This comes as the Dundee market is in short supply of high-quality affordable student accommodation

 

[SINGAPORE] The manager of Elite UK Real Estate Investment Trust : MXNU +2.94% (Reit) on Thursday (Jul 24) announced that it has received planning approval to convert a freehold property in Scotland into a 168-bed purpose-built student accommodation (PBSA) facility. 

 

The property, Lindsay House, is a former government building in the city of Dundee that was valued at around £ 1.5 million (S$2.6 million) as at end-December 2024. 

 

Occupying a prime location in the city&rsquo s Central Business District, it is close to transportation nodes as well as the city centre. 

 

It is also within walking distance of the University of Dundee and Abertay University. The manager of the Reit noted that the University of Dundee has been ranked top in the UK for bioengineering and biomedical engineering, while Abertay University is renowned for video game design. 

 

&ldquo With strong rental fundamentals in the area, the project presents an attractive opportunity to generate long-term, resilient income while supporting Dundee&rsquo s growing student population,&rdquo the manager said. 

 

The two universities&rsquo combined student population of 16,165 during the 2023/2024 academic year and the Dundee market&rsquo s existing PBSA bed capacity, estimated to stand at 4,620, translates to a student-to-bed ratio of around 3.5 times, it added. 

 

To reduce time to market, the property&rsquo s existing structures will be maintained during redevelopment, the manager said. 

 

With that, the new PBSA facility is expected to be ready for occupation before the 2027/2028 academic year starts in September 2027. 

 

Given Dundee market&rsquo s short supply of high-quality affordable PBSA, the redevelopment is a &ldquo timely addition&rdquo to the city, remarked Mark Findlay, director of development at Mys Asset Management, the development manager and PBSA operator engaged to manage Lindsay House&rsquo s development. 

 

Lindsay House has an estimated gross development value of around £ 24 million, with a return on investment of around 18 per cent and a yield on cost of more than 7 per cent. 

 

Joshua Liaw, chief executive officer of the manager, remarked that securing planning approval for Lindsay House will broaden the Reit&rsquo s portfolio mix to non-discretionary sectors such as student housing.  

 

&ldquo This redevelopment of Lindsay House will significantly transform the currently vacant property into a resilient income-generating asset and strengthen the Reit&rsquo s intrinsic value,&rdquo Liaw said. 

Elite UK REIT&rsquo s wholly-owned subsidiary, Elite Dram Limited, has completed the acquisition of three freehold or virtual freehold government infrastructure and workspaces in the UK.

 

On June 10, the REIT announced that it entered into a conditional sale-and-purchase agreement to acquire the assets for GBP9.2 million ($15.95 million).

 

To partly fund the acquisition, the REIT launched a private placement to raise GBP4 million by issuing around 13.3 million units priced at between GBP0.295 to GBP0.30 apiece.

 

The manager of the REIT announced today that it has reallocated and fully utilised the gross proceeds from the private placement to part finance the proposed acquisition and associated costs, and to pay for the estimated fees and expenses including professional fees and expenses.

To partly fund the acquisition, the Reit has launched a private placement to raise £ 4 million

 

[SINGAPORE] The manager of Elite UK Real Estate Investment Trust (Reit) announced on Tuesday (Jun 10) that the Reit has entered into a conditional sale-and-purchase agreement to acquire three freehold government infrastructure assets in the United Kingdom for £ 9.2 million (S$15.9 million).

 

The seller is Elite Phoenix, a subsidiary of Elite UK Commercial Fund II. The deal was struck at a 7.6 per cent discount to the average of the independent valuations of these assets.

 

To partly fund the acquisition, the Reit has launched a private placement to raise £ 4 million by issuing around 13.3 million units priced at between £ 0.295 and £ 0.305 apiece, it announced on Tuesday (Jun 10). These three properties, all leased to the UK government, generate an annual gross income of £ 0.8 million and provide a gross rental income yield of 9.2 per cent, which is higher than the Reit&rsquo s existing portfolio yield of 9.0 per cent as at Mar 31.

 

On a pro forma basis for FY2024, the properties are expected to be 0.6 per cent distribution-per-unit accretive, and gearing would have reduced by 20 basis points to 43.2 per cent. These properties would have a weighted average lease expiry (Wale) of 7.4 years, significantly longer than the Wale of 3.1 years for Elite UK Reit&rsquo s current portfolio. Following completion, the overall portfolio Wale will edge up to 3.2 years.

 

Lease expiry concentration will also improve, with no leases maturing before 2028, and the proportion of leases expiring that year dropping by 220 basis points to 95.7 per cent.

 

Joshua Liaw, chief executive of the Reit&rsquo s manager, said: &ldquo This acquisition of mission-critical national infrastructure aligns with our strategy to provide investors with resilient, counter-cyclical income backed by government tenancies. It enhances tenant diversification and strengthens the stability of our portfolio.&rdquo

 

As at Mar 31, Elite UK Reit&rsquo s portfolio comprised 148 properties, with 136 of them leased to the Department for Work and Pensions, primarily for Jobcentres, which are UK government-funded offices found in most cities, set up to help people of working age find employment in the UK.

 

Post-acquisition, the portfolio will expand to 151 assets, lifting total valuation by 2.2 per cent to £ 424.8 million. Two of the properties &ndash Priory Court in Dover, and Customs House in Felixstowe &ndash are tenanted to the Home Office, an existing tenant. A third property, Ty Merlin in Carmarthen, has taken on the Department for Environment, Food and Rural Affairs as a new tenant.

 

 

Are the S-REITs going the way of the UK REITs with their privatisation offers and/or buyouts by private equity firms?

 

Strategic reviews and potential privatisations of REITs appear to be gathering momentum. On April 22, Paragon REIT&rsquo s independent unitholders voted to amend its trust deed, and they voted in favour of the scheme of arrangement to privatise and delist the REIT. Both resolutions required super-majorities of 75%. The court hearing to approve the scheme is on May 8. If all approvals are received, the last trading day for Paragon REIT will be on or around May 14, and it will be delisted on or around June 6.

 

Earlier this year, Paragon REIT&rsquo s sponsors proposed a scheme consideration (privatisation price) of 98 cents compared to its FY2024 net asset value (NAV) of 93.8 cents, and 91.5 cents after distribution per unit (DPU). The announcement also stated that the scheme consideration would NOT be reduced by Paragon REIT&rsquo s 2HFY2024 DPU of 2.33 cents.

 

On April 23, the managers of Frasers Hospitality Trustannounced they are conducting a review of FHT&rsquo s strategy. In 2022, Frasers Property(FPL), the sponsor of FHT, offered to take the trust private by acquiring all FHT stapled securities, excluding those held by itself, its subsidiaries, and TCC Group Investments, for $0.70 per stapled security by a scheme of arrangement. At the time of the scheme proposal, FHT&rsquo s NAV was 65.19 cents. Subsequently though, 74.88% of independent stapled securityholders voted in favour of the scheme (a slither short of 75%) and hence the privatisation failed.

 

FHT&rsquo s NAV as at March 31 stood at 64 cents and the distribution per stapled security (DPS) in 1HFY2025 for the six months to end-March is 1.0257 cents.

 

DBS Group Research says: &ldquo [FHT&rsquo s] recent price momentum suggests the market could be positioning for a privatisation rerun in the light of the recent successful Paragon REIT offer. From the sponsor&rsquo s perspective, privatisation makes sense given the redevelopment potential within FHT&rsquo s local assets. We now view privatisation as the base case with a potential offer coming in above the previous 70 cents.&rdquo

 

Other analysts have suggested that 68 cents would be a generous offer given that the post-Covid peak in travel is over, and a recession could be looming. &ldquo If the catalyst fails, FHT will be back to 45 cents,&rdquo an analyst says.

 

Separately, on Jan 13, First REIT announced it had received a preliminary non-binding letter of intent (LOI) from Siloam International Hospitals to acquire First REIT&rsquo s portfolio of hospital assets in Indonesia. Siloam is the existing tenant and operator of these hospital assets, and is majority-owned and controlled by a fund managed by CVC Capital Partners. The board announced it has decided to undertake a strategic review to assess the LOI and explore all strategic options for First REIT. The board has also appointed Citigroup Global Markets Singapore to conduct the strategic review.

 

&ldquo A marketing agent has been appointed to run a competitive and robust price discovery process where there was an outreach to over 60 parties to solicit interest for the Indonesia portfolio. Separately, through Citi, we have approached multiple parties to explore all options relating to the business, including joint ventures, partnerships, asset acquisitions and/or divestments as part of assessing opportunities with a view to delivering sustainable long-term value for unitholders,&rdquo First REIT&rsquo s manager said in its 1QFY2025 business update.

 

First REIT&rsquo s unit price is trading at 0.97 times its NAV of 27.37 cents as at March 31, compared to an NAV of 28.6 cents as at Dec 31, 2024.

 

UK REITs which could privatise

 

Interestingly, two UK REITs are conducting strategic reviews with the purpose of narrowing the discount between their trading prices and their NAVs and/or net tangible assets (NTAs). Two UK REITs have received offers (though not all in cash), announced during their strategic review process and one UK REIT has received an all-cash offer from KKR and Stonepeak Partners.

 

PRS REIT (PRSR) listed in 2017 via an IPO which raised GBP560 million. It had follow-ons in February 2018 and September 2021. PRS owns 5,437 new rental homes valued at GBP1.18 billion ($2.03 billion) as at Dec 31, 2024.

 

In October 2024, the REIT&rsquo s management initiated a strategic review and formal sale process. On Feb 11, 2025, PRSR announced it had received multiple non-binding acquisition proposals. The majority of these were pitched within a price range representing a premium to the then-share price and a discount to the NAV (published June 2024) of 133.2 pence. As at Dec 31, 2024, PRSR&rsquo s NAV stood at 139.6 pence, up 5.5% h-o-h. The REIT last traded at 115.6 pence as at May 5.

 

The REIT says it has invited a select number of parties to undertake due diligence and discussions are ongoing. It adds: &ldquo Alongside this, and as part of the wider strategic review, the board continues to explore all the options available to the company, with a view to maximising value for the company' s shareholders. Further updates will be made in due course, and by no later than the end of calendar 2Q2025.&rdquo

 

Life Science REIT (LABS) is a specialist property business focused on the UK' s life science sector. The REIT' s portfolio is located across the " Golden Triangle" of research and development hubs in Oxford, Cambridge and London' s Knowledge Quarter. However, it is facing headwinds.

 

On March 14, Life Science REIT announced that it was undertaking a strategic review to consider the future of the REIT and to explore all options available to maximise value for shareholders. The background to that decision includes the significant headwinds the REIT has faced since its IPO in November 2021.

 

&ldquo These challengers include higher inflation and elevated interest rates, as well as the company&rsquo s size and low levels of liquidity, which have resulted in the share price trading at a significant discount to NAV for a prolonged period of time. The outcome of the strategic review may include a potential sale of the whole business or a managed wind down of the company,&rdquo Life Science REIT says in a statement.

 

The total value of the portfolio stood at GBP385.2 million as at Dec 31, 2024, up marginally on an absolute basis, but with the investment portfolio down 4% on a like-for-like basis, driven by 30 basis points of yield expansion, partially offset by like-for-like estimated rental value (ERV) growth of 8.6%.

 

The financial statement for the 12 months to Dec 31, 2024, contains a &ldquo going concern with material uncertainty&rdquo statement. However, the REIT&rsquo s board says its forecast cash flow for at least the next 12 months and under its base-case scenario indicates that the REIT can meet its covenants and liquidity requirements.

 

&ldquo Further to a number of discussions with potential acquirors in recent months, the board has confidence that, in the context of a strategic review, the business should be attractive to multiple parties if the outcome of the strategic review leads to the sale of the business,&rdquo an announcement dated March 14 says.

 

EPRA NTA (which excludes goodwill and tax liabilities) per share was 74.4 pence as at Dec 31, 2024, compared with 79.9 pence a year earlier &mdash reflecting the portfolio revaluation loss (GBP17.4 million) and dividend payments (GBP7.0 million), partially offset by positive adjusted earnings. The IFRS NAV per share was 75.1 pence as at Dec 31, 2024, compared to 81.1 pence a year earlier. Life Science REIT last traded at 43.2 pence.

 

Urban Logistics REIT (SHED) announced a proposal to internalise its management on March 7, after facing activist pressure from Achilles Investment Company, which, along with other shareholders, is calling for board changes and a strategic review. The internalisation has been paused following the offer of a merger from LondonMetric Property on April 14.

 

LondonMetric is proposing a shares and cash offer. For each Urban Logistics share, its shareholders will receive 0.5612 new LondonMetric shares (the exchange ratio) and 42.8 pence in cash, and shareholders can receive a dividend per share expected at 4.35 pence.

 

Based on LondonMetric' s closing share price of 182.1 pence on April 11, the LondonMetric proposal values each Urban Logistics share at 145.0 pence comprising 102.2 pence in new LondonMetric shares, with cash representing the remaining consideration as at April 11.

 

The pricing represents an implied EPRA NTA discount of approximately 3% of LondonMetric' s and Urban Logistics' EPRA NTAs per share as at Sept 30, 2024. Urban Logistics&rsquo NTA was 158.05 cents, down 1.5% h-o-h. LondonMetric&rsquo s EPRA NTA was 195.7 pence as at Sept 30, 2024.

 

Following the April 11 offer, Urban Logistics announced that should a firm offer be made, its board &ldquo would be minded to recommend such an offer to Urban Logistics shareholders, subject to agreement on the other terms of the offer&rdquo .

 

According to UK M& A regulations, LondonMetric must announce a firm offer for Urban Logistics by no later than 5pm (London time) on May 9.

 

Warehouse REIT (WHR) said it would recommend Blackstone Europe&rsquo s latest indicative, non-binding cash offer of 115 pence per share to its shareholders adjusted for the interim dividend of 1.6 pence, should it turn into a firm proposal.

 

The latest published NAV as at Sept 30, 2024, was 128.8 pence per share. According to an update by Morningstar, Warehouse REIT has &ldquo requested a further extension of the &lsquo put up or shut up&rsquo deadline to May 12&rdquo . The deadline extension is to allow Blackstone additional time to complete due diligence work, Morningstar said.

 

Blackstone&rsquo s 115 pence bid for Warehouse REIT is its fifth, and is 4% higher than its most recent bid it made along with Sixth Street Partners. Altogether, Blackstone and Sixth Street have made four bids for Warehouse REIT. Sixth Street has dropped out of the bidding. The March 27 bid values Warehouse REIT at GBP489 million.

 

Assura (AGR) is a REIT that specialises in the development of, investment in and management of a portfolio of healthcare buildings across the UK and Ireland. On April 9, its directors received a cash offer from Sana Bidco consisting of funds managed by KKR and Stonepeak Partners. The offer of 49.4 cents is made up of a cash offer of 48.56 cents and a quarterly dividend of 0.84 pence which was paid on April 9. Assura&rsquo s last announced NAV as at Sept 30, 2024, was 49.4 pence.

Across the broader market, gainers beat losers 308 to 257, after two billion securities worth S$1.8 billion changed hands

 

SINGAPORE stocks ended higher on Monday (Mar 3), tracking gains on Wall Street.

 

The benchmark Straits Times Index (STI) rose 0.3 per cent or 13.22 points to 3,908.92. Across the broader market, gainers outnumbered losers 308 to 257, after two billion securities worth S$1.8 billion changed hands.

 

ST Engineering led gains on the STI, with the counter up 8.5 per cent or S$0.46 at S$5.87. The company&rsquo s shares are up 26 per cent year to date. Several analysts have raised their target price on ST Engineering, citing its strong growth prospects.

 

Meanwhile, the theme of leadership surrounded the companies that were the top two losers on the STI on Monday.

 

Genting Singapore was the top decliner, falling 2.7 per cent or S$0.02 to S$0.71.

 

Shares of the integrated resorts operator have fallen since Friday, following news that the current patriarch of the family-run business, Lim Kok Thay, will step down as chief executive of Malaysia&rsquo s Genting after nearly two decades at the helm.

 

Also in the red was property developer City Developments Ltd (CDL), which lost 2.3 per cent or S$0.12 to S$5.

 

Earlier on Monday, the counter fell as much as 7 per cent to its lowest since 2009. It resumed trading after a three-day halt, amid news of a father-son tussle for board control at the group majority owned by the Kwek family.

 

Executive chairman Kwek Leng Beng said in a statement on Feb 26 that he had filed a court action to deal with an &ldquo attempted coup&rdquo by his son and CDL CEO Sherman Kwek, as well as Philip Lee Jee Cheng, Wong Ai Ai and directors acting with them.

 

Sherman Kwek subsequently issued a statement on behalf of the majority of CDL&rsquo s board, expressing his disappointment at his father&rsquo s &ldquo extreme actions&rdquo .

 

The conflict moves into Singapore&rsquo s Supreme Court on Mar 4, when a closed-door case conference will be heard.

 

The three local banks ended mixed on Monday. UOB gained 0.4 per cent to S$38.35, OCBC was flat at S$17.21, while DBS fell 0.3 per cent to S$45.77.

 

Elsewhere in the region, the Hang Seng Index rose 0.3 per cent, Nikkei 225 was up 1.7 per cent, FTSE Bursa Malaysia KLCI lost 0.2 per cent, and Kospi Composite Index tumbled 3.4 per cent.

Elite UK REIT&rsquo s trustee, Perpetual (Asia) Limited, has divested Crown Buildings, Caerphilly at Claude Road, Caerphilly, for GBP710,000 at an 18% premium. 

 

In a March 3 bourse filing, the manager of Elite UK REIT says the vacant property was valued at GBP600,000 at end-2024 based on an independent valuation conducted by CBRE.

 

Located in Wales, Crown Buildings, Caerphilly was valued at GBP530,000 at end-2023.

 

Net proceeds from the divestment will be used to repay Elite UK REIT&rsquo s outstanding borrowings.

 

According to Elite UK REIT&rsquo s website, Crown Buildings, Caerphilly has 20,712 sq ft of gross floor area. 

 

Following its successful GBP28 million preferential offering in January 2024, Elite UK REIT reduced its leverage ratio from 50.0% at end-2023 to 43.4% at end-2024. Similarly, its net gearing ratio declined from 47.5% at end-2023 to 42.5% at end-2024.

 

There is no debt maturing in 2025 and 2026 and refinancing is only due in 2027.

DBS Group Research analysts Tabitha Foo, Derek Tan and Dale Lai have upgraded their call on Elite UK REIT to &ldquo buy&rdquo from &ldquo hold&rdquo as they see the REIT&rsquo s distribution per unit (DPU) back on a growth trajectory. The analysts have also given the REIT a higher target price of 36 British pence (61 cents) from 25 British pence previously.

 

The REIT&rsquo s results for the FY2024 ended Dec 31, 2024, exceeded their expectations with full-year distributable income up by 2.3% y-o-y to GBP18.5 million. The higher distributable income was due to savings in property holding costs from the divestment of vacant assets, lower interest costs and tax savings. Meanwhile, Elite UK REIT&rsquo s FY2024 DPU fell by 6.5% y-o-y to 2.87 pence on an enlarged unit base, although DPU would have been 5% higher y-o-y after adjusting based on FY2024&rsquo s weighted average units in issue. The team had predicted Elite UK REIT&rsquo s FY2024 DPU to come in at 2.76 pence.

 

&ldquo Over the past three years of headwinds on multiple fronts resulting in declining DPU, we maintained a neutral stance on Elite. We now turn positive on the REIT as distributable income has stabilised and is operationally driven and sustainable, boosted by interest savings,&rdquo the analysts write in their Feb 12 report.

 

They note that the REIT&rsquo s borrowing costs as at Dec 31, 2024, dipped by 30 basis points y-o-y to 4.9% with the estimated annual savings potentially up to as much as GBP2 million.

 

In addition, lease renewal discussions with the REIT&rsquo s main tenant, UK&rsquo s Department for Work & Pensions (DWP) are expected to begin as early as this year, which is a plus in the analysts&rsquo book. This is given that early negotiations for leases expiring in 2028 will be crucial to maintaining income visibility.

 

&ldquo Thanks to proactive asset management, Elite has unlocked value from its vacant portfolio over the past year through dilapidation settlements and divestments at an average premium of 15%, which has been used to pare down debt,&rdquo they add.

 

Despite the upgrade and higher target price, the analysts have lowered their FY2025 revenue estimate as they factor in the absence of contribution from the REIT&rsquo s vacant and disposed assets. This will be offset by higher expected net property income (NPI) margins due to lower vacancy costs and higher interest savings, as well as an increase in the distribution payout ratio to 95% for the full year, they note.

 

The analysts&rsquo FY2025 and FY2026 DPU estimates are now at 2.93 pence and 3 pence respectively, which imply forward yields of 10% at the current share price, which they deem as &ldquo compelling&rdquo .

 

Analysts from RHB Bank Singapore and Phillip Securities Research are aligned on Elite UK REIT&rsquo s target price following the release of its results for FY2024 ended Dec 31, 2024 both research houses now have a 35 pence (59 cents) target price on the UK-focused S-REIT, which represents a 17% upside from its Feb 11 close price of 30 pence. 

 

Notably, Phillip Securities analyst Liu Miaomiao&rsquo s Feb 11 report, lists a number of positives in the REIT&rsquo s outlook &mdash justifying her &ldquo buy&rdquo call and higher target price of 35 pence from 34 pence previously &mdash and zero negatives. 

 

Elite UK REIT&rsquo s portfolio valuation rose 1.2% y-o-y to GBP416 million in FY2024, driven by a 36% y-o-y increase in its Peel Park land plot in Blackpool. 

 

The REIT successfully divested three assets in FY2024, generating total proceeds of GBP6.2 million at an average contractual price of 15% above book value. The REIT remains committed to its asset recycling plan, focusing on non-vacant assets in FY2025. 

 

The REIT underwent a name change in May 2024 alongside an expanded investment strategy that now includes purpose-built student accommodation (PBSA) and soon, its Peel Park land plot could house a data centre. 

 

At the release of its results on Feb 10, management said it has secured 120 megavolt-amperes (MVA) of power supply for the latter, while land use regulatory approval is underway.

 

&ldquo The site benefits from a subsea cable that reached landfall in Blackpool in 2022. We believe Elite is likely to monetise the land value by selling to a third party or hyperscale player at a good premium, considering the huge capex required for developing data centres,&rdquo says RHB analyst Vijay Natarajan. 

 

Likewise, Natarajan is staying &ldquo buy&rdquo on Elite UK REIT with an unchanged target price of 35 pence. 

 

Phillip Securities&rsquo Liu also expects Elite UK REIT to divest Peel Park this year for some GBP32.7 million, alongside Caerphilly, which should go for some GBP600,000. &ldquo All proceeds from the divestment will be used to pay down debt, potentially lowering gearing to below 40%,&rdquo she adds. 

 

As at Dec 31, 2024, the REIT&rsquo s net asset value per unit was 41 pence, its gearing ratio was 42.5% and its interest coverage ratio was 2.5 times. 

 

Borrowing costs declined by around 30 basis points to 4.9% from 5.2% a year ago. The REIT has no further refinancing requirements until 2027 and all its debt is sustainability-linked.

 

During the year, Elite UK REIT managed to refinance and hedge 86% of its loan exposure to &ldquo competitive&rdquo rates, which is expected to result in annual savings of GBP2 million, notes Natarajan. 

 

While the Bank of England recently cut its benchmark rate by 25 basis points to 4.5%, Liu expects &ldquo minimal immediate impact&rdquo on Elite UK REIT, with the cost of borrowing anticipated to remain at 4.9% in FY2025. 

 

The REIT is also lifting its dividend payout ratio to 95% from 90%, as management guided that the REIT is now in better shape &mdash with asset values stabilising, lower gearing and minimal capex requirements. 

 

This was implemented for 2HY2024 and, coupled with lower interest costs and rental escalations, resulted in adjusted distribution per unit (DPU) rising 6% y-o-y. 

 

FY2023 DPU was adjusted based on FY2024 weighted average units in issue of 593.4 million.

 

Elite UK REIT posted DPU of 1.47 pence for 2HFY2024, up 5.8% y-o-y. This brings its full-year distribution to 2.87 pence, up 5% over the preceding FY2023.

 

Key tenants

 

Management is in active discussions with its key tenant, the Department for Work & Pensions (DWP), as well as other government tenants, for early lease renewals. 

 

Combined, these tenants account for some 99% of its income, with some 97% of leases set to expire in April 2028. This presents concentration risks and an overhang to share price, says Natarajan. 

 

That said, Elite UK REIT is targeting an early renewal rate of 25% in FY2025. &ldquo If it materialises, [it] would be highly positive,&rdquo adds Natarajan. 

 

Liu thinks this is Elite UK REIT&rsquo s &ldquo key share price catalyst for the upcoming financial year&rdquo . &ldquo The current valuation assumes a non-renewal rate of 25%, significantly higher than the historical average of 5% to 15%.&rdquo

 

Leasing momentum in the UK remains robust, and Elite UK REIT has re-let two non-central London locations at rental reversions of 30% and 5%. This indicates a pick-up in demand, writes Liu. 

 

&ldquo Operationally, Elite UK REIT continues to deliver by divesting vacant assets at healthy premiums to valuations, and advancing on redevelopment plans for the remaining assets,&rdquo says Natarajan. 

While the Reit aims to renew most of its UK government leases, it is looking to convert vacant assets into student housing or build-to-rent as an alternative to divesting or re-letting

 

ELITE UK Reit : MXNU -1.69%, the only UK-focused real estate investment trust (Reit) listed in Singapore, is now expanding into what it calls &ldquo living sector&rdquo assets &ndash which includes purpose-built student accommodation and build-to-rent residential assets &ndash as it seeks to diversify its government-backed income stream.

 

The Reit&rsquo s portfolio is currently unique in that more than 99 per cent of its real estate assets are leased to the UK government. Its main tenant is the Department for Work and Pensions (DWP), which runs Jobcentre Plus offices that support citizens in finding employment.

 

This broadened investment strategy beyond commercial assets has spawned a change in name too. The Reit was previously known as Elite Commercial Reit, before it became Elite UK Reit in May this year.

 

Yet Joshua Liaw, chief executive officer of the Reit&rsquo s manager, emphasised that this foray into a new sector is not a pivot.

 

&ldquo There&rsquo s nothing wrong with government credit&hellip it&rsquo s the best sort of credit you can get in the UK,&rdquo he told The Business Times in an interview. &ldquo But what could work better, is if we had a Plan B.&rdquo

 

That means having more options to manage assets returned to Elite UK Reit, in the event their leases are not renewed by the UK government.

 

The Reit now aims to reposition vacant offices into student accommodation or build-to-rent residences as an alternative to divesting or re-letting them to other tenants, said Liaw.

 

For the nine months ended Sep 30, 2024, Elite UK Reit&rsquo s revenue dipped marginally to £ 28 million (S$47.8 million) from £ 28.5 million the year before, due to the return of seven vacant assets.

 

Still, it posted a 3.9 per cent rise in distribution per unit year on year to 2.13 pence. Liaw attributed this to tax savings and higher distributable income, which came from the Reit increasing its rental rates by 13 per cent and removing lease breaks.

 

When he took the helm in June 2023, his first priority was to reduce the Reit&rsquo s gearing ratio &ndash more than 46 per cent at that time.

 

&ldquo Some investors and analysts said that if our gearing is that high, we might not survive they will not be able to cover our stock or invest in us,&rdquo he recalled.

 

To address this, the Reit carried out an equity fundraising exercise in December 2023 to raise £ 28 million. Liaw also sought out the relationship banks of the Reit&rsquo s three sponsors &ndash Elite Partners Holdings, Ho Lee Group and Sunway RE Capital &ndash to extend its debt for 3.25 years.

 

As at Oct 7, the Reit&rsquo s net gearing ratio stood at 43.6 per cent. Borrowing costs declined by 20 basis points to 5 per cent from 5.2 per cent through refinancing and hedging 87 per cent of its exposure.

 

Sticking to safe bets

Even as it intends to diversify its rental income, Elite UK Reit is still playing it safe with its asset classes.

 

&ldquo After speaking to investors, it&rsquo s apparent that many of them have invested in us because they like the government credit,&rdquo said Liaw.

 

&ldquo They like the non-discretionary, counter-cyclical nature of the real estate that we own. For example, in times of recession and economic stress, the job centres are even more utilised.&rdquo

 

Student accommodation and build-to-rent residential properties similarly offer stable and counter-cyclical cashflows, he noted.

 

During downturns, more people tend to head back to school to prepare for economic recovery. At the same time, higher mortgage rates in the United Kingdom are making renting more attractive than buying homes, he said.

 

Asian parents may also be more inclined to send their children to further their studies in the UK now, instead of the United States, he added. This is especially given the latter&rsquo s uncertain state, with president-elect Donald Trump set to take office in 2025.

 

Said Liaw: &ldquo The demand-and-supply dynamics for both asset classes are very favourable for us right now.&rdquo

 

Other players are already capitalising on these tailwinds. On Dec 19, CDL Hospitality Trusts said that it was venturing into the student accommodation business with the purchase of a purpose-built student accommodation in Liverpool.

 

Liaw believes Elite UK Reit is in an advantageous position.

 

Most of its existing assets, such as DWP Jobcentre Plus offices, are strategically located in town centres, and close to key transport nodes and amenities. This makes them optimal sites for conversion into student housing &ndash especially those in university towns &ndash and build-to-rent residences, he said.

 

While he declined to disclose possible targets for conversion, the Reit singled out Lindsay House in Dundee &ndash which was returned in March 2023 &ndash in a recent analyst briefing as &ldquo being well-placed&rdquo for student accommodation.

 

Focus on organic growth

For now, Liaw does not have a target allocation for commercial assets and living-sector assets in Elite UK Reit&rsquo s portfolio.

 

The Reit&rsquo s base case is to renew most of its government leases &ndash many of which are expiring in 2028 &ndash over the next 12 months. Only then will he have more clarity on the availability of vacant assets for repositioning.

 

Separately, the Reit has been busy with the planned development of an 80-megawatt data centre campus at Peel Park, Blackpool &ndash which it aims to sell eventually.

 

It owns the entire site, spanning 15.65 hectares of freehold land. Only one-third is currently occupied by buildings leased to the DWP, with the rest comprising woodland.

 

Describing the investment as &ldquo opportunistic&rdquo , Liaw noted that the site benefits from a new sub-sea cable that connects Blackpool to Dublin and extends to Europe and the US, thereby offering low latency to data centre operators and end-users. There are also plans to power the centre with renewable energy from local offshore wind farms.

 

Both the lease renewals and sale of Peel Park will help to &ldquo move the needle&rdquo in paring Elite UK Reit&rsquo s debt further, he added. Peel Park had a valuation of £ 25.2 million as at end-June 2024.

 

Thus, Liaw sees a &ldquo good chance&rdquo of reducing the Reit&rsquo s gearing ratio to below 40 percent in 2025. The Reit will also be receiving proceeds from the divestment of three UK properties &ndash all sold at a premium &ndash in the last three months.

 

When it comes to acquisitions, Liaw remains prudent.

 

&ldquo Inorganic growth is truly quite difficult with our current cost of capital,&rdquo he said, adding that any acquisition will need to be accretive &ldquo to be worth the time of the management and unitholders&rdquo .

 

&ldquo We do come across deals from time to time, but to be honest, anything that&rsquo s accretive right now will be more in the government assets rather than in the living sector.&rdquo

 

He has no plans to acquire any purpose-built student accommodation or build-to-rent residential properties for now.

 

A bigger priority for Liaw is improving Elite UK Reit&rsquo s trading liquidity.

 

His ambition is for the Reit to be part of indices in the next three to five years so as to appeal to more investors.

 

That means having to at least double the Reit&rsquo s market capitalisation, he said, noting that this is a function of assets-under-management growth and subject to market conditions.

 

Units of Elite UK Reit closed at £ 0.29 on Friday (Dec 27), giving the counter a market capitalisation of £ 170.3 million and a price-to-book ratio of 0.72 times. Year to date, the Reit has generated total returns of 15.1 per cent.

 

In a report published on Dec 18, KGI Securities analyst Alyssa Tee initiated coverage of Elite UK Reit with an &ldquo outperform&rdquo rating and a 12-month target price of £ 0.37.

 

She highlighted the Reit&rsquo s resilient cash flow from government tenancies and exploration of alternative revenue streams such as student accommodation, while pointing out that currency risk is also minimised, as its operations and revenue generation are denominated in pounds.

 

Said Liaw: &ldquo We are a bit of an underdog we&rsquo re not a household name like Mapletree or CapitaLand... so we don&rsquo t take things for granted.&rdquo

Analyst cites portfolio resilience, strong occupancy rate growth, improved borrowing costs and distribution growth

 

KGI Securities has initiated coverage on Elite UK Real Estate Investment Trust (Reit) with an &ldquo outperform&rdquo rating while highlighting it as a high-yielding Reit with government-backed cashflow. 

 

Its 12-month price target of £ 0.37 implies an upside of 27.6 per cent from the counter&rsquo s Dec 17 closing price of £ 0.27, and 37.7 per cent after accounting for distributions.

 

In a report on Wednesday (Dec 18), KGI analyst Alyssa Tee said that she liked Elite UK Reit for its portfolio resilience, strong occupancy rate growth, as well as improved borrowing costs and distribution growth as evident in the Reit&rsquo s latest third-quarter and nine-month financials.

 

She foresees &ldquo strong growth&rdquo to be supported by the Reit&rsquo s secure government-backed income, given how the bulk (99.1 per cent) of its gross rental income is derived from the UK government.

 

This is further backed by its manager&rsquo s strategy of exploring alternative revenue streams, such as converting office spaces into student accommodations with a focus on properties near Russell Group universities.

 

In Tee&rsquo s view, such a &ldquo proactive approach&rdquo by the manager will position the Reit to leverage rental reversions and capitalise on expiring leases to drive near-term revenue growth. 

 

&ldquo The Reit has also expanded its investment mandate to living sector assets such as student housing, which could reduce tenant concentration over time,&rdquo said the analyst.

 

Its pound sterling-denominated operations and revenue generation further helps to minimise currency risk, she added. 

 

The analyst is also positive on Elite UK Reit&rsquo s latest data centre development at Peel Park, Blackpool, which she believes to represent a &ldquo significant growth opportunity&rdquo as a low-emission data centre.

 

&ldquo Classified as &lsquo critical national infrastructure&rsquo , the development offers long-term value maximisation for unitholders through strategic divestment or partnerships with data centre operators,&rdquo explained Tee. 

Its manager says that net proceeds will be used to repay debt 

 

ELITE UK Real Estate Investment Trust (Reit) has entered a contract to divest Hilden House, an office building in Warrington, England, for a sale consideration of £ 3.3 million (S$5.6 million). 

 

This represents a 6 per cent premium above the property&rsquo s valuation of £ 3.1 million as at Jun 30, 2024, based on an independent valuation conducted by property player CBRE. 

 

The Reit&rsquo s manager said on Wednesday (Nov 27) that the sale contract will be subject to conditions. 

 

Net proceeds from the sale of Hilden House, which is currently vacant, will be used to repay debt. 

 

The divestment is not expected to have a material impact on the Reit&rsquo s net asset value and distribution per unit for the financial year ending Dec 31, 2024, said the Reit&rsquo s manager.

 

RHB Bank Singapore and PhillipCapital have maintained their &ldquo buy&rdquo calls on Elite UK REIT while upgrading their target price. This follows the REIT&rsquo s 3QFY2024 update, which was released on Nov 5.

 

RHB Bank Singapore has upgraded its target price to 35 British pence (60 cents), up from 31 British pence previously. PhilipCapital has increased its target price to 34 British pence, up from 32 British pence previously.

 

RHB analyst Vijay Natarajan notes that &ldquo Elite UK REIT&rsquo s 3QFY2024 numbers were slightly ahead on lower financing costs.&rdquo

 

&ldquo Overall, it was a good quarter with the completion of loan refinancing and hedging most of its debt at better-than-expected rates,&rdquo Natarajan adds.

 

In its update, Elite UK REIT reported that 9MFY2024 distribution per unit (DPU) grew by 3.9% y-o-y to 2.13 pence, attributed to tax savings and lower financing costs, as the REIT used dilapidation settlement to pay down its debt. Year to date, Elite UK REIT collected GBP1.4 million in dilapidation settlement charges.  

 

&ldquo The 9MFY2024 DPU aligns with our forecast, forming 78% of full-year estimates,&rdquo Phillip Capital analyst Liu MiaoMiao notes.

 

&ldquo Elite UK REIT may raise its payout ratio to above 90% amid an improving macroenvironment and progress in asset monetisation,&rdquo Liu adds.  

 

Elite UK REIT&rsquo s gross revenue for 9MFY2024 decreased by 1.8% y-o-y to GBP28 million due to an income vacuum from several vacant assets and recent divestments.

 

This is in line with PhillipCapital&rsquo s Liu&rsquo s expectations, forming 74% of her FY2024 estimates.

 

Conversely, this accounts for 78% of RHB&rsquo s Natarajan&rsquo s previous FY2024 forecasted DPU.

 

Financing costs

 

PhillipCapital&rsquo s Liu notes that the REIT&rsquo s cost of borrowing has decreased 20 basis points (bps) q-o-q to 5% due to a 4 percentage point (ppt) increase in hedging position.

 

Furthermore, RHB&rsquo s Natarajan notes that Elite UK has completed the refinancing of its entire GBP215 million of loans via sustainability-linked facilities, with interest savings as the assets&rsquo energy performance improves.

 

Although the Bank of England (BOE) has revised its inflation forecast upward from 1.5% earlier this year to 2.6% in 2025, which could trigger a more cautious outlook on interest rate cuts, Phillip Capital&rsquo s Liu anticipates this will have little impact on Elite UK.

 

PhillipCapital&rsquo s Liu attributed this to the increased hedging exposure, which stands at 87%, with no refinancing obligations until 2027.

 

As such, Liu anticipated the all-in cost of borrowing will &ldquo remain stable&rdquo at this level in FY2025 estimates.

 

RHB&rsquo s Natarajan adds that the REIT was able to hedge majority of its debt by taking advantage of the recent central bank rate cuts, leading to an overall borrowing cost of 5% per annum (pa).

 

According to RHB&rsquo s Natarajan, this is better than his initial expectation of a mid to high-5% level for the next two years.

 

Development and divestment

 

Elite UK REIT divested Sidlaw House at a price 41.7% above its book value, and is in the advanced stages of divesting three vacant assets and redeveloping two others into a student accommodation and built-to-rent facility.  

 

PhillipCapital&rsquo s Liu believes these assets will also be divested at a price premium, with completion expected by 1Q2025.

 

&ldquo With additional proceeds directed toward debt reduction, Elite UK REIT is well-positioned to deliver positive DPU growth in FY2025 estimates,&rdquo Liu adds.

 

Additionally, RHB&rsquo s Natarajan notes that Elite UK REIT has secured power supply for an 80 megawatt (MW) data centre (DC) for the proposed DC facility in Peel Park site, and is in discussions to utilise the sustainable wind power infrastructure nearby, which is potentially ideal for hyperscale players.

 

Elite UK REIT has submitted its planning application to the local government, with a positive outcome expected in six to 12 months.

 

RHB&rsquo s Natarajan is of the opinion that Elite UK REIT can then monetise the asset by selling land to a third party.

 

&ldquo Asset recycling and repositioning are on track, with more divestments at a premium expected,&rdquo Natarajan notes.

 

Looking ahead

 

Moving forward, RHB&rsquo s Natarajan sees the UK budget as a &ldquo mild positive.&rdquo Elite UK REIT&rsquo s largest tenant, the Department for Work and Pensions (DWP), will be hiring 3,000 additional staff to combat fraud and error.

 

According to RHB&rsquo s Natarajan this could lead to higher workspace requirements or maintenance of the existing space in the future.

 

There are further plans for reforms and additional budget allocations for the infrastructure and housing segment, which RHB&rsquo s Natarajan suggests could aid in conversion plans for Elite UK REIT&rsquo s vacant assets.

 

Additionally, while the UK budget saw an increase in capital gains tax and stamp duty land tax, this will not impact Elite UK REIT given its technical listing under the UK REIT tax regime.

 

PhillipCapital&rsquo s Liu has adjusted her FY2024 to FY2025 estimated DPU forecasts by 3%/0% to 2.8/3.28 pence. This assumes a 90% payout ratio as a base scenario, given Liu&rsquo s expectation that Elite UK REIT will retain some distributable income to cushion against macro-economic uncertainties.

 

RHB&rsquo s Natarajan raises his FY2024 to FY2026 forecasted DPU by 3% to 5% factoring in lower finance costs and reducing his cost of equity (COE) by 75 basis points (bps).

The proposed facility will be built on a site located on 15.65 hectares of freehold land

 

ELITE UK Real Estate Investment Trust&rsquo s (Reit) manager has submitted a planning application to develop a new 80-megawatt (MW) data centre campus at Peel Park, Blackpool, England.

 

On Thursday (Oct 3), the manager said that this comes after it received &ldquo positive feedback&rdquo from the local authority during the pre-planning phase.

 

The proposed campus will be built on a site located on 15.65 hectares (ha) of freehold land, of which existing buildings sit on a land area of about 3.95 ha. It will benefit from a nearby transatlantic subsea Internet cable linking Blackpool with North America and Europe. The site is also located less than 5 km to the town centre.

 

Elite UK Reit&rsquo s manager said that it has secured sufficient power supply for the proposed facility.

 

It is also in discussions to bring renewable power supplies to the site from wind power infrastructure nearby &ndash thereby enabling the delivery of a sustainably powered data centre.

 

Joshua Liaw, chief executive of the manager, said that Peel Park&rsquo s strategic location offers low-latency and reduced emissions, making it &ldquo highly attractive&rdquo to both data centre operators and end-users.

 

The planning application was submitted as part of Blackpool&rsquo s Growth and Prosperity programme, which includes development projects in the 144-ha Blackpool Airport Enterprise Zone as well as the Talbot Gateway Central Business District.

 

Elite UK Reit&rsquo s manager noted that it has been working with the Department for Work and Pensions (DWP) to ensure ongoing occupational requirements are taken into consideration in its planning application &ndash with DWP&rsquo s ongoing occupation needs remaining a priority.

 

Notably, its proposed data centre campus will be located next to existing DWP buildings.

 

The manager is also &ldquo evaluating a number of strategic options&rdquo for Peel Park, which may include strategic divestments or partnerships with data centre operators.

 

Units of Elite UK Reit : MXNU -3.12% were trading £ 0.005 or 1.6 per cent lower at £ 0.315 as at 10.21 am on Thursday, after the announcement.

 

The news comes days after advisory platform Beansprout initiated coverage on Elite UK Reit, rating the European-focused trust at &ldquo buy&rdquo with a target price of £ 0.44.

 

This implies a 7 per cent forward yield for FY2024, and 7.8 per cent for FY2025.

 

Analyst Peggy Mak said that she sees room for the Reit&rsquo s assets to appreciate &ndash particularly when their leases are renewed.

 

She believes a &ldquo substantial&rdquo 96.9 per cent of the Reit&rsquo s leases, which are due to expire in 2028, is weighing on its unit price as well as the value of its assets.

 

&ldquo As Elite is among the largest providers of critical social infrastructure to the DWP and other government departments, the risk of non-renewal for all leases is remote, in our view, though it is difficult to say for sure how many will be renewed,&rdquo added Mak in a Sep 30 report.

 

Against the backdrop of an improving macroeconomic environment, the analyst also thinks that further rate cuts would also reduce borrowing costs and raise distribution income for the Reit.

 

Beansprout is projecting a 25 basis point rate cut to take place in the fourth quarter of 2024, followed by a full percentage point cut in FY2025.

 

&ldquo Elite has also expanded its mandate to include other asset classes. A conversion to residential use would boost valuation,&rdquo Mak noted. 

 

The manager of Elite UK REIT says the REIT has entered into a contract of sale for the divestment of Sidlaw House, Dundee. 

 

According to an Oct 2 bourse filing, the property is currently vacant, and has a sale consideration of   GBP1,275,000 ($2.2 million). 

 

The sale consideration represents a 41.7% premium above its valuation of GBP900,000 as at June 30, based on an independent valuation conducted by CBRE. 

 

Net proceeds from the divestment are set to be used for the repayment of the REIT&rsquo s outstanding borrowings. 

 

According to the group, the divestment is not expected to have a material impact on Elite UK REIT&rsquo s net asset value and distribution per unit for the financial year ending Dec 31.