starting falling again).

I think these are a good risk/reward at this level and am a buyer.

[lagosboy] 10/3/2010 11:52

Another 8% fall this morning, just the one large sell of 140,000 odd shares, but hardly large value.

Looking like my decision to get out at 28 cents was correct, although I was not sure at the time.

I would like to buy again, but have a feeling this might just be heading sub 10 cents.

If it generating zero free cash, and using cash to refurb whilst the Estate value is being marked down....how do you value it?

[jeffian] 08/3/2010 23:04

Thanks, Sleepy, that's very helpful.

[sleepy] 08/3/2010 22:47

Jeffian,

If you use this link and scroll down you should find the initial and subsequent prospectus - SDIC and SDCC admission documents

[lagosboy] 08/3/2010 14:30

jeffian

In regard to your no no no no no comment I am not disagreeing with you, I am only saying what the company thought it could do & what the model was based upon to drive capital growth and higher rents. This is what is says on the tin.

I respect your knowledge, which far greater than mine,as an old property hand.

It seems that nobody yet knows exactly what the breach is, which would a good starting point.

I also find it a little odd that the bank did not, shall we say,did not relax the covenant whilst the problem was resolved. All they they are doing is further damaging their own security as the market cap, common equity and investor confidence are negatively impacted by such disclosures.

[scburbs] 08/3/2010 13:36

Clearly the board do actually recognise the need to sell properties to de-lever the group. I guess €22m is a start, but they need to do rather more. In the circumstances (i.e. the share price discount) there is only one way to de-lever the group whilst maintaining maximum shareholder value and that is to sell properties.

"Given the economic climate and the particularly adverse effect of this on the share price of leveraged property investment companies, we are continuing to review ways to de-lever the portfolio whilst maintaining maximum shareholder value. In line with the terms of the original loan agreements, the Company has begun to amortise a proportion of its debt. Long-term amortisation requirements may be fulfilled by selective asset disposals."