RHB shaved its target price on IReit Global : UD1U 0% to S$0.42 from S$0.53 on a more muted outlook as the Europe-focused real estate investment trust (Reit) faces challenges in the German office leasing market.

The research team maintained its “neutral” call on the Reit, but expects occupancy weakness to persist in the short term as leasing progress at IReit’s Darmstadt Campus property located in Frankfurt remains slow.

Occupancy at the property currently stands at only 25 per cent, with the sole tenant committed so far being a 15-year lease with a German federal government body. 

That being said, the Reit had a better-than-anticipated outcome for its leases with Deutsche Rentenversicherung Bund (DRV), its largest tenant, RHB said in a report on Tuesday (Sep 12).

DRV said it would extend its lease by six months until the end of 2024 and pay a revised rate that is 45 per cent higher than existing rents from Jul 1, 2024.

DRV will also pay a lump sum of 15.5 million euros (S$22.7 million) – or more than 16 months in current rent – to compensate IReit Global for dilapidation costs to reinstate the property back to its original state at the end of the extended lease term.

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“We believe DRV is likely to vacate the premises by end-2024, as it has been consolidating its footprint nearby,” said analyst Vijay Natarajan.

He added that IReit Global earlier guided that it would need to spend about 50 million to 100 million euros in capital expenditure to substantially refurbish the asset, which could lead to 12 months to 24 months of downtime.

Refurbishing, however, could “unlock significant value” for the asset as it is still under-rented at 50 per cent below market rents.

RHB’s outlook on the Reit’s distribution per unit for the second half of 2023 remains weak – although better than the first half – and is supported by recent acquisitions and contributions from a government lease for Darmstadt Campus.

Units of IReit Global were trading 1.3 per cent or S$0.005 higher at S$0.40 as at 2.18 pm on Wednesday.