JSE-listed German real estate investment trust (Reit) Deutsche Konsum Reit-AG (DKR) lowered its forecast for funds from operations (FFO), often used as an indicator of a Reit’s performance, by about one-tenth for the rest of its financial year, because of higher interest rate expectations and “unexpectedly few acquisitions”.
As a result, the company, valued at R4.2bn on the JSE, said in its interim results that it now expects FFO of €36m-€39m (R757.1m-R820.1m).
“Like the real estate market as a whole, the market for local retail properties was extremely weak in the first half of the financial year due to the sharp rise in interest rates,” it said. “There are currently hardly any transactions taking place in the present interest rate environment due to a strong divergence of purchase price expectations on the buyer’s and seller’s side, which is why DKR has not made any significant purchases here either.”
The Reit, which focuses on retail properties in smaller locations, has a portfolio worth €1.1bn comprising 184 retail properties with a rental area of around 1.1-million m² or about the size of 150 soccer fields. DKR bucked the delisting trend on the JSE in 2021 with its secondary listing on the local bourse, with its primary listing in Frankfurt.
In the six months to end-March, DKR’s FFO decreased 5.8% to €19.9m despite net rental income rising 7.3% to €26.5m and like-for-like rental growth of 3.4% as net interest expenses were €1.9m greater.
The reporting period was earmarked by challenging economic conditions, characterised by interest rate hikes and high inflation, signs of a possible banking crisis in the US and Switzerland, and the ongoing war in Ukraine interrupting supply chains and pushing up energy prices.
“Largely unaffected by this, DKR’s operating business with its non-cyclical local retail tenants and inflation-protected rental income continued to be robust. Nevertheless, the effects of the interest rate turnaround are directly noticeable in increased interest expenses, which are incurred for the variable-interest part of the debt as well as for newly raised loans,” the company said.
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