Earlier this month, I had the chance to sit down with our Chief Investment Officer, Tariq Khader, who shared his insights on Sirius’ acquisition strategy.

This year has been a strong year for Sirius so far, with robust half-year interim results and acquiring eight new sites since year-end. Together we discussed asset selection, the Sirius acquisition strategy and the wider real estate market.

Acquiring the most appropriate assets is crucial for enabling and optimising our business model, which is where Sirius acquires, transforms, manages, and eventually recycles assets to deliver strong and consistent returns for shareholders. You can read more about the Sirius business model on our website.

The assets

Andrew Coombs: How does Sirius evaluate whether a property is a good fit? What criteria or benchmarks do you use?

Tariq Khader: We use a number of key performance indicators (KPIs) to assess a property’s fit within the portfolio. Specifically, we ensure that each transaction stacks up on its merits in terms of overall return/internal rate of return (IRR).

At Sirius, we are focused on driving the earnings of our properties by leveraging our operating platform to fill vacancies, investing in space to improve the quality of the estate and drive rate improvement, capturing service charge leakage and monetising all aspects of the business park (e.g. car parking). The yield on cost (running yield) is therefore a key metric in how we assess each acquisition. As we are adding assets to our portfolio we also continue to assess the impact the asset has on the portfolio, ensuring new properties are accretive to the portfolio.

Andrew: What kind of properties is Sirius looking for and what key factors make a property stand out as a strong acquisition target for Sirius?

Tariq: Sirius looks for multi-use commercial business parks and warehouses or industrial/production-heavy parks located on the edge of towns or major cities in both Germany and the UK. These sites are typically under-managed, running at 60% - 80% occupancy. In Germany we are targeting lot sizes of £10-£40m and 15k-40ksqm, and in the UK we are targeting lot sizes above £5-£25m and 5-25k sqm.

The key factors of a strong potential acquisition for Sirius are quality, location and potential. Good quality, well-located assets with opportunities to improve the sustainable net operating income which ultimately results in an increased valuation.

The strategy

Andrew: Why is a robust acquisition process so important?

Tariq: Over the past 10 years, Sirius has built a successful track record as a serial acquirer of property. This strong reputation puts us in a privileged position, whereby our shareholders are keen to support capital raises to grow the business. Therefore, maintaining a robust acquisition process is key to being able to deliver strong acquisition returns for our shareholders and continue to keep our access to fresh capital.

Equally as important from an operational standpoint, a robust process is key to ensuring that there are no surprises with an acquired property. We perform a thorough due diligence (legal, commercial tax, technical, environmental, and ESG) of the property to develop a detailed business plan. The due diligence findings often lead to us needing to renegotiate the price. A key part of our financial modelling process scenario planning, whereby we run a number of different scenarios, is to ensure we can sufficiently mitigate our downside risks.

Andrew: How does a strong acquisition strategy contribute to Sirius' long-term business objectives?

Tariq: Sirius has managed to achieve at least a 5% like-for-like rent roll growth over the past 10 years, which has enabled us to pay 21 consecutive progressively increasing dividends. A key avenue for being able to achieve this is the acquisition strategy. Acquiring value-add assets, with opportunity in terms vacancy, structural void/capex requirements and high service charge leakage, provides Sirius with the runway to continue to deliver this sustainable growth.

Once we have actively asset-managed these properties and optimised their income, we generally see an increase in the valuation of the site. The asset is then moved to our mature portfolio, where it is held for income stability or recycled into new value add opportunities in a continuous cycle.

Andrew: What makes a successful acquisition for Sirius?

Tariq: Assets where we have managed to outperform the business plans – and where colleagues are happy – generally indicates a successful transaction.

The market

Andrew: How does Sirius stay competitive in a crowded real estate market?

Our proven track-record of more than €1.5bn of acquisitions in Germany and the UK over the last decade, more-or-less, proves we are a reliable owner and operator of business parks, offices and mixed-use spaces. 

We may not always be the highest bidder, but we have stable funding and can provide sellers with certainty around our ability to execute on transactions. This is supported with our strong balance sheet with c. €300m cash on the balance sheet and a low net LTV.

Andrew: What trends are you seeing in the real estate market?

Tariq: We are continuing to see strong demand for multi-let industrial business parks across both markets. More recently we are seeing the number of competitors bidding for assets increase, with pension funds starting to transact again. We see this as a healthy return to ‘normal’ market conditions across the industrial real estate sector. 

Andrew: How has Sirius adapted to challenges such as rising interest rates or economic uncertainty in its recent acquisitions?

Tariq: These wider market factors mean we have to be more selective in our screening process. We have also reviewed our return requirements to ensure the appropriate level of risk is priced in and put greater emphasis on the covenant strength of the main anchor tenants on site. However, ultimately, we continue to follow our same robust acquisition process as always, with just a few small tweaks to reflect the tougher economic landscape in both Germany and the UK.