ELITE MXNU : MXNU 0% Commercial Real Estate Investment Trust (Elite Commercial Reit) occupies a unique position in the Reits space given its large exposure to the UK government, DBS Group Research said in a research note on Thursday.

The research team initiated coverage on the UK-focused Reit with a "buy" call and target price of £0.80, noting the Reit has a resilient and counter-cyclical portfolio that provides stable cash flows through the economic cycles.

Units of the Singapore-listed Reit ended the Thursday morning trading session at £0.67, up 0.5 pence or 0.8 per cent.

The Reit's portfolio will likely see minimal risks as over 99 per cent of its gross floor area is leased to the UK government's Department for Work and Pensions (DWP), DBS said.

The DWP is responsible for welfare, pensions, and child maintenance, and is seen as a counter-cyclical occupier that can provide stability throughout economic cycles.

DBS also likes that the Reit's leases incorporate rent reviews every five years based on the UK's consumer price index. There is an annual minimum increase of 1 per cent and a maximum of 5 per cent, which gives the portfolio "built-in upside".

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Selected leases will likely see an 8 per cent rental growth during the next rent review in April 2023, which should result in a 7.4 per cent rental growth for the portfolio that year, the research team said.

DBS also noted the Reit's 100 per cent occupancy rate and its long weighted average lease expiry (WALE) of 7.2 years, which should provide strong income visibility. It further noted that the Reit has consistently achieved 100 per cent of rent collection in advance since its listing.

In March 2023, lease break options will kick in for 64.5 per cent of Elite Commercial Reit's portfolio. These must be exercised with a one-year notice period.

DBS has made a conservative assumption that half those options will be exercised, but believes this is "highly unlikely". It therefore expects an uplift in valuations if the options are not exercised by March 2022.

Units of Elite Commercial Reit have remained resilient relative to peers with portfolios focused on Singapore offices. The counter has rebounded quickest amid UK office Reits, and is now almost back to pre-Covid-19 levels.

The Reit's distribution per unit has outperformed forecasts made at the time of the initial public offering, despite the challenging environment.