Annual Report 2006 - Tamar European Industrial Fund

Investment Manager’s Review
Property Market Review
In 2006, total industrial investment market activity was approximately equal to that in 2005, accounting for 5% of total
investment activity. Germany accounted for 20% of all European investment activity. A lack of investment supply is
the key constraint to growth in market size, however, investor demand remains high and this mismatch is expected to
further fuel yield compression.
Supply in the industrial sector remains constrained which in turn has contributed to rental stability. As a result of
stronger macro economic performance across Europe and improving tenant demand, rent stability remains strong with
the potential for rental growth in the short-to-medium term. In general terms, caution from developers and investors
regarding new construction, in particular speculative development, means that there is a limited threat from both oversupply
and downward pressure on rents.
France
In 2006, take-up in the Ile de France area has continued to recover with almost 950,000 square metres of leasing
activity. Rental levels remain constant and despite low levels of demand / activity in the fourth quarter, the prognosis
for 2007 is positive with rents expected to remain stable and demand to return to normal levels seen over the past two
years. Lack of investment stock has led to a slowdown in activity over the past two years and this is expected to remain
true in 2007, but will also continue to fuel yield compression.
Germany
The steady recovery of the German economy continues to fuel occupier activity and is expected to keep in-line with
new supply. Despite some downward pressure in and around Dusseldorf, rents are expected to be stable in 2007.
Essen and Dortmund have experienced high levels of demand in 2006. In investment terms, 2006 was a record year
for Germany with particularly strong interest in the warehouse sector. Yields in Germany are still trading at 50 basis
points above the average for the rest of Europe.
Belgium
Leasing activity in 2006 was very active, especially along the Antwerp-Brussels corridor running through Mechelen.
Take-up in Antwerp has been at record levels, but this is not a consistent story across Belgium - northern Brabant has
seen modest take-up of 30,000 square metres. In terms of investment transactions, 2006 was a record year after the
slow down in 2005. Notably, investors in 2006 showed strong interest in all sectors of industrial property not just larger
units as had been the case in previous years.
The Netherlands
Strong export growth has boosted the Netherlands economy driving improved performance in the industrial market.
Increasing levels of container freight have resulted in strong demand for warehousing in and around Rotterdam. While
there remains high levels of vacancy across the Netherlands industrial market (15% in Rotterdam) much of this is
structural vacancy in older poorly designed units. Rents have stabilised in the past twelve months and with increasing
tenant demand there is the potential for rental growth. Due to limited supply of investment opportunities, 2006 saw
a slow down in investment transactions compared to 2005. Strong demand and limited supply is expected to lead
to further yield contraction in 2007. Despite limited supply there remains strong interest from both domestic and
international investors.
Norway
Occupier demand, in part driven by a strong oil-based economy, has increased significantly in 2006. Rents are
stable and new supply remains limited, in part due to a shortage in construction capacity. Despite being outside the
Eurozone, investor interest continues to increase, though many international investors are not yet represented in Norway
and the local investors remain a strong force in the market place.
Sweden
An improving market economy is fuelling a rapid growth in stock with 300,000 square metres of warehouse space to
be delivered in 2007. Tenant expansion was a key aspect of the market in 2006. Growth in supply off-set by strong
demand has led to stable rental levels and this trend is expected to continue in 2007. Interest for industrial/warehouse
investments remains very high for prime properties and as a result of limited investment supply the secondary market
is also increasingly attractive to international investors. This is expected to fuel yield compression in 2007. In 2006
Sweden saw 8% of the European industrial investment market, a marginal increase on 2005.
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Investment Manager’s Review
Finland
The industrial leasing market remains strong with stable demand and a very low market vacancy. New supply is
constrained and there is very limited speculative development, therefore, rents are stable with the promise of rental
growth in the short-to-medium term. Finland has seen strong growth in interest from international investors across all
asset classes. As elsewhere in Europe, market activity has been limited by a lack of product. Due to perceived lack
of market transparency Finland has traditionally not been favoured by international investors. However, this is now
changing with many investors focusing strongly on Finland. Nevertheless, yields are still significantly higher than
elsewhere in Europe.
Portfolio Overview
As at 31st December 2006 the total portfolio was valued at over £286.76m and the seed portfolio increased from
£212.7m to £219.7m, a rise of over 3%. By value the portfolio breaks down across six countries as follows: France
49%, Norway 24%, Netherlands 11%, Belgium 7%, Sweden 5% and Germany 4%. This shows a reduction in exposure
to France of 17%, an increase in Norway and Belgium and the first assets bought in Germany.
The portfolio comprises 80 properties, 658,000 square metres with 390 individual leases. The current portfolio rent is
£21.5m (NOI) reflecting a net yield of 7.5% with a void of 12.5% by area and reversionary yield of 8.65%.
Belgium France Germany Netherlands Norway Sweden Total
Number of Assets 3 57 2 4 10 4 80
Number of Tenancies 20 284 8 4 56 18 390
Total Area (sqm) 66,333 261,168 89,916 97,652 92,830 50,196 658,095
Average Lot Size £’000 £6,554 £2,449 £6,070 £7,662 £6,932 £3,727 £33,394
Value (per sqm) £296 £534 £135 £314 £747 £297 £435
Area/Tenancy (sqm) 3,317 920 11,240 24,413 1,658 2,789 1,687
Area/Asset (sqm) 22,111 4,582 44,958 24,413 9,283 12,549 8,226
During the reporting period, the portfolio saw 15 new leases signed or renewed, representing 3.5% of gross income and
31,579 sqm, and 19 tenants vacate premises, representing 3.7% of gross income and 30,515 sqm; the income of the
seed portfolio dropped by 0.9% and occupancy of the whole portfolio increased by just under 1% due to purchases.
It is worth noting that the French market had a relatively soft final quarter in terms of leasing and experienced high rental
increases as construction price indexation rose to 8%. We intend to use this unsustainable indexation to induce tenants
to commit to longer lease terms in return for a reduction to market rental levels. The portfolio as a whole is performing
within the business plan.
Transactions
Between launch and 31st December 2006, a total of 10 properties were purchased at a cost of £65m excluding
purchaser’s costs of 4.4% on average. The total net operating income for the new properties was £5.6m providing a net
initial yield of 8.2% and a reversionary yield of 8.8%. These additional investments take the fund to approximately 70%
invested by cost. No sales were undertaken.
The properties acquired include:
• Drammen, Norway (£13.95m; 7.1%; 18,177 sqm) – a well-let distribution unit which offers an opportunity to take a
surrender on release to the under tenants. The location is likely to improve as the main Oslo port is relocated.
• Dortmund, Germany (£9.68m; 12.4%; 81,438 sqm) – a well-located multi let industrial estate predominantly (70%) let
to Edeka. This provides the opportunity of redeveloping and reletting to a number of current under-tenants as Edeka
will not renew their lease.
• Aarschot, Belgium (£11.7m; 7.6%; 31,600 sqm) - a multi let industrial estate located in the prime Antwerp-Germany
distribution corridor. The property is currently under-rented and has the opportunity to develop a further 6,300 sqm.
The assets acquired were valued at 31st December 2006 at £67,046,227, approximately 0.6% less than their gross
purchase price.
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