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BUSINESS REVIEW > Continental Europe |
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Inès Reinmann Chief Operating Officer, Continental Europe |
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Sustained delivery of strong lettings performance
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“We have been delighted with the pace and success of our growth across Continental Europe as we continue to secure excellent acquisitions and as strong lettings have fuelled an expanding development programme.”
Overview
A year of significant progress
We have been delighted with the pace and success of our growth across Continental Europe as we secured a number of excellent acquisitions and as strong lettings fuelled our expanding development programme.
In 2007 Walter Hens led another successful performance by SEGRO’s Continental European operations, including significant further expansion of the business. At the end of 2007, Walter moved into a Group-wide role as head of SEGRO’s new Business Development function. Inès Reinmann stepped into the position of Chief Operating Officer in Continental Europe.
Acquisitions, development gains and valuation gains during 2007 have caused the value of the investment portfolio in Continental Europe to grow from £406.2 million at the end of 2006 to £932.8 million as at December 2007, an increase of 130 per cent. The total value of our Continental European property assets, including trading properties, developments and our share of joint venture properties amounted to £1.4 billion.
The Continental European property business achieved an adjusted operating profit before interest and taxation of £38.0 million, up 26.7 per cent from 2006 and reflecting the benefit of very strong profits from the disposal of trading properties, excellent lettings of new and existing buildings and the impact of acquisitions.
We completed acquisitions amounting to £425.2 million (€620.8 million) during the year, averaging an initial yield on investment of around 7 per cent, but with the potential to enhance these margins significantly with development and asset management initiatives.
During 2007 new lettings of 298,000 sq m were delivered, an increase of 76 per cent over the previous year. The total net absorption for the portfolio was 229,000 sq m providing additional rental income of £6.7 million. Total annual rental income, including new acquisitions in the year, was £79 million, an uplift of £37 million from the previous year.
With constructions starts of 328,599 sq m, 226,962 sq m of new developments were delivered over the course of the year of which 83 per cent is now let and income producing.
Currently 114,000 sq m stand vacant, representing just 5.9 per cent of the investment property portfolio which compares to a figure of 8.7 per cent at the end of 2006.
H1 property valuation gains of 9.1 per cent were followed by only a modestly positive 0.2 per cent gain in H2. Year on year this represented an overall 6.2 per cent surplus at the end of December 2007; ranging from flat positions in Spain and Italy to a very strong 24.9 per cent surplus in Central Europe – with France, Germany and Belgium achieving respective surpluses of 5.4 per cent, 3.9 per cent and 5.7 per cent.
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Strategy and Positioning
Including joint ventures and trading properties our Continental European business comprised over 2 million sq m of built space as at the end of 2007, representing a 70 per cent increase year on year. This followed the acquisition of 706,679 sq m of space and 295.7 hectares of land across nine countries, the disposal of 84,470 sq m of non-core property and the demolition of a further 24,537 sq m of redundant buildings for redevelopment.
We have 76 holdings; the mix of our investment property comprises 1,021,000 sq m of ‘big box’ warehouses, 429,000 sq m of other industrial properties and 85,000 sq m of offices. This profile is quite different to our UK business and reflects the maturity of both our business and the markets in which we are investing. We are actively supporting the developing logistics channels in Continental Europe, particularly in Central Europe, we see more opportunity for smaller light industrial facilities in the more established urban conurbations (eg Paris, Düsseldorf) and this is likely to represent an opportunity in Central Europe as those economies develop.
The Continental European markets in which we are expanding continue to offer attractive yields on investment, low borrowing costs and good prospects for growth. Our strategy continues to be to identify substantial markets with attractive growth prospects and then to selectively assemble a critical mass or cluster of properties in those locations.
We continue to develop our existing clusters in each of the regional markets where we are established, such as Ile de France (near Paris), Düsseldorf, and the Brussels-Ghent-Antwerp triangle. We have also made significant progress in establishing new clusters in important and growing economic areas such as Lyon in France, Greater Milan in Italy, Frankfurt in Germany and Silesia in Poland where local offices have been set up to support customers and our planned expansion in such locations. Our operational model is to employ local people with the necessary technical expertise and market knowledge to serve our customers and grow the business. A key to our success has been the proximity of our employees to our local markets and our ability to respond quickly to opportunities and changing circumstances as these arise.
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Acquisitions |
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| Country |
Transaction |
Price m |
Size |
Annual
Rental
Income m |
Net Initial
Yield % |
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| Germany 1 |
Neckermann.de* |
197 |
310,000 sq m |
15.6 |
8.1 |
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| France 2 |
DHL* |
160 |
210,000 sq m |
11.2 |
7.0 |
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| France |
Lyon, St Exupery |
43.5 3 |
55,000 sq m |
2.9 |
6.7 |
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| France |
Bondoufle* |
19.9 |
21,000 sq m |
1.4 |
7.1 |
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| France |
Gonesse - land |
12.9 |
13 ha |
NA |
NA |
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| Italy |
Energy Park, Vimercate* |
98.4 3 |
68,000 sq m |
6.7 |
7.4 |
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| Hungary |
Ullo, Budapest - land* |
16.4 |
38 ha
143,000 sq m
to be built |
NA |
NA |
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| Poland |
Poznan, Kormorniki |
18.0 |
25,000 sq m |
1.2 |
6.8 |
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| Poland |
Nadarzyn - land* |
16.6 |
35 ha |
NA |
NA |
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| Poland |
Gliwice - land* |
13.9 |
451,000 sq m |
NA |
NA |
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| Belgium |
Kobbegem |
18.4 |
26,000 sq m |
1.5 |
7.3 |
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| The Netherlands |
Hoofdorp De Hoek |
18.1 |
22,000 sq m |
1.6 |
8.0 |
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| The Netherlands |
Almere |
17.3 |
9,000 sq m |
1.3 |
7.7 |
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| The Netherlands |
Rijnlanderweg - land* |
13.0 |
46,000 sq m |
NA |
NA |
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| The Netherlands |
Rotterdam |
11.2 |
36,000 sq m |
1.5 |
12.6 |
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| The Netherlands |
Skypark |
10.7 |
7,000 sq m |
0.8 |
7.1 |
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| Other |
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38.7 |
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| * |
Acquisitions with significant development potential. |
| 1 |
270,000 sq m (€160.4 million) of this transaction completed during 2007, the balance is due to complete in 2008. |
| 2 |
144,000 sq m (€93.4 million) of this transaction completed during 2007, the balance is due to complete in 2008. |
| 3 |
Price represents value of properties acquired in corporate acquisition. |
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During 2007 we completed a number of important acquisitions, as we executed our previously stated strategy of entering new markets and establishing critical mass. We identified and completed a number of income producing standing investments with good development potential as well as additional land for new schemes. Overall, £425.2 million (€620.8 million) was invested with the more significant deals highlighted in the table above.
We also completed disposals, above book value, of non-core assets acquired as part of larger portfolios and, following these divestments, SEGRO no longer has any property in Finland or Switzerland.
Germany
Our German business had a record year in terms of acquisitions, lettings and new development and it represents the largest landholding outside the UK with over 750,000 sq m under management.
During the year trading properties were sold, generating sales proceeds of €36.9 million and trading profits of €5.9 million.
New Frankfurt Office
Since January 2007, a new office has been operational in Frankfurt – where SEGRO currently has several live projects. This has been delivering good results with four units let at the new Am Martinzehnten business park, including 1,200 sq m to PricewaterhouseCoopers. A 13,800 sq m logistics building, fully let to Bermes Logistik on a long-term lease and around 9,500 sq m of land for future development have been acquired for €6 million at Willich-Münchheide on the main road between Düsseldorf and Mönchengladbach.
€197 million Acquisition in Frankfurt
In July we exchanged contracts on our largest ever transaction in Continental Europe, the sale and leaseback from Neckermann.de (KarstadtQuelle group company) of a major office and distribution campus in Frankfurt for €197 million, including all acquisition costs, and a net initial yield of 8.1 per cent. This followed on from the relationship we had developed as a result of our €163 million acquisition of a logistics portfolio and landbank purchased from KarstadtQuelle AG in a sale and leaseback transaction in 2005/6. The assets comprise a total of 30 hectares and have a built area in excess of 310,000 sq m including some 86,000 sq m of high quality office space. The remainder of the site includes high and low bay warehousing, Flexible Business Space, a large data centre and a number of smaller retail units.
This acquisition has helped to develop one of our core markets into a significant cluster and we believe we are now the market leader for Flexible Business Space in Frankfurt; it also provides development potential in both the medium and long term, underpinned by a strong income stream. Approximately 83 per cent of the €15.6 million income from the site (occupied entirely by Neckermann.de) is secured on leases of at least nine years, with the remaining space, principally offices that have been let to other KarstadtQuelle group companies or to Neckermann.de’s contractors, leased on shorter terms, representing refurbishment and redevelopment opportunities in the medium term. We intend to enhance the value of the site by developing 6,000 sq m of business space in the short term and subsequently refurbishing and redeveloping additional areas as they are handed back.
Berlin and Essen
Construction is underway for new SEGRO business parks totalling 16,000 sq m at Berlin and Essen, where the first unit has already been pre-let. Construction was completed in November 2007 for 7,900 sq m of speculative logistics development at Kapellen. In addition a 6,600 sq m warehouse building with further development potential at Aachen was bought at a yield of 9 per cent.
Munich – Post Year End
In 2008 we entered the Munich market with a €113 million, 7.1 per cent yield sale and lease back acquisition of a production and logistics space from MPM – over 150,000 sq m of space on 24 hectares of land in a good location just North West of Munich, combining immediate income, development potential and opportunities from yet another corporate partnering project with a major blue chip company.
New Berlin Airport – Post Year End
Early in 2008 we announced that it had signed a major partnership agreement with the Berlin Airport Authorities to develop a business and logistics park of up to 230,000 sq m on a 38 hectare site in the immediate vicinity of the new Berlin Brandenburg International Airport terminal in Schonefeld – currently under construction. SEGRO is paying €34 million for the cost of the site and anticipates a further approximately €120 million investment cost for the construction and related costs of the development.
France
€160 million Sale and Leaseback with DHL
In November 2007 we exchanged contracts on a sale and leaseback agreement with DHL for €160 million, involving the acquisition of 19 prime logistics sites located in our target markets around France. The portfolio will provide annual income of €11.2 million, representing a net initial yield of 7 per cent and offering immediate and longer-term development potential as we build on our growing relationship with DHL. |
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Continental European Land bank
Space to be built
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| Continental Europe: strong development lettings and steady consolidation of expansion |
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Total property assets of €1.9 billion (including developments, land and trading properties). Equivalent yield of 7.0 per cent valuation of completed investment properties |
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Attractive acquisitions of £425 million (€621 million) at an average yield of approximately 7 per cent |
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227,000 sq m of developments were completed in 2007, of which 83 per cent had been let or sold by the year end. 253,000 sq m of developments were under construction at the end of 2007, of which 31 per cent had been let or sold by the year end |
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Excellent letting successes – 298,000 sq m let during 2007, vacancy levels down to 5.9 per cent |
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90 per cent of the portfolio by value is concentrated in geographic clusters we have earmarked for expansion – 60 per cent in the Paris region, 10 per cent in Lyon, 12 per cent in Marseille and over 5 per cent in Lille, with the remainder located in Toulouse, Bordeaux, Nantes, Orleans and Strasbourg. The portfolio totals a built area of 210,000 sq m and comprises distribution and logistics centres used by the DHL and supply chain and small cross-dock facilities used by DHL Express. All properties are subject to new nine year leases with DHL, 20 of them with six year break options and six of them with three year break options.
Nine hectares of land have been identified as having immediate development potential and it is estimated that a further 10,000 sq m of built area can be added in these locations. This includes a large site at Aulnay, close to Charles De Gaulle airport and adjacent to the well-established logistics and industrial area of Garonor, with important frontage onto the A1.
These different elements of the transaction demonstrate our well-defined strategy of selectively purchasing sites which already generate good rental income from well-established occupiers but which also have good development potential and are located in Europe’s key economic growth areas.
Development and Lettings
In 2007 we completed the development of 5,452 sq m of space which has been 100 per cent leased. Construction has started on the last two buildings, totalling 8,294 sq m, at the Carré des Aviateurs business park in Le Blanc Mesnil. This brings the occupancy rate of the park up to 95 per cent and demonstrates a continued demand for this type of product in the northern suburbs of Paris. We also started the first 20,000 sq m phase of construction at Aeropark in Gonesse, close to CDG airport which is a 56,500 sq m business park. At La Courneuve, on the former Alstom site we started the first 9,420 sq m phase of what will be a 23,000 sq m business park similar to SEGRO’s development at nearby Le Blanc Mesnil.
Canal Toys leased an 18,100 sq m logistics building in Marly la Ville just to the north of Charles de Gaulle Airport and a lease renewal has been agreed with ODS at the 17,000 sq m Marinière I logistics building in Bondoufle to the south of Paris.
Central Europe (Czech Republic, Hungary, Poland)
Across Central Europe we significantly increased the amount of space under management with 175,000 sq m of new space completed during the course of the year. The majority of this activity is in Poland where we opened a further office in Katowice, Silesia, to complement our operations in Poznan and Warsaw. Occupier demand continues to be very strong across the region and we leased over 151,000 sq m of space during the year. Major new lettings included 12,683 sq m to Intercars in three separate leases of at least five years at Kormorniki, 3,253 sq m to Lidl in Strykow and 2,820 sq m to Eurocash (KDWT) who took a ten year lease. In Strykow 9,941 sq m was let to Complex and a further 10,278 sq m to Sonoco, who are an existing customer.
In Czech Republic we completed 27,851 sq m of which over 60 per cent has been let. Major lettings were achieved to CMS and Kuhne and Nagel on Tulipan Park for 3,221 and 9,064 sq m respectively on ten year leases.
In Hungary we completed the first 13,000 sq m phase of Tulipan logistics scheme at Biatorgaby which is now 80 per cent occupied with leases to major brands such as GEFCO, Puma and Eurogate. The second 15,000 sq m phase has now been started with completion planned for mid-2008.
We also purchased a 25,000 sq m distribution warehouse, adjacent to SEGRO’s existing holdings in Poznan, Poland. The acquisition price of €18 million reflects a net initial yield of 6.75 per cent with an unexpired lease term of ten years. This transaction helps to provide critical mass on top of our existing successful developments (25,000 sq m phase one fully let, 23,500 sq m phase newly completed and already over 50 per cent let), gives solid underlying income and a diversification of lease end dates.
We have concentrated our energy in Czech Republic on the Hostivice area, just west of the Prague ring road and adjacent to the airport. Following additional acquisitions we now have a total of 40 hectares and have options over a further 25 hectares.
We have also been building on the success of our existing development schemes by starting both new phases of development and acquiring adjacent and nearby sites, including the purchase of a 35 hectare development land site in Poland at Nadarzyn to the Southwest of Warsaw and of 38 hectares in Hungary at Ullo in close proximity to Budapest Airport – for a total investment of €33 million.
Italy
In August we announced our first major move into Italy with the acquisition of a 68,422 sq m business park in Northern Italy with potential for a further 40,000 sq m of development for €98.4 million and an initial 7.4 per cent yield. The business park is located at Vimercate, north east Milan and sits adjacent to the A51 eastern bypass providing excellent frontage and visibility to the three main buildings which are used exclusively as offices. The campus is in a well-established business zone where many of the leading technology and communications sector businesses are also based with firms such as Cisco, IBM and Microsoft nearby.
The site comprises a mixture of light industrial, laboratory and related space on a 15.2 hectare site with Alcatel-Lucent occupying 56,377 sq m on several leases that run for at least a further five years. The adjacent site is the landmark Torre Bianche mixed use development with shopping centre, offices, four star hotel and a residential and leisure complex. This acquisition provided immediate income of €6.7 million per annum on the part Alcatel-Lucent occupy as their principal offices, research and assembly campus in Italy as well as development potential in the medium to longer term. SEGRO plan to develop at least 40,000 sq m of mixed office and light industrial space on a phased basis starting in 2009 whilst retaining the campus feel of the park. This acquisition gave us the necessary scale to hire a country manager and set up an office in Milan from which we will develop our business in northern Italy.
Belgium
There was good progress in Belgium over the course of the year with 23,753 sq m of developments completed, which are 100 per cent leased. Construction has been started on Ernst & Young’s new 17,000 sq m headquarters building at Pegasus Park, close to Brussels International airport.
A €3.25 million disposal to Hotel Management Services of land opposite Pegasus Park has been completed. SEGRO will continue to project manage the development and will take a €2.5 million development fee for the construction of a 182 room hotel and 3,000 sq m of serviced offices.
Major lettings included 1,778 sq m to Honda at Relegem Sphere, 1,337 sq m to Van den Bergh in Zaventum and 1,183 sq m to ERG Transit Systems.
The Netherlands
The Netherlands saw a number of important acquisitions over the year. At De Hoek near Schiphol airport, we purchased for €18.1 million 22,000 sq m including a warehouse building let to DHL/Exel and an industrial property let to A-Point. This transaction is part of the planned site assembly for our S Park (security park) concept where we now have a total of 26.4 hectares of land and the site will further enhance the Group’s presence around Amsterdam’s main international airport, providing significant development opportunities.
At De Hoek we continued to build up our cluster of space around Schiphol airport with the acquisition of 6,800 sq m of buildings at Skypark, a logistics orientated business park, at a purchase cost of €10.7 million on a net initial yield of 7.1 per cent. An excellent location in its own right, this fully let site creates synergies with our existing property at the nearby De Hoek development and establishes occupier relationships in this strategic location.
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The next phase of our expansion in Continental Europe
We now have critical mass in our Continental European business and have built or acquired an excellent portfolio with a strong customer base, a good income stream and the potential for rental growth.
We have built up an excellent client base of blue chip Pan-European occupiers with whom we actively seek to partner to create more business – such as DHL, Neckermann.de, Kuhne and Nagel and GEFCO. Nonetheless, despite the importance of such international businesses we are equally focused on servicing the needs and helping to grow the many smaller businesses which make up the backbone of our business and which helped us to achieve a record number of lease transactions in 2007 – 75 new leases, 23 heads of terms and 13 pre-lets.
We have established an outstanding land bank over the past three years and this should provide a strong platform for further growth in the years ahead. Including schemes currently under construction, we have the potential to build some 1.9 million sq m of business space on the existing land bank of 384 hectares. At today’s prices, this would involve future capital expenditure of some £856 million and incremental rental income of approximately £97 million per annum. As with the UK, we have the ability to accelerate or slow down the rate of development with relative ease. Accordingly, whilst current occupier demand and pre-let agreements underpin our 606,000 sq m of current construction and intended starts in 2008, we remain vigilant of the wider economic conditions and will take appropriate action should any weakness appear in the months ahead.
We are optimistic about the growth prospects in all of our existing markets where we combine local expertise and market knowledge with the support of an international group and will continue to develop new clusters or enter new markets as suitable opportunities arise. In the near term, we are exploring opportunities in Spain (where we already have a small presence), Romania and Slovakia. |
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