So far, I invested in two German real estate funds in liquidation – TMW Weltfonds and Axa Immoselect. I exited both investments at the end of last year. My introductory post about this investment topic can be found here.
Together with CS Euroreal and SEB Immoinvest, Kanam Grundinvest is one of the “big three” German real estate funds currently in liquidation. The fund is now approaching the end of the almost 5 year official liquidation phase. The remaining assets will be transferred to the custodian bank at the end of December 2016. The sales process will be ongoing afterwards. The current portfolio consists of twelve properties located in Luxemburg, Montreal, Rotterdam, Paris and Brussels. Management expects to have sales agreements in place for the majority of the remaining fund assets before the transfer to the custodian bank takes place. This implies that December will bring a lot of news flow for this fund.
As of October 2016, the fund had EUR 900.5 m in real estate and EUR 539.9 m in cash. They have provisions and obligations of EUR 254.9 m on their balance sheet. Other assets sum up to EUR 165.9 m. The fund has no bank debt outstanding. The NAV is EUR 1,351.4 m or EUR 18.85 per fund unit. Fund units can currently be bought in the market at EUR 15.2 or a 19.4% discount to NAV.
During the ongoing liquidation phase 40 out of 52 properties have already been sold generating gross proceeds of roughly EUR 5.0 bn. I expect the following office properties to be sold in due course:
E-Commerce 1 and 2, an office complex in Montreal seems to be in the later stage of the sales process. According to this article from Reuters, two Canadian financial service companies are set to buy the property for around CAD 415 m. The sales price would be roughly 12% above the appraised value. The two Canadian assets comprise 29% of the fund’s remaining property portfolio.
Atrium Business Park consists of four properties and is located in Luxemburg. Tenants include KPMG, Zurich Eurolife, Baloise-Versicherung, Sodexo, IS4F and Dentons. The weighted average lease term is four years. Based on the appraised value and expected next year rental income the asset implies a gross yield of 6.0%. The four Luxemburg properties comprise 27% of the fund’s remaining portfolio.
The refurbishment of Square de Meeus in Brussels should be completed soon. There is already a lease agreement until 2025 with the European Parliament in place. The asset comprises 18% of the fund’s remaining portfolio.
Hence, based on my expectation, the fund should be able to announce the disposition of 74% of current property portfolio value within the next one or two months.
The difficult to sell part of the portfolio comprises three properties in the challenging Dutch office market and two properties in Greater Paris:
Delftse Port is 50% owned by Kanam Grundinvest. The rest belongs to the Dutch Office Fund. The property has recently been refurbished and is currently being marketed. The property has more than 65 thousand sqm of leasable area. According to this site roughly 15 thousand sqm are currently marketed for around EUR 200 per sqm/year. The asset represents roughly 7% of the fund’s remaining property portfolio.
Blaak 555 is 70% vacant and Robecohuis is 100% vacant. Consequently, a time and capital consuming repositioning of these assets might be necessary to be able to sell them. Together they represent roughly 8% of the fund’s remaining portfolio value.
All three Dutch assets are located in or close to Rotterdam’s city centre. Since June 2015 appraised values have been adjusted downwards by 14% for Blaak 555, 17% for Delftse Poort and 55% for Robecohuis. In April 2016, another German real estate fund in liquidation, CS Euroreal, showed that Dutch office properties attract interest from investors again, when they sold almost their entire Dutch portfolio above appraised value.
The two French properties, Le Colombia and ONYX, are located in the North of Paris. Le Colombia is currently vacant and ONYX has a relatively short remaining average lease term of one year with 25% being vacant. Together they represent 11% of the remaining portfolio value. Based on latest rental income generated, le Colombia is valued at an 8.6% and ONYX at a 6.1% gross yield.
Consequently, 26% of the current real estate portfolio might not be marketable immediately. Nevertheless, I believe that all five properties have the potential to be successfully repositioned and to be sold on average at 85% of current appraised value (including potential repositioning expenses and disposition costs) over the mid term.
How could the fund’s further liquidation look like?
Overall, the fund should be able to generate at least EUR 630 m of net sales proceeds (after 5% disposition costs) in the near term or EUR 8.8 per fund unit. This brings the cash balance to EUR 1,170 m or EUR 16.3 per fund unit. Assuming that fund management keeps EUR 450 m within the fund, potential near term distributions at the beginning of next year sum up to EUR 720 m or EUR 10 per fund unit. After the distribution and taking into account a 15% value adjustment for the remaining properties, the fund has a NAV of EUR 591 m or EUR 8.2 per fund unit. Assuming that the unwinding of the fund takes until 2021 with the remaining assets being distributed pro rata each year in October, I expect an annual distribution of EUR 1.65 per annum over a period of five years. In this scenario, an investment is expected to generate a 17.3% IRR and a 19.6% total return.
The success of this investment depends on the current momentum keeping up in the property markets. I believe that the quality of the remaining portfolio is relatively high and sought after by a number of potential buyers. Management has indicated that they are eager to sell as many assets as possible before the transfer to the custodian bank takes place. Given my assumption, that 53% of current NAV will be distributed to unitholders soon, I am allocating a relatively large portion of my portfolio to this investment.
I am assuming that I bought a 7.9% position of my portfolio from November 21 to November 25, 2016 at an average weighted price of EUR 15.21 per fund unit.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!