Inovalis REIT takes JV approach to German office property buy

Inovalis REIT (INO.UN-T) recently completed its first purchase since going public in April: an eight-storey office building in Dulsberg, Germany.

Innovalis HanoverThe Toronto-based REIT has agreed to purchase 50 per cent of the property on a joint venture basis. It has not identified its JV partner, describing it only as a strategic, global institutional investor with a long-standing relationship with Inovalis SA.

An executive with the REIT said the 13-year partner has joined Inovalis on a number of private equity property purchases in France and Germany.

The 217,400-square-foot office tower is fully leased to Mitsubishi Hitachi Power Systems Europe GmbH until the end of 2020. The purchase will be immediately accretive to the REIT’s AFFO per unit, Inovalis said.

The REIT said it will not need to raise additional equity capital to fund its portion of this acquisition. It will pay for the purchase through a combination of existing cash on hand, proceeds from re-financing and up-financing of its REIT’s French properties and a first mortgage of $18.4 million Cdn.

“We are excited because the acquisition is consistent with our previously stated growth strategy of acquiring high-quality assets located in good locations in stable markets at attractive relative valuations,” said Khalil Hankach, Inovalis REIT’s chief investment officer.

“The REIT continues to see similar investment opportunities in the targeted European markets, and thanks to the possibility of the JV, we will have sufficient liquidity to continue buying assets throughout 2014. Additionally, and despite the fact that the REIT has not yet closed its first fiscal year, its legitimacy is established enough to convince institutional investors from outside of Canada to invest alongside the REIT.”

An eye on Europe

Inovalis REIT was set up last year to buy office properties primarily in  France and Germany and opportunistically in other European countries when there are deals that meet their conditions.

The main selling point for REIT investors from Inovalis’ standpoint is that real estate prices can’t fall much further and represent a rare bargain.

“We offer Canadian investors the opportunity to invest through a TSX-listed company in markets that have really been hit by the crisis,”  said Antoine Tronquoy, the REIT’s chief financial officer. “The type of properties that we are looking at, they are sort of 25 to 30% down versus peak price. Not only did they go down, but we don’t expect them to go down any further.”

In fact, Inovalis is expecting a turnaround. “We clearly can see and can feel, because we have many people on the ground in France and Germany, that the market is bottoming out so the recovery is there,” Tronquoy said.

The Inovalis CFO said cap rates have been on the decrease in Europe, particularly for prime properties and falling less so for the “B type of properties” that the REIT is purchasing. “Rents are stabilizing and slightly bottoming out, but the trend is less clear for rents. For cap rates, it is a fact.”

Plenty to buy

Whether the REIT does future deals in partnership or raises the capital to do it on its own, there is plenty to buy, said Tronquoy.

“The great thing in Europe right now is it’s a buyer’s market because you have a certain number of German funds that are in liquidation mode. It is not that it is a fire sale, it is just that those funds have reached the term of their investment horizon and therefore they have to sell properties.”

The REIT CFO said Inovalis could currently buy another $100 million worth of properties but if it were to raise further equity, its infrastructure on the ground in France and Germany could handle $300 million to $400 million worth of properties annually.

The REIT’s initial portfolio, which dates back to last April’s IPO, includes a 124,076-square-foot building in Hanover, Germany and three Paris-area properties of 96,111 sq. ft., 50,407 sq. ft. and 258,675 sq. ft., respectively, in Courbevoie, Paris and Vanves.

Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more

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