WertArt Capital published two posts this year about Italian real-estate that I couldn’t ignore since it almost sounds too good to be true: Italy is filled with various closed-end real estate funds that are trading at a sizable discount – often around 50% – to net asset value and because of fixed maturity dates they have a solid catalyst on the horizon. That sounds pretty compelling to me, although I can imagine that not everybody has the same initial thoughts. Italy? Yak…
WertArt does a good job of providing some background on the history of the funds, and even more information can be found in this report on Italian REIFs. I have been busy compiling an overview of all the funds that are currently traded on the Italian stock exchange. Not an easy task because all the reports in Italian and I don’t speak/write Italian. Luckily Google Translate exists in this day and age. But, unfortunately, the quality of the disclosed information seems to be mediocre in many cases. In almost all reports you can, for example, find information about the development of the GDP in Japan while most funds exclusively own property in Italy. More relevant information such as rental yields and occupancy levels is often nowhere to be found.
I have decided to make this a multi-post series. Today I’ll give a brief overview of the various funds and the reason why I think they are attractive as a group, and in one or more future posts I’ll dive deeper in some individual funds and other relevant details (e.g. taxes, fees).
The table below provides an overview of the various listed Italian REIFs sorted by the “unleveraged MoS” column. This column is based on the discount to NAV, but adjusted for leverage using the following formula: “(NAV – Market cap) / book value real estate”. This gives a crude proxy by how much property values could decline before NAV is equal to the current market cap. Implicitly this values all other assets and liabilities that are part of the NAV at book value, so for funds that have significant other assets the measure might be flawed:
Note that the data is a mix of values originating from 30 June 2014 and 31 December 2014. All funds reevaluate the market values of their real estate biannually, but not all have released annual reports for the year 2014. I have also adjusted various figures to account for example for dividends paid after the end of the latest report, or for liquidation payments that have already been announced. But I almost certainly have missed something for a few funds!
With the average Italian REIF trading at an almost 50% discount to NAV it appears that there are plenty of bargains available and what’s great is that a lot of funds that have a low amount of leverage. Not surprisingly, these are favored by the “Unlevered MoS“ measure as can be seen in the corresponding LTV column. Loan-to-value is calculated by dividing the value of the real estate with the amount of mortgages outstanding. Other assets and liabilities are ignored.
Also visible in this table are the expiry dates of the various funds. Most funds expire in the next couple of years, but an expiry date is not a guarantee that the fund will be liquidated at that date. Real estate is an illiquid asset class, and especially in Italy transaction volumes have dropped after the financial crisis. Because of that new regulations have been adopted that allow funds to extend their maturity date by three years. Funds with a green cell in the “+3?” column have already taken advantage of this option while funds with a red cell still have this option available (perhaps I should have switched the color coding?). The maturity date can be further extended if approved by shareholders. Given that the alternative is a possible liquidation at fire sale prices I’m guessing that there is often no real choice.
A big discount to NAV is, of course, great but preferably you also want to own property that is backed by cash flows. Cash flows not only allow investors to generate some income (and/or pay for management fees…) while we wait for a liquidation, but it also acts as a sanity check for the reported assets values.
Most properties appear to be valued at roughly a 7% gross rental yield which sounds reasonable to me for commercial properties. Nothing to get too excited about, but for an asset class that falls somewhere between equity and bonds on the risk spectrum that seems like a reasonable deal. A recent KPMG report about the European real estate markets also mentions yields in this range for offices. Given the large discounts that the funds trade at I don’t think it really matters what a fair yield exactly is. A fund with a 7% gross yield at a 66⅔% discount is yielding 21% at current prices. You have a lot of room for bad stuff at that price level!
I don’t have yield information for all funds, but I guess that the trend is visible: the funds with the highest discounts often also offer the highest yields. Unicredito Immobiliare Uno is a bit of an exception, but approximately 50% of the portfolio value is concentrated in a property that is being redeveloped and not generating any income at the moment (and the occupancy figure is meaningless since it isn’t adjusted for the sale of a big part of the portfolio after the end of the period while the other numbers are adjusted). Anyway, that’s a discussion for a future post :).
Long various Italian REIFs