RHB on Tuesday (Jan 2) upgraded IReit Global : UD1U 0% to “buy” from “neutral” after the real estate investment trust (Reit) announced it would sell its Spanish asset at a premium to valuation.

The research team also raised its target price on the counter to S$0.47 from S$0.42, implying a potential upside of 17.5 per cent from the counter’s last traded price of S$0.40 as at the midday trading break on Tuesday. IReit Global’s units were down 1.2 per cent or S$0.005 at the time.

To recap, IReit Global is divesting Il·lumina, an office building in Barcelona, Spain, for 24.5 million euros (S$35.8 million), 5.2 per cent above the property’s valuation of 23.3 million euros as at Jun 30.

The move is expected to improve the Reit’s portfolio weighted average lease to expiry and further strengthen its balance sheet position with a low gearing.

RHB believes the divestment could provide debt headroom for opportunistic acquisitions ahead. Furthermore,the recent slide in eurozone bond yields could provide tailwinds as this makes current yield spreads attractive.

This opinion comes as annual inflation for the euro area drops more than expected to 2.4 per cent in November 2023, versus 2.9 per cent in October 2023, resulting in economists forecasting that rates have peaked, with rate cuts to come in early Q2 2024.

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These tailwinds, coupled with risk-free rates receding, could mean that the capitalisation rate expansion cycle is likely over for European assets, and further asset devaluations are unlikely, RHB said.

RHB has cut its distribution per unit forecasts for FY2024-25 forecasts by 2-3 per cent after accounting for a loss of income from the Spanish asset divestment. It also lowered its cost of equity assumptions by 70 basis points after taking into account reduced risks from IReit’s low gearing profile and the fall in risk-free rates.