ANALYSIS Bumpy road ahead for aspiring Italian REITs

The postponement to next year by aspiring Italian REITs Coima Res and Idea of their public flotation hides deeper problems linked to the management and portfolios, market experts warn.

As such, their listings are expected to face difficulties similar to the IPO of peer Sorgente, which failed to take off last month amid poor investor demand.

‘The Coima and Idea portfolios are not going to grab investors' attention for a number of reasons, but mostly due to sky-high valuations of the assets,’ predicted Henri Quadrelli, an analyst at Société Generale in Paris.

According to those who track the market, both Coima RES and Idea Real Estate are looking to list the assets at values reflecting a yield of 4.5%, below the market’s current prime office yield in Milan of 4.75% (source: CBRE Q3 2015). ‘Companies spinning off their portfolios in a public offering should offer a discount to market values, particularly in a market such as Italy which is expected to attract opportunistic investors,’ Quadrelli noted.

Coima Res is the REIT to be launched by the former Hines Italia platform with backing from the Qatari sovereign wealth fund while Idea Real Estate is sponsored by major publishing and communication group DeAgostini.

Market experts also point to the limited track record of the companies' management. Alessandro Pasquarelli, CEO of Idea Real Estate, is the former head of property development company Euro Milano with little investment expertise while Massimo Capuano of Coima RES is the former CEO of Borsa Italiana, with no real estate background. ‘The Spanish SOCIMIs which listed successfully 18 months ago chose renowned personalities in the real estate world with a long track record in real estate investment,’ commented an expert who wished to remain anonymous.

Another weakness of the two Italian REIT candidates is their portfolio’s so-called single asset risk. Both Coima and Idea are listing retail units with a single tenant, respectively Deutsche Bank and Unicredit. In Coima’s case the bank units represent roughly half of the portfolio to be spun off, which also includes the Vodafone Village valued at some €200 mln. In the case of Idea, its 119-property strong bank portfolio represents the entirety of the offering. Both banks have announced plans to close hundreds of bank branches worldwide.

While a similar operation fared successfully in Spain, where Merlin Properties, a newly created REIT managed by Magic Real Estate, bought €740 mln of BBVA assets in 2014, a number of differences remain between the Italian and the Spanish situation, experts say. ‘Merlin had an internationally well-known manager, former RREEF executive Ismael Clemente, and the portfolio was being acquired from third parties. In both Coima’s and Idea’s situation, there is a case to be made for conflicting interests, as both parties are spinning off assets they already manage through real estate funds.'

Another major difference between the Spanish and the Italian model is the structure of the IPO. In Spain, the managers listed units which initially held no assets but had a clear investment pipeline. They would then carry out a capital increase to finance acquisitions. In Italy, Idea and Coima are undertaking a much more challenging task of listing an existing portfolio at a high offering price. 'And the business model beyond that is not really clear,' a market expert said.

Planned listings
Italy eased rules for the so-called Società di Investimento Immobiliare Quotate (SIIQs or REITs) last summer through the 'Unblock Italy' decree. Signed by prime minister Matteo Renzi, the new legislation was designed to put the vehicle's tax-efficient status on an equal footing with the successful Spanish and French regimes while also bringing the SIIQs into line with the country's closed-end property funds.

The changes resulted in several companies announcing plans to launch REITs over the past 12 months.

Coima sgr (previously Hines Italia sgr) has won backing from the Qatar Investment Authority (QIA) to spin off its income-generating assets and convert the unit to a real estate investment trust (REIT or SIIQ in Italian).

Similarly, Italian asset manager Idea Real Estate applied for a listing of its shares on Milan's MTA junior stock Exchange. It aims to raise €500 mln through the listing. Aedes, a listed company, said it would convert to tax-efficient REIT status later this year.

But a first attempt to launch a new REIT failed to take off 'due to insufficient demand'. Asset manager Sorgente, which had aimed to issue a total of 134 million shares at a price of €3 apiece, dropped plans for the €440 mln IPO as a result of poor investor demand.