Cromwell European REIT - Stabilisation of asset values with interest rate cuts

Pan-European logistics & office REIT

Listed in 2017, Cromwell European REIT (CEREIT) focuses on direct or indirect investments in income-producing commercial real estate assets across Europe, with a minimum portfolio weighting of at least 75% to Western Europe and at least 75% to the logistics/light industrial and office sectors. 

CEREIT currently targets a majority investment weighting to the logistics/light industrial sector while also investing in core office assets in gateway cities.

Announcement of Stoneweg as the new sponsor and substantial shareholder

In May 2024, it was announced that Stoneweg, a global multi-strategy real estate advisor and asset manager company, will be the sponsor and substantial shareholder of CEREIT. 

This follows a €280 mn sale and purchase agreement entered into by Cromwell Property Group to divest its entire 27.79% stake in CEREIT, its 100% interest in the Singapore Manager of CEREIT, 100% interest in the property manager of CEREIT and other associated co-investments. 

Nonetheless, CREIT shared that there are no anticipated changes to CEREIT’s independent directors and management team.

Portfolio of 106 properties across Europe

CEREIT’s portfolio comprises 106 predominantly freehold properties (93.0% by valuation) in or close to major gateway cities. 

Overall portfolio occupancy stood at 93.9% with a Weighted Average Lease Expiry (WALE) of 4.7 years as of 30 September 2024. 

As a share of portfolio valuations by geography, The Netherlands represented the single largest country at 27.5%, followed by 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%) and the United Kingdom (2.8%). 

By asset class, logistics/light industrial represented the majority at 54.0%, in line with the manager’s strategic pivot to this asset class, with office at 44.0% and other property types rounding up the remaining 2.0%. 

Stabilising portfolio valuations

As of June 2024, CEREIT's total portfolio valuation was €2.24 bn, up 0.6% or €13.1 mn on a like-for-like basis compared to six months ago, marking the first like-for-like increase in two years. 

The portfolio valuation rose slightly further to €2.25 bn as of September 2024, following interest rate cuts by the ECB and other EU central banks. 

1H24 Distributions per Unit however, declined 9.5% YoY to €7.05 cents. While 1H24 Net Property Income (NPI) was down a more moderate 4.4% YoY, due to the loss of rental income from asset divestments, DPU declines were further impacted by higher borrowing costs which rose 11.0% YoY. 

CEREIT’s manager expects European real estate fundamentals to gradually improve in 2H 2024, with real estate yields expected to stabilise and, in some markets, may compress. 

Leverage of 41.0% as at September 2024

Aggregate leverage of 41.0% as at September 2024 was a 0.7 percentage point increase from December 2023. 

However, CEREIT has no debt maturing until its €450 mn Euro Medium Term Note (EMTN) Programme November 2025 maturity date. 

All-in interest rates as at 30 September 2024 was 3.16%, marginally lower than the 3.19% as at 31 December 2023. 

Deceleration of divestment strategy

With gearing deemed to be at a comfortable level by management, CEREIT intends to decelerate its divestment strategy, which was first initiated in early 2022. 

For context, CEREIT’s board had then initiated a €400 mn asset sales programme as a proactive measure to offset the impact of rising interest rates and falling valuations on gearing. 

Eleven assets in Germany, Finland, France, Italy, and Poland, have been divested for total of ~€261 mn and at a blended 13.8% premium to the most recent valuations. 

Nonetheless, CEREIT still complete the remaining ~€90 mn in non-strategic divestments, while increasing weighting to logistics/ light industrial and recycling capital into its development and asset enhancement program. 

Key risks

Current economic conditions in Europe remains soft, with tight monetary policy largely preventing higher consumer spending. 

In addition, geopolitical risks may drive higher tariffs and other trade impediments which could undermine economic performance. 

Finally, the European logistics market has slowed in recent quarters, with vacancy rate increasing to 3.8% in Q3 2024 according to CBRE.

Trading at 8.8% annualised distribution yield

CEREIT is currently trading at a 22% discount to NAV, and a 8.8% distribution yield based on annualised 1H24 DPU. 

This is higher than the overall S-REIT average of 6.3%. 

Key catalysts to lookout for include further progress in its asset divestment programme, improvements in the interest rate environment and geopolitical developments in Europe. 

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. 

Related links:

• Cromwell European REIT share price and share price target
• Cromwell European REIT dividend history and forecast

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