Orava Residential REIT seeks a total return of 10% for its shares. The company attempts to distribute dividend returns of 7–10%, and dividends are distributed in each quarter. Under the Tax Exemption Act, the company shall distribute at least 90% of its returns in dividends, excluding unrealised value changes (and comprehensive income items under IFRS).
Orava Residential REIT is the first real estate fund in REIT (Real Estate Investment Trust) form in Finland. Following the listing of the company, investors can now participate in the housing investment market in a transparent, diversified and effective manner by buying or selling the company’s shares in the marketplace.
In the residential market, prices depend on whether the apartments are acquired individually or in larger entities. Major investors have been able to utilise the wholesale market where the buyer of a residential property obtains a discount of 10–30%. Orava Residential REIT also operates in the wholesale market and seeks to utilise its price level. Even though there can be no guarantees that the wholesale market discounts will remain at this level, as long as the company can acquire entire investment properties at wholesale discounts, the small-scale investors investing in the company’s shares can also utilise the same benefits that major investors usually get. The wholesale discount typically increases with the age of the investment property and gets smaller with the size of the target city or town.
The company is exempt from income tax, but it is correspondingly obligated to distribute dividends that are fully taxable as income of the shareholders.
Orava Residential REIT enables investment in a professionally managed and diversified residential portfolio. The Residential REIT utilises the services of professionals, such as Realia Management Oy, Newsec Asset Management Oy, Ovenia Oy and Raksystems Anticimex Oy, for building and managing the housing portfolio and for finding tenants.
Residential apartments have traditionally been less sensitive to economic cycles than commercial and office premises, for instance. Residential investments have also historically provided good protection from inflation. The company also aims to ensure good diversification and thus returns by investing in small apartments in cities and large towns as well as medium-sized towns, which have traditionally also been subject to steady rental demand in weaker economic conditions.
The conditions for the investment strategy of Orava Residential REIT are determined in the rules for real estate investment operations. The investment strategy consists of three areas: i) acquisition and divestment of investment properties, ii) investment property strategy and iii) financing strategy.
Acquisition and divestment of investment objects
The company seeks to utilise the wholesale discounts often achievable by major investors in the housing market by mainly acquiring or developing entire properties for its portfolio. The apartments are sold to the market individually.
Investment property strategy
The investment property strategy takes into account the macro- and micro-locations of the investment properties and the features of the real estate and the apartments. The primary macro-location criteria are the population volume (the liquidity of rental and resale markets) and population growth (the development of market value) in the area.
As a rule, the properties to be acquired for the Residential REIT shall be located in cities and towns for which Statistics Finland forecasts population growth. If the forecasted population growth of a target town remains materially below the average for the entire country, it is additionally required that the property to be acquired is located in a pedestrian zone in the centre of the town.
The investment portfolio of the Residential REIT is divided into three parts:
i) The portfolio of the Helsinki metropolitan area mainly consists of properties purchased or developed by the company in the Helsinki metropolitan area and the surrounding municipalities. Through the portfolio, the company seeks good rental yield and the best possible increase in value.
ii) The major cities portfolio consists of properties acquired or developed by the company in the five major cities outside the Helsinki region, i.e. in Tampere, Turku, Oulu, Jyväskylä and Lahti, and its objectives are good rental yield and a good increase in value.
iii) The medium-sized town portfolio consists of investment properties acquired or developed by the company in large or medium-sized towns outside the Helsinki region and the above major cities, and its objective is optimal rental yield. In this context, “medium-sized town” means a town with at least 20,000 inhabitants.
The regional distribution objectives of the company for its investment properties are as follows: approximately 53% of the weight of the current market value of the investments is allocated to the Helsinki metropolitan area, 22% of the weight is allocated to major cities and 25% of the weight is allocated to medium-sized towns.
|Distribution of investment property values by location||Sep 30, 2016||Dec 31, 2015|
|Helsinki metropolitan area||38 %||40 %|
|Major cities||31 %||29 %|
|Medium-sized towns||31 %||31 %|
|In total||100 %||100 %|
The company also seeks to diversify its investment properties according to their age. The targeted weight for newer properties in the portfolio, i.e. properties completed in the 1990s and 2000s, is defined as 51%.
Financing and hedging strategy
The company’s financing strategy seeks to optimise the amount of debt to suit the current interest rate and market situation. The aim is that the crediting rate of the Residential REIT is lowered when market interest rates rise and the housing market weakens. Correspondingly, when interest rates fall and the housing market strengthens, an increase in the share of liabilities is sought. The aim to keep the company’s crediting rate between 30% and 60%.
To hedge the interest rate risk, the Residential REIT may use derivative contracts; however, this is only possible according to a separate decision of the Board of Directors, within the limits of the Tax Exemption Act and the rules for real estate investment operations. The company mainly uses interest rate swaps to change variable-rate loans to fixed-rate loans.