15th January: Press Release by RDI REIT PLC
The portfolio value of £161.7 million reflects an anticipated net initial yield of over 6.0%. The acquisition includes existing debt facilities of £73.5 million reflecting a loan to value ("LTV") of 45%, in line with the strategic priority of reducing Group leverage.
The equity consideration for RDI's 80% interest in the portfolio of £72.5 million, including transaction costs of less than 1.0%, is a timely and efficient reinvestment of the majority of the proceeds from the recent disposal of the German supermarket portfolio. The net cash yield on equity is anticipated to be in excess of 9.0%. The acquisition supports the Company's strategy of recycling capital into assets and locations benefiting from sustainable long-term growth opportunities, structural change in occupational demand and strategic infrastructure investment.
OSIT, the Company's new strategic partner, will continue as the operator and retain a 20% interest in the portfolio. OSIT is one of the sector's most experienced managers with a track record of over 25 years developing and managing serviced offices in the UK. OSIT is led by founders Giles Fuchs and Niki Fuchs, who have extensive industry experience and will have a strong alignment of interests through OSIT's 20% co-investment and an EBITDA based management fee.
London is the global leader in the serviced office market, where structural and behavioural changes are driving strong demand for quality, flexible, cost efficient space. In a global workplace with technology supporting employee mobility and flexibility, businesses are demanding the ability to adapt and save costs. This trend is not only seen in small and start-up companies, but also large corporates which are increasingly embracing flexible space.
Within the flexible office sector there are operators that own the assets outright and others operating a property leased model, essentially sub-letting the space. As owners of the assets, the Company has direct control over the building management, design (including density and service provision), desk rates, cost base and use of the properties. In addition, RDI has the freedom to leverage asset management opportunities and synergies with its existing London portfolio.
OSIT provides a premium flexible office service at mid-market rates which has consistently delivered high levels of occupancy and client satisfaction. The newly acquired assets offer a high ratio of quality shared and amenity space, while design and services are focused on key client requirements including sound attenuation and market leading IT services. All four properties have been extensively refurbished and redeveloped by OSIT in the last four years and each presents a unique identity with flexibility in design to accommodate customers' bespoke requirements.
In an exciting and growing market, this acquisition presents a scalable platform which could be easily integrated with potential future acquisitions and which complements RDI's existing portfolio, through strategic optionality and synergies.
Mike Watters, CEO of RDI commented:
“We are very pleased to have secured this opportunity to efficiently recycle the majority of the proceeds from the recent disposal of German retail assets into four high quality flexible London offices whilst maintaining our high-quality income profile. The long-term market outlook for the flexible office sector remains extremely positive, with structural and behavioural change driving the momentum behind strong occupier demand. Our detailed analysis of the market suggests that this sector is resilient and well positioned to withstand any market uncertainty.”
Separately, Giles Fuchs, CEO of Office Space in Town, commented on the acquisition in a news item published on CoStar on 15th January 2018.
“RDI’s commitment to the sector is the first time that a long-term, income-seeking institutional investor has moved into the market – and will likely be the catalyst for a potential wave of longer-term institutions, such as pension funds and insurance companies, moving into the serviced offices sector.
“What is attracting long-term, income-seeking institution is the robust yields – the RDI transaction was at a net yield of just over 6% – and the sector’s expansion, which is giving serviced offices the critical mass and market size to be attractive to insurance companies and pension funds with billions to deploy.”
Fuchs commented on the rapid growth of the sector and the increasing number of serviced office centres in London and regional cities including Birmingham and Manchester. Future investment, he said, will be accelerated with “a market-accepted valuation for such buildings to help the market to become truly liquid” – which is “on the horizon”.
He added: “Given the performance and returns generated by serviced offices over the past few years it is no surprise that long-term institutions are finally taking note. Their search for yield has prompted many to invest in a range of alternative assets, in everything from infrastructure to timber forests and agricultural land. Yet I believe, relatively more prosaic serviced offices could prove to be their best investment of all.”