Another prospective REIT listing on SGX – UK-based Elite Commercial REIT

News just came out regarding another REIT IPO in SGX, this time its UK-based Elite Commercial REIT (let’s call it ECR). Read about it here.

We’ve had Lendlease Global Commercial REIT IPO in Singapore last year, check out my layman analysis.

I guess its no secret that Singaporeans love property, and within SGX, the REIT market has been very robust. People pour their savings into REITs as their investment vehicle, paying them dividends over time. Plus, Singaporeans have a LOVE for IPOs (maybe because its new like our Build-to-Order houses?) so the demand is there. I definitely agree with the REITs in wanting to list on SGX – the environment is attractive!

But to the consumer, not all REITs are created equally, and the key is to select good REITs to give you healthy, sustainable dividends. So before you jump in to the next big ‘REIT’ or ‘IPO’ craze, take some time to think about it.

What I like about it

Portfolio size

ECR will list with a portfolio of 97 mostly freehold properties in UK, with a quarter of the properties in London, and the rest in 2nd and 3rd tier cities. At least the 97 properties are pretty substantial, compared with Lendlease’s 2 properties in their REIT. This means that its eggs are spread out in different baskets.

What I am cautious about

Portfolio diversity

Properties in UK must be worth something, but in land-starved areas, they’re worth a lot more. In my opinion, while it’s great that the locations are spread out across Britain, the real value comes from properties within bustling London. And then again, since all properties in the portfolio are in UK, there is a lack of diversity into other economies. Some thoughts of potential issues come to mind when properties are solely in UK: 1) Brexit and all its uncertainty, 2) the general slowdown of the UK economy due to lack of innovation push, and 3) UK being a matured economy with much less room to grow.

Master lessee

Was a little surprised to see that more than 99% of the gross rental income is derived from the British government’s lease. It’s a little bit too much risk having 99% of the lease dependent one 1 party. If that fails, I don’t know what will happen to rental income. Whether it’s a private player or public player taking up such a huge chunk of the lease, I would be a little scared.

Compounding to my concerns is that this is a government instead of a private player. Governments tend to be slower to action, less efficient, less competitive due to their unique position. For private players, its more of a dog-eat-dog world so they tend to fight harder for their lives. And if you think governments are stable and will always pay up, well, it just pays to be cautious. Anything can happen these days.

Purpose of the funds

IPO proceeds will be used towards partial repayment of loans, redeeming private trust units, blah blah. HMM I don’t know about you, but personally I prefer not to transfer money to anyone for them to pay off their loans, or for others to ‘cash out’.

Conclusion

REIT IPOs are a great way for property developers to raise funds, but we need to be aware as a consumer what are the various parameters to look at. At this point I personally would not invest in ECR, mainly due to the uncertain of the overall UK economy.

~Rabbit

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