While the allure of taking a European holiday captivates the dreams of many, the desire to purchase physical real estate in the region is often not as popular as in other regions due to a varied number of reasons. Fortunately, Singapore investors are not limited to only physical real estate and also have the option to invest in properties via Real Estate Investment Trusts (REITs).
Among the several types of REITs that are listed on the Singapore Exchange, is Cromwell European REIT, which has been listed since 2017 and trades in both SGD (SGX Code: CWCU) and EURO (SGX Code: CWBU) terms.
Cromwell European REIT, which has a 100% exposure to European real estate portfolios, has a principal mandate to maintain at least 75% of its portfolio in Western Europe and at least 75% in the light industrial/logistics and office sectors. It currently has over 110, predominantly freehold properties in or close to major Western European cities like the Netherlands, Germany, France, Italy, UK, and Central Europe. These properties serve a growing pool of tenants in the European logistics sector, which is supported by e-commerce and supply chain investments.
Here are 5 things to know about Cromwell European REIT if you are interested in light and industrial properties in western Europe and the Nordic regions.
Elaborate on Cromwell European REIT’s recent capital management initiatives.
We recently completed two sustainability-linked refinancings totaling €322.5 million with higher loan-to-value (LTV) covenants of 50%, leaving CEREIT with no debt expiring until November 2025: o New 5-year revolving credit facility (RCF) for an aggregate amount of €165 million. The signing of this RCF follows the recent full repayment of the existing facility. o New 4-year loan facility of €157.5 million to refinance the last of the FY 2024 debt.
94% of debt is fixed / hedged for an average of 2.3 years as of 31 Jul 2023, largely minimising the risk to CEREIT from any further rate increases over the next 1-2 years. We remain committed to maintaining CEREIT’s investment-grade credit rating of at least ‘BBB-’ with a stable outlook.
What are some key takeaways from Cromwell European REIT’s June 2023 property valuations?
CEREIT’s June 2023 portfolio independent valuations declined by a modest 1.6% compared to December 2022 levels, demonstrating the resilience of CEREIT’s portfolio in the face of weaker macro fundamentals. Valuations were supported by active leasing and renewals of over 30% of the portfolio and sustained a high level of positive rent reversions and market rent growth in the last 18 months, which largely offset the rise in caprates.
Our portfolio’s relatively higher initial yield of 5.9% provided a valuation cushion well above the rise in interest rates, relative to the much lower European prime office and logistics yields of c.3%, which have risen around 100bps this cycle.
What are some of the REIT’s potential catalysts that investors can be excited about in the near term of 1 to 2 years?
First, the end of interest rate hikes and stabilising of credit conditions should be positive for the S-REITs sector more broadly. On a macro level, Oxford Economics expects two further quarter point rises in 3Q before the cycle rate-raise cycle peaks in 2023 and rates reduce in the second half of 2024. Once this overhang from market uncertainty resolves, analysts expect REITs to perform better as a sector. CEREIT’s annualised 10% DPU yield and 35% discount to NAV / unit at today’s price compares favourably to the 7% DPU yield and 4% discount to NAV / unit that the S-REIT sector is currently trading at.
A second potential catalyst would be the income growth from repositioning to majority logistics. CEREIT has now effectively achieved 51% exposure to logistics / light industrial (up from 34% 24 months ago). With the sector most recently demonstrating NPI +8.7% like-for-like growth in 1H 2023, this presents a potential upside opportunity.
Third, as we are focused on “alpha generating”, CEREIT is more than just a “play on rates” with additional income contribution expected to flow through the bottom line, against the backdrop of the current redevelopments in Italy and the Czech Republic positively contributing from 1H 2024 and as we roll out other projects.
What are the most significant ESG risks and opportunities faced by the REIT and how is it managing them?
CEREIT is now one of only three S-REITs with a leading MSCI ESG “AA” rating in Singapore and is in the lowest ESG risk score category according to Morningstar Sustainalytics, putting it in a lead position amongst more than 450 REITs rated worldwide. We achieved this after five years of continued improvement in reporting and asset management initiatives.
Sustainability and ESG are no longer ‘nice-to-haves’ but ‘must-haves’, as ESG credentials increasingly become barriers to entry for both access to capital markets and income resilience due to evolving customer needs.
On the capital markets side, our leading ESG reporting practices and ratings allowed us to introduce green financing framework two years ago. Including the recently refinanced term loan facility, we have now completed approximately €575 million in sustainability-linked loan facilities over the last two years, which allow us to benefit from interest cost saving that are linked to sustainability metrics.
On the income resilience side, there is growing demand for quality Grade A office properties with green certifications, as occupiers are taking less space but are paying more for it. We tap into this opportunity through our Nervesa 21 redevelopment, which is already achieving well over €350 / sqm of rent, way above the initial targets. This highlights the limited options for tenants seeking quality Grade A offices with green certifications, as well as the opportunities that CEREIT can take advantage of.
With many economists predicting a slowing economy and a possible recession in the near term, how is the REIT preparing itself to ride out this storm?
Global real estate fundamentals are not expected to improve for a year or so, but Europe is expected to outperform the other major markets with supportive tailwinds in logistics in particular, while inflation indexation is helping to offset the rise in interest costs.
Key priorities 2H 2023 for CEREIT are:
- Continue with focus on active asset management to:
- maintain occupancy above 94%
- drive rent reversion growth and capture ongoing inflation indexation
- deliver fully-let current developments and AEIs, and prepare further projects to rejuvenate and future-proof the portfolio
- Mitigate impact on distributable income from higher interest costs and operating costs
- Maintain Fitch investment-grade rating and keep gearing within the Board’s policy range of 35-40%
- Continue to deliver on asset sales
We are confident in the medium to longer term cyclical recovery and will be well-placed with Cromwell’s teams on the ground to take advantage of our competitive position when markets stabilise.
Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 22 August 2023 and have been republished with permission. You can read more on Cromwell European REIT (SGX Code: CWBU/CWCU) on the SGX website.
Feature Image Credit: Cromwell European REIT