Elite Commercial REIT Eyes Expansion To Drive Growth (Exclusive Interview)

February 25, 2020- Elite Commercial REIT’s shares debut on February 6 on the Singapore Stock Exchange during the COVID-19 outbreak.

The shares have since climbed from its IPO price of £0.68. The REIT, with an appraised value of £319 million[1], has an initial portfolio comprising 97 properties across the UK, of which 96 are freehold properties, and one property is on a long leasehold tenure expiring on May 19, 2255. Almost all of its gross rental income is derived from leases with the UK Government, with the Department for Work and Pensions (DWP), the country’s largest public service department, occupying the properties.

Its sponsors are Elite Partners Holdings Pte. Ltd., a Singapore-based investment holding firm for Elite Partners Group, property and construction firm Ho Lee Group Pte. Ltd., and Sunway RE Capital Pte. Ltd., a wholly-owned unit of Malaysian conglomerate Sunway Berhad. Together, the sponsors own about 20% of the REIT post-IPO. The REIT Manager, Elite Commercial REIT Management Pte. Ltd., is 85% held by Elite Partners Holdings, in which former Viva Industrial Trust Founder Victor Song and Ho Lee Group have a stake. Sunway RE Capital holds the remaining 15%.

REITAsiaPac met and spoke with the REIT Manager’s Chief Executive Officer Shaldine Wang, Chief Investment Officer Jonathan Edmunds, Chief Financial Officer Joel Cheah and Senior Manager of Investor Relations Leng Tong Yan.

Elite Commercial REIT Team
From left to right: Chief Investment Officer Jonathan Edmunds, Chief Financial Officer Joel Cheah, Chief Executive Officer Shaldine Wang, Senior Manager of Investor Relations Leng Tong Yan.

Question: What do you think about your IPO performance. Did you expect the outbreak of the Coronavirus to affect the timing of your IPO?

Shaldine: We are very thankful to successfully complete the listing on the Mainboard of the Singapore Stock Exchange at the right time. The placement tranche was closed ahead of Chinese New Year, just before the onset of the virus panic. The nature of this portfolio is very stable, especially in this environment. We have a core and stable tenant, which is the UK Government, and the vehicle is very counter-cyclical.

Before we embarked on this transaction, there were concerns about the relatively small offering size and how it would be received. However, the investment thesis of the portfolio and its focused investment strategy has resonated with many investors. We have a pool of investors who followed us during the private fund stage, and the same thing happened at the placement. We are glad to have attracted institutional investors who believe in our REIT.

Question: Did you consider listing on the London Stock Exchange?

Shaldine: UK-listed REITs are slightly different, with an internal management structure and a 30% development exposure allowed compared to 10% for Singapore REITs. Investors here have limited opportunities to invest in a portfolio of UK properties. If they do invest, they typically have exposure to single assets in prominent cities like London, which can be prohibitively expensive. Elite Commercial REIT allows investors to gain exposure to professionally managed assets that are diversified across the whole of the UK, with an attractive forecast 2020 distribution yield of 7.1%[2]. We also realised that there is a big investor appetite in this part of the world. So that solidifies the initial thought that we should go for a Singapore listing as opposed to other jurisdictions.

Question: What is the geographical make-up of your investors?

Shaldine: They are mainly from Asia, not just Singapore. We have quite a big pool of investors from Hong Kong and Malaysia as well. We also have a couple of UK investors. We do have some long-only funds with us, and we hope they will continue to support us as this REIT grows.

Question: Being the first British-pound denominated REIT in Singapore, what unique opportunities are you looking to tap? Similarly, what unique opportunities are in store for Singaporean investors looking into investing in your REIT?

Shaldine: One of the key focus is growth, as we are relatively small in the Singapore REIT market. We are also looking to tap into certain indexes to attract even more institutional investors in the longer term.

Jonathan: The UK is a huge real estate market. It is the second-most traded real estate market globally and consistently outperforms all other European countries in terms of investment volumes. So that means that there’s a very deep pool of asset acquisition opportunities. Also, the UK Government, which is our tenant, is reported to be one of the largest occupiers of real estate. Since the mid-90s, the UK Government has gone asset-light, which means that there’s a very deep and liquid market for real estate assets let to the UK Government.

We see some good opportunities to acquire assets that are accretive for the REIT’s dividend profile. We are focused on accessing assets in the UK market as the main driver for growth.

Shaldine: We do have a ROFR (Right of First Refusal) from the sponsors, which provides growth opportunities. In the UK, real estate transactions tend to transact faster than in Asia. The completion timeline is usually very compact, and ideally, you would want to have the capital on hand to complete a transaction. In addition to acquiring assets by the REIT directly, we also have sponsors that are committed to acquire and hold the assets and provide the REIT with ROFR to purchase.

Jonathan: I think it is a very good opportunity for this REIT to grow via the ROFR pipeline because the 62 assets are located across the UK and are long-leased to the UK Government. It is very much in line with the REIT’s investment strategy.

Question: Would you consider going beyond the UK, say to other European countries?

Shaldine: The investment mandate within the prospectus stated that this REIT will be UK-focused.

Joel: There is sufficient liquid stock available in the UK that doesn’t warrant going out of the country. It is common for REITs with assets in Singapore to go abroad because Singapore is too small, and they need to find other investment stock. I don’t think we would have the same limitations.

Question: What is your growth strategy in the medium term? As early as now are you expecting acquisitions (local or overseas), asset enhancement and redevelopment down the line after the IPO?

Jonathan: There are broadly three ways that we’re looking to grow this REIT. We can look at the traditional route of asset enhancement, development of any excess land potentially, as well as growth via acquisitions.

First and foremost, all our properties are leased to the UK Government, so anything we do on the existing portfolio will need to be in agreement with the UK Government. There are clear opportunities that exist, and they are primarily through the potential to grow the portfolio on the existing land that the REIT owns, which is more than 47 hectares of land across towns and cities in the UK.

One asset, which is highlighted in the prospectus, is Peel Park in Blackpool. It has almost 12 hectares of undeveloped grassland. The UK Government is actively investing in regenerating Blackpool. We understand that they have been looking at our asset as a potential place to grow into a government hub.

We have had discussions with them about how to bring forward a proposal to increase the amount of lettable area on our property, so that will be one of the key growth drivers of the REIT.

There are also opportunities which may come through on a longer term where asset values could be enhanced. In the UK, there’s a system called Permitted Development Rights, which means any office building can be converted to residential without requiring planning permission. In the UK, there’s a long-term structural under-supply of housing, and that’s driving up the value of land and buildings that can be converted into residences. We are not saying we will start converting our properties to residential developments, but we want to highlight is the potential of our assets and what are the possible options to unlock some of these potentials.  

Our asset management strategy involves building and maintaining a very close relationship with our tenant. Based on the current REIT portfolio, we are one of the largest landlords to the DWP. This gives us a lot of opportunities to plan and work with the UK Government on their long-term requirements.

Question: Will future expansion be UK-focused and follow the government-as-tenant theme?

Shaldine: One thing we have been saying to our investors is that we want to keep the credit standing of our REIT as close to what we have now as possible, which is essentially deriving rent from the UK Government. It is not easy to get a tenant as good as this. We do not expect to change or deviate from our strategy. We will still very much be UK Government-focused, and we are open to expanding into other government departments.

Question: Are there are any immediate acquisition opportunities that you are looking at right now?

Shaldine: There is no shortage of acquisition opportunities in the UK real estate market. However, we would also like to emphasise that while we want to grow the REIT, we want to do it responsibly and acquire assets which are accretive to our unitholders.

Question: While most analysts gauge Elite REIT as relatively stable because most properties are government-backed, some flag this as a concentration risk, especially with uncertainties surrounding the Brexit and other EU developments. How are you looking to address this and what could be the potential effect of Brexit developments to your distribution, profitability and vacancy rates?

Shaldine: Our tenant, DWP, is responsible for the welfare, pensions and child maintenance policy. Their operations are counter-cyclical in nature. In addition, without Brexit, there’s already a stable number of claimants visiting our properties to utilise DWP services. So, depending on how Brexit is going to transpire over the next year; if unfortunately, the economy is going to turn south, there will be a potential increase in DWP commitments. Then, the usage of the buildings or footfall within the buildings will naturally increase.

Furthermore, the leases are signed on a 10-year basis with some of the leases giving the tenant an option to break in the fifth year. However, the tenant is required to give us at least a year’s notice if they do decide to exercise the break option. That should give us sufficient time to either secure new tenants or evaluate other options.

Question: How will Prime Minister Boris Johnson’s recent announcement about plans to move the government out of Westminster affect your business?

Shaldine: If you look at the spread of the REIT’s portfolio, it’s mainly outside central London. Therefore, we do not foresee any major impact on our business, it may even benefit us. For example, our asset Peel Park in Blackpool, will benefit from this announcement. The UK Government, via the Blackpool Council, has pumped in hundreds of millions of dollars trying to regenerate Blackpool and to bring in more civil servants there. That’s also in line with our discussion with DWP on trying to work on a medium-term plan to put up more space for their departments. This goes hand-in-hand with what the UK Government is planning.

Question: How will you address concerns about the currency risk given that the British pound has recently been under pressure?

Joel: The base case we have presented to investors is that this REIT has benefited from a natural currency hedge. Our assets and liabilities are all denominated in Pounds. Similarly, we will report our financials and declare our distributions in Pounds. Unitholders have the right to elect their distributions to be in Pounds. We see this REIT as pure-play with minimal FX (foreign exchange) exposure.

[1] As at 31 August 2019.

[2] Based on the IPO price of £0.68 per unit

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