Cromwell European Reit eyes further growth after acquisition spree

FRESH on the heels of over 400 million euros (S$619.4 million) in acquisitions over the last 12 months, Cromwell European Real Estate Investment Trust (CEREIT) sees further room to grow by leveraging on its sponsor's presence in Europe.

Since its listing, CEREIT's portfolio increased from 74 properties worth 1.35 billion euros to 97 properties in seven countries - including Denmark, Finland, Germany, Italy and the Netherlands - worth some 1.8 billion euros as at Feb 14 this year. Its portfolio has an aggregate lettable area of approximately 1.4 million square metres with over 900 tenants, and a weighted average lease expiry (WALE) of around 4.6 years.

Its sponsor Cromwell Property Group (Cromwell) gives it an edge through access to deals that are under the radar as opposed to competing in open market auctions, said Simon Garing, chief executive of manager Cromwell EREIT Management. Meanwhile, Cromwell's on-the-ground presence also enables it to manage and extract value out of its assets.

Australia-listed Cromwell has been in the European real estate sector for over 15 years, with 20 offices in 12 countries in Europe. Cromwell's stakeholders include ARA Asset Management, which scooped up a near 20 per cent stake in the group for A$405.9 million (S$394.2 million) in March last year. Meanwhile, Cromwell has a 35 per cent stake in CEREIT.

For its part, Cromwell is not a sponsor that "takes out the garbage and puts it into the Reit, as some Reit managers do", said Paul Weightman, Cromwell's chief executive officer. "We're there shoulder to shoulder with our investors, investing our own capital to make sure we have the same interests and outcomes."

CEREIT adopts a "barbell" approach, with its assets in the office sector offering steady growth through long leases from governments and blue chip companies, while its assets in the light industrial/logistics sector offer high growth. Presently, around 55 per cent of its portfolio focuses on office assets, and 40 per cent on logistics, thanks partly to the rising popularity of e-commerce.

Pointing to the ability to purchase assets in Europe at below replacement cost, Mr Weightman said: "We're looking for office buildings with long WALEs at a significant discount to what it would cost per square metre to build." Cromwell is monitoring as many as 120 cities.

CEREIT, which was listed on the Singapore Exchange in November 2017 at an IPO price of 0.55 euro per unit, announced the acquisitions of 24 properties last year, of which 16 were completed during the course of the year. Seven of the remaining eight deals were sealed early this year - four logistics properties in France and three office properties in Poland - while the eighth property acquisition in France was axed as the manager was not satisfied with the outcome of the due diligence process.

One advantage to the Reit's European focus is the ability to acquire assets with a 6 per cent yield, while its debt rate is about 1.4 per cent. Other markets, such as Singapore, may deliver lower yields and higher interest costs, points out Mr Garing.

Meanwhile, factors such as urbanisation, population growth and the One Belt One Road initiative which links China to Europe (via Belarus) are all seen as positive for real estate demand, especially for certain European markets.

In particular, the Reit's manager sees opportunity in Central Europe, pointing to markets such as Poland, the Czech Republic and Slovakia, given gross domestic product (GDP) growth as well as the shift of manufacturing services into Central Europe which should enhance demand for assets.

"Poland is still a fantastic economy," asserted Mr Weightman, although earlier efforts to include Polish assets as part of its portfolio in the Reit's first attempt at a listing did not go over too well with investors. In September 2017, it called off the initial IPO process, only to take another crack at it in November, this time having dropped the Polish retail assets. Investors, it seemed, were less than enthused at the idea of retail assets in Poland especially as consumers increasingly turn online to let their fingers do the shopping.

Nonetheless, the Reit has since acquired three office assets in Poland as part of a broader acquisition of 23 properties across five countries for some 384 million euros. The Reit carried out a 38-for-100 rights issue to raise about 224 million euros to partly fund that larger acquisition.

Commenting on attractive markets for acquisition, Mr Garing said: "We're underweight where we'd like to be in France and Germany. We see potential opportunities, particularly in France. Paris is the largest office market."

Mr Weightman added: "We like to buy where we see value. We have targets for sectors but we don't invest to hit a portfolio allocation. Certainly, we have an idea of where we'd like to be. We would like to be at a level where we get global index inclusion and that would require us to continue to grow at the current rate for a few years to get there." Doubling in size over the next four years from where it stood last year is an "achievable prospect", he reckoned.

But at the same time, Mr Garing added, CEREIT will certainly be looking to sell assets this year, especially if there have been value-add opportunities to buy and sell quickly. "The target of doubling (in size) isn't the goal in of itself. It's delivering returns higher than investors expect, and that driving our share price up enables further support to grow."

Aside from acquisitions, other growth levers for CEREIT will come from rental income escalations as well as its efforts to boost occupancy levels within its assets.

Meanwhile, it is turning to technology to improve its value proposition. By collecting usage data from its buildings as well as retrofitting buildings with technology, it is able to better optimise service delivery around energy consumption, Internet connectivity and operating costs, in addition to being more sustainable and creating a more enjoyable experience for tenants.

Looking ahead, its focus will remain delivering on its forecasts, as well as acquiring the right properties which meet the Reit's criteria, the trust's manager said.

For the 13 months ended Dec 31, 2018, the Reit's distribution per unit (DPU) came to 4.10 euro cents, lower than its forecast of 4.64 euro cents, owing to an enlarged unitholder base. Excluding the rights issue which took place in late 2018, the DPU would have been 4.70 euro cents.

Net property income (NPI) totalled 90.18 million euros, 3.7 per cent higher than the forecasted 87 million euros, while gross revenue came to 135.29 million euros, 1.3 per cent higher than its IPO forecast.

The counter last traded at 0.495 euro per unit.