Cromwell European REIT - Kicking The Tires In Europe
- We recently went on a site tour with Cromwell European REIT (SGX:CWBU) to visit several of its properties in Italy, France, and Amsterdam. The tour gave us the opportunity to meet with independent market consultants, as well as the local teams managing the portfolios in these 3 markets that account for ~67% of Cromwell European REIT’s portfolio.
- European cities are booming with the return of tourists, and we were pleasantly surprised to see the bustling cities of Milan, Paris, Amsterdam, Rotterdam, The Hague, and Tilburg. Businesses are ramping up their activities in preparation for the summer season, as they welcome troves of tourists from around Europe, America, and Asia.
- The 12 properties that we have visited are tenanted by a wide array of businesses from the retail, F&B, e-commerce, technology, professional services, and media industries. In particular, the light industrial and logistics properties seem to be teeming with activity. At the office buildings, physical occupancy was not up to full capacity, but we understand that several tenants are still in the process of transitioning back to working in office, while others have flexible work arrangements, which is common in many European cities.
- Cromwell European REIT’s portfolio is on the forefront of environmental sustainability and many of the properties exceed local ESG requirements. Cromwell European REIT has also implemented a system to track and report the sustainability performance of each property, ensuring that they meet their target of net-zero operational carbon emissions by 2040. Having a high green rating for its properties not only reduces operational costs, but ensures that Cromwell European REIT’s assets are well poisitioned to retain and attract tenants, which increasingly look for a green rating.
- Although the ongoing conflict in Ukraine continues to create an overhang, there seems to be minimal direct impact on western Europe. Even as Cromwell European REIT’s local teams remain cautious, they continue to see minimal exposure from its assets and tenants from the rise in energy prices or Ukraine disruption. We understand that many businesses in the e-commerce, 3PL, technology, professional services, and consumer retail sectors are continuing to grow and seek more space for expansion. Rents in most markets continue to be on the uptrend and existing leases enjoy rental indexation that is pegged to CPI.
- While markets are focused on rising rates as a risk to distributions, we believe that Cromwell European REIT is well positioned and is fully hedged till Oct ’22 but is expected to remain subtantially high at ~77% in the medium term. We note that Cromwell European REIT’s high interest coverage ratio of 6.8x.
- Maintain BUY call on Cromwell European REIT with target price of EUR2.60. As Cromwell European REIT continues to benefit from the strong performance of its light industrial and logistics properties, its local teams on the ground are constantly exploring opportunities to drive organic growth within its portfolio.
- In addition to the several redevelopment and AEI opportunities the teams are currently working on, they provide Cromwell European REIT with first-hand insights into the various markets. By having well-established local teams on the forefront, Cromwell European REIT also has the added advantage of accessing off-market deals that are mostly initiated by individuals privately. With property yields compressing very significantly in the gateway cities of Europe, these off-market deals enable Cromwell European REIT to benefit from arbitrage through more attractive yields, and complete acquisitions in a shorter amount of time.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-06-13 2022-06-13
Previous report by DBS Research:
2022-02-24 Cromwell European REIT - Pivot To Logistics Has Paid Off
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