German City Estates

Set up in 1990, German City Estates was – until 1994 – the only Dutch quoted property company specialising in the German market. In retrospect this specialisation has been unfortunate as Germany’s performance so far this decade has been disappointing. As a result, the company’s return and its share price have been lagging those of other quoted funds. In response, the company has been trying to boost income returns and asset values by actively managing and trading its portfolio, undertaking development and diversifying away from offices, which used to dominate its portfolio. But the most dramatic diversification has come more recently, as it has sought to reduce its dependence on the German market by investing in other related ones. This widening geographical spread is reflected by changing the name to European City Estates, subject to shareholders’ approval this month. In 1994, GCE took an interest in an office, retail and leisure project in Vienna; last year it invested NFl 12.5m in a distribution complex in Luxembourg and paid NFl 67m for a portfolio of office buildings in Amsterdam, the Hague and Eindhoven. As a result of these acquisitions, the share of investments in Germany has dropped to 70% and Dutch properties now make up 24% of the portfolio. NFl m ALIGN=”CENTER”>1996 ALIGN=”CENTER”>1995 Property investments ALIGN=”CENTER”>292 ALIGN=”CENTER”>194 Net assets ALIGN=”CENTER”>12.3 ALIGN=”CENTER”>10.6 Net rental income ALIGN=”CENTER”>6.3 ALIGN=”CENTER”>5.8 Net asset value per share ALIGN=”CENTER”>NFl 38.11 ALIGN=”CENTER”>40.56 The company remains active in the German market, where during 1996 it sold a small office building in Wiesbaden and acquired a 50% stake in an industrial and office complex in Munich. Despite net initial returns of between 8% and 10% on last year’s purchases, their timing in the latter part of the year meant that these acquisitions contributed only partly to a modest uplift in the net income return, which rose to NFl 6.3m from NFl 5.8m. This year, GCE is forecasting profits growth of 20%. In contrast, the capital values of its core portfolio of small to medium-sized German offices continue to be affected by the poor state of the market in that country. Last year, the company reported a further 9% fall in the value of its German investment portfolio. Last year’s spate of acquisitions boosted the total value of the investment portfolio to NFl 292m from NFl 194m. Cash and disposal proceeds have funded a small part of the purchases, but borrowings were the main source of finance: long term liabilities leapt to NFl 155m from NFl 48m. The recent buys have pushed gearing up from 25% of property assets at the end of 1995 to 53%. GCE is prepared to take this up to 60%, but this leaves it limited scope for further purchases. Because of the company’s development exposure and investors’ lack of confidence in the performance of the German market, its shares continue to trade at a discount to net asset value. This prevents it using a rights issue to raise capital. Therefore, the emphasis on improving returns may have to shift, to a focus on restructuring the existing portfolio. The company expects to be a net seller of German property in the next two years, with the proceeds seeking higher returns through further international diversification. Squeezing performance from a diverse development programme is proving time-consuming. Work has started on a 2,600 m2 office and retail development in Erfurt, but a similar project in the same town, on a site acquired three years ago, is still awaiting planning consent. A residential development near Berlin is also under way, but sales have been disappointing. Plans for the city centre site in Vienna are ambitious – the Wien Mitte project envisages 100,000 m2 of retail, offices, apartments and hotel space – but have yet to receive planning consent. German City Estates Johannes Vermeerplein 51071 DV AmsterdamThe Netherlandstel 31 20 676 6887fax 31 20 676 6912