Navigating opportunities in European S-REITs
REITs
By Gerald Wong, CFA • 18 Nov 2024
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With interest rate cuts by European central banks, the valuation of real estate assets in Europe has largely stabilised. We find out what this may mean for European S-REITs.
Easing inflation leaves room for rate cuts
The European Central Bank (ECB) has cut interest rates by three times since June 2024, bringing its benchmark rate to 3.25%.
With inflation easing further to 1.7% in September 2024, below the ECB’s target rate of 2%, we see scope for interest rates to be cut by a further 1%-point by end-2025.
Likewise, the Bank of England has implemented two interest rate cuts since August.
Property valuations stabilising amid decline in interest rates
With the interest rate cuts, the valuation of real estate assets in Europe has largely stabilised in the third quarter of 2024 following declines over the past two years.
Encouragingly, the UK logistics and high street retail sectors, and France office sector saw a decline in the prime yields in the third quarter of 2024, according to CBRE.
Divergence in performance across sectors
Despite early signs of recovery, the outlook across the office, retail, and logistics sectors varies significantly.
Demand for logistics assets remains robust, driven by ongoing e-commerce growth, although leasing activity has softened compared to the post-Covid peak.
The retail sector is experiencing a revival in key markets as easing inflation boosts consumer spending.
Meanwhile, the office sector faces the greatest challenges due to persistent work-from-home trends, though well-located, environmentally sustainable buildings continues to outperform.
Cromwell European REIT has largest portfolio by value
Across the three European S-REITs, Cromwell European REIT has the largest portfolio by valuation at €2.25 billion across 106 light industrial/logistics and office properties throughout Europe.
Elite UK REIT has the largest number of properties at 149 office assets in the UK.
IREIT Global has the smallest property portfolio with 53 office properties across Germany and Spain and retail properties in France.
Cromwell European REIT | IREIT Global | Elite UK REIT | |
Number of properties | 106 light industrial/logistics and office properties in Europe | 53 office and retail properties in Europe | 149 office assets in the UK |
Lettable area (sqm) | 1,749,993 | 425,116 | 350,563 |
Portfolio valuation | €2.25 billion | €855.6 million | £415.0 million |
Valuation breakdown by country | The Netherlands (27.5%), France (20.0%), Italy (18.2%), Germany (9.1%), Poland (7.0%), Denmark (6.1%), Czech Republic (3.4%), Slovakia (3.1%), Finland (2.8%) | Germany 61.3%, France 23.7% and Spain 15.0% | 100% UK |
Valuation breakdown by asset type | Logistics/light industrial (54.0%), office (44.0%) and other property types (2.0%) | Office 76.0% and Retail 24.0% | 100% UK |
Source: Company Data as of September 2024 |
Cromwell European REIT has most diversified tenant base
Cromwell European REIT has the most diversified tenant base with the top 10 tenants representing only 23% of rental income.
Elite UK REIT has the highest tenant concentration with 93.5% of its properties are leased to the Department for Work & Pensions (DWP), with other UK Government and social infrastructure assets making much of the remaining tenants.
Cromwell European REIT | IREIT Global | Elite UK REIT | |
Tenant mix – Top 10 tenants by rental income | 23% | 81% | 99% |
Occupancy rate (%) | 93.9% | 89.6% | 93.9% |
WALE (years) | 4.7 | 4.6 | 3.5 |
Source: Company Data as of September 2024 |
Leverage in the range of 37% to 44%
Elite UK REIT has the highest aggregate leverage at 44.1%, even though it has refinanced borrowings to 2027 in July 2024.
IREIT Global has the lowest aggregate leverage at 37.7%, and similarly, has the most favourable credit metrics across indicators such as debt costs and interest coverage ratios, while Cromwell European REIT has an aggregate leverage of 41.0%.
Cromwell European REIT | IREIT Global | Elite UK REIT | |
Aggregate leverage (total debt/total assets) | 41.0% | 37.7% | 44.1% |
Weighted Average Debt Expiry (years) | 2.7 years | 2.0 years | ~3.0 years |
Debt Cost (%) | 3.2% | 1.9% | 5.0 |
Interest coverage ratio (x) | 3.6 | 8.1 | 3.0 |
Source: Company Data as of September 2024. Elite UK REIT leverage as of 7 Oct 2024. |
Key risks
Geopolitical risks may drive higher tariffs which may lead to a slower than expected economic recovery.
In addition, the outlook across various sub-sectors remains mixed, and selected assets which are poorly located may become obsolete.
Higher distribution yields compared to sector average
All three European S-REITs have relatively high distribution yields ranging from 8.6% at Elite UK REIT, 9.3% at Cromwell European REIT and 10.3% at IREIT Global.
The European S-REITs trade at significant discounts to NAV at 0.53x for IREIT Global, 0.72x for Cromwell European REIT and 0.74x for Elite UK REIT.
- Elite UK REIT dividend history and dividend forecasts
- Cromwell European REIT dividend history and dividend forecasts
- IREIT Global dividend history and dividend forecasts
Cromwell European REIT | IREIT Global | Elite UK REIT | |
Price | € 1.62 | € 0.25 | £0.30 |
Market Capitalisation | €911 million (S$1,287 million) | €288 million (S$403 million) | £175 million (S$403 million) |
P/NAV (x) | 0.72 | 0.53 | 0.74 |
Distribution Yield (%) | 9.3% | 10.3% | 8.6% |
Source: Company Data. Priced as at 29 October 2024 |
Related Reports:
- Elite UK REIT: Room for positive asset repricing
- Cromwell European REIT: Stabilisation of asset values with interest rate cuts
- IREIT Global: Pure-play Western Europe-focused REIT
Join us at "SGX Discovery Series with Beansprout: Navigating the landscape of European S-REITs" on 19 November, where we’ll dive into the exciting prospects of investing in this dynamic sector. This event features exclusive insights from senior executives of leading European REITs, including Cromwell European REIT, Elite UK REIT, and IREIT Global. Register for free here.
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