What we learnt from our dialogue with European S-REITs

As European central banks signal potential interest rate cuts and early signs of stabilisation emerge in the European real estate market, it's natural to wonder how these developments might affect Singapore REITs with European exposure.

To dive deeper into this topic, we recently hosted the webinar SGX Discovery Series with Beansprout: Navigating the Landscape of European S-REITs. 

The session featured insights from key players in the sector, including Cromwell European REIT, IREIT Global, and Elite UK REIT, alongside a thorough analysis of the European real estate market.

We discussed the key factors influencing performance, the potential impact of interest rate cuts, and took a closer look at how individual European S-REITs are positioning themselves in this evolving landscape.

For those who were unable to attend, here’s the recording of the session. 

Transcript of "SGX Discovery Series: Navigating the Landscape of European S-REITs"

Summary

• European central banks have started cutting interest rates with easing inflation.
• Real estate valuations have stabilised as yields have peaked.
• European S-REITs offer exposure to improving sector outlook, and trade at dividend yields of above 9% on average.

2:35 - 6:44 Backdrop of Interest Rate Cuts

• The US Federal Reserve began cutting interest rates in September 2024, with a 50-basis-point cut, followed by a 25-basis-point cut in November. These moves have influenced global financial markets, including Singapore and Europe.
• The ECB initiated rate cuts in June 2024, with three rate reductions so far. The moderation of inflation in the eurozone, from a peak above 10% in 2022 to 2% in October 2024, provided room for these actions.
• The BoE has implemented two rate cuts, aligning its approach with the Fed but emphasizing caution to ensure inflation remains under control.
• Rate cuts across these regions reflect a response to taming inflation and supporting economic growth.

6:45 - 11-25 European Real Estate Sector Impact

• After rising during the high-interest-rate cycle, prime yields for property asset classes have begun stabilising, signaling improved valuation conditions.
• While overall investment volumes in 2023 were subdued due to elevated financing costs, recent data indicates a resurgence in activity. Investment volumes are expected to increase in 2025, supported by declining borrowing costs and stabilising market conditions.
• The performance of real estate asset classes remains polarised. Office rentals are projected to grow at a slower pace over the next five years compared to the past decade, while retail rentals are expected to see stronger growth in the same period.

11:26 - 12:54 Sector Performance

• Office: Rental growth remains polarized. Prime office spaces with modern specifications and sustainability features are experiencing robust demand and rental increases, while average office spaces face challenges due to higher vacancy rates and outdated infrastructure.
• Logistics: Logistics assets have been bolstered by structural trends like e-commerce and supply chain localization. Though rental growth has moderated after 2021–2022 peaks, demand for well-located logistics assets remains high.
• Retail: The retail sector is recovering from its pre-pandemic decline, driven by improving consumer sentiment, falling inflation, and stabilized demand for retail spaces. Retail parks and proximity retail spaces, especially, are experiencing higher rental growth.

13:59 - 16:02 How does this affect Singapore REIT Investors?

• While Singapore REITs traditionally focus on local assets, over 90% of Singapore-listed REITs now hold overseas properties.
• European REITs, in particular, stand out with an average dividend yield of 9%, significantly higher than the yields from local REIT sectors like office, retail, or industrial, which average above 5%.
• This dividend yield is also higher than the Singapore 10- year government bond yield.

16:11 - 17:56 How to Select the Best REIT using Beansprout's REIT checklist

• Use the Beansprout REIT checklist to understand the fundamentals, financial strength, and valuation of REITs

20:15 - 24:36 Macroeconomic Trends

• Modest growth is projected for Europe, with the Eurozone GDP up 0.4% in Q3 2024, exceeding forecasts. The UK saw slower growth at 0.1% but remains on a recovery trajectory.
• Unemployment remains near record lows, supporting GDP and consumer confidence, though labor market softening in select industries is a risk.
• Consumer spending is expected to grow over the next five years, supported by resilient labor markets and rising consumer confidence.
• Inflation has significantly declined, nearing the 2% target, driven by lower energy and goods prices, enabling further interest rate cuts by the ECB and BoE.
• The pace of rate cuts in the UK may align more closely with the Fed’s cautious approach, reflecting its smaller, open economy's sensitivity to global market trends.

24:37 - 33:40 Real Estate Trends

• Vacancy rates have risen due to weaker economic activity and a high rate of pre-repricing cycle completions.
• Rental growth is concentrated in prime assets, driven by location and specification demands from occupiers.
• The polarisation trend persists, with better quality assets outperforming, while secondary assets face uncertain returns and higher capex requirements.
• Over the next five years, total annual returns for European real estate sectors are forecasted at 10.6% for offices, 10.1% for logistics, and 7.8% for high street retail.
• Investors aligned with occupier preferences, focusing on prime, modern assets, stand to benefit from strong rental growth and capital appreciation.

IREIT Global

• IREIT Global holds a diversified portfolio comprising 53 properties, with 76% in office assets (Germany and Spain) and 24% in retail (France).
• The portfolio has a strong weighted average lease expiry of nearly five years and a below-market leverage ratio of 37.7%. Weighted average interest rates are low at 1.9%, supported by systematic loan hedging.

Key Projects and Performance:

• Darmstadt office building: After being fully vacated in late 2022, occupancy is expected to reach 66% by early 2025, backed by long-term lease agreements.
• Spanish portfolio: Occupancy rates are improving, with projections increasing from 70% to 77% in the coming months.
• Berlin repositioning project: Transforming a single-use office asset into a mixed-use property with hotels, offices, and retail. This unique large-scale project is expected to deliver long-term value and differentiate IREIT from peers, despite an anticipated temporary dip in rental income.

Future Objectives:

1. Berlin project execution: Successfully manage the repositioning to unlock long-term value.
2. Boost occupancy rates: Prioritise improving occupancy across the portfolio.
3. Diversify portfolio and build scale: Mitigate real estate cycles by expanding asset classes and geographies, with potential entry into new markets like the UK.

Read also: IREIT Global: Pure-play Western Europe-focused REIT

Elite UK REIT

• Elite UK REIT is a UK-focused REIT listed in Singapore, benefiting from the UK REIT structure with tax parity to London Stock Exchange-listed REITs.
• The portfolio comprises assets fully leased to the UK government under triple net leases, ensuring income stability and sovereign credit reliability.
• Assets are 100% freehold and strategically located near city and town centres, primarily serving as job centres within the UK’s social welfare system.

Performance Highlight:

• Dividend growth: Distributable income per unit (DPU) increased by 4% year-on-year for the first nine months, supported by higher distributable income and tax savings.
• Refinancing success: Refinanced debt for three more years at a fixed 5% interest rate, reducing borrowing costs by 20 basis points.
• Asset divestments: Sold an asset at a 42% premium to valuation, with total divestments in the year reaching 4.6 million.
• Occupancy rate: Improved to 93.9% as of June 2024.
• Portfolio yield: Currently offers an attractive yield of 10-11%, well above the average for Singapore REITs and UK 10-year gilt bonds.

Strategic Focus:

1. Proactive asset management: Extending lease profiles to longer maturities and exploring better valuations through alternative uses such as student accommodations or built-to-rent residential properties.
2. Capital management: Targeting long-term gearing below 40% by leveraging asset divestments and asset enhancements to reduce borrowings and improve valuation.
3. Improved liquidity: Enhancing market visibility and investor engagement through active communication and increased equity coverage.

Future Plans:

• Elite UK REIT plans to continue aligning its investment strategy with social infrastructure while considering repositioning assets where feasible.
• It aims to create value for unit holders by diversifying asset uses, improving operational efficiency, and maintaining a sustainable capital structure.

Read also: Elite UK REIT: Room for positive asset repricing

Cromwell European REIT

• Cromwell European REIT (CEREIT) manages a €2.25 billion portfolio with over 100 assets, spanning 10 countries, totaling close to 2 million square meters. It employs a diversified "barbell approach" with core assets (long-term leases), core-plus assets (value-add opportunities), and assets ripe for material upgrades.
• Majority of the portfolio is logistics and light industrial assets, driven by tailwinds such as e-commerce growth, supply chain reshoring, and demand from industries like semiconductors and renewable energy.

Performance Highlights:

• Despite economic headwinds, the REIT maintains robust occupancy and income growth. During COVID-19, rental loss was minimal at €500,000 out of €200 million annual rental income.
• Delivered a 4% quarter-on-quarter distribution increase, supported by 7% net property income (NPI) growth from rent indexation, reversions, and asset enhancements.
• CEREIT is a leader in ESG, achieving a double A MSCI rating. Initiatives include increasing green power usage (40% portfolio-wide) and delivering energy-efficient buildings, such as the second most energy-efficient office in Italy.

Strategic Developments:

• Transition to logistics: The portfolio has shifted towards logistics and light industrial assets, capitalising on higher yields and lower capex compared to office assets.
• Active asset enhancements: Major projects in Amsterdam, The Hague, Milan, and Paris aim to upgrade B-grade assets into prime properties, achieving significant rent increases (up to 50%).
• Landmark asset in Paris: The Parc des Docks project in Paris, adjacent to the Olympic Village, has seen rental rates nearly double due to scarcity of last-mile logistics properties.

Financial Stability:

• Strong balance sheet: Net gearing of 40%, investment-grade BBB- rating with a positive outlook, and €470 million in recently refinanced debt.
• Shareholder value: Current dividend yield of 9% and ongoing efforts to narrow the 25% discount to net asset value (NAV), driven by interest rate cuts and asset appreciation.

Future Direction:

• Rebranding to Stoneweg: Transitioning ownership to Stoneweg, a Geneva-based investor, who recently invested €280 million, endorsing the REIT's strategy and potential for growth.
• Opportunities in logistics: Continued focus on expanding logistics exposure to capture e-commerce and reshoring trends, driving higher returns and valuation growth.

Read also: Cromwell European REIT: Stabilisation of asset values with interest rate cuts

Resources mentioned in the video

• Navigating opportunities in European S-REITs

• Best Singapore REITs Screener Tool: Compare Singapore REITs to find the best REIT for your portfolio.

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