SINGAPORE (Jan 7): Elite Commercial Real Estate Investment Trust is likely to lodge its prospectus next week.

The portfolio – valued at around £320 million ($567 million) – comprises 97 freehold properties, all in the UK. Some 25% of the properties (by rental income) are in London, with the rest in second and third tier cities across the UK, including Glasgow and Cardiff. These properties are currently in Elite UK Commercial Fund I.

Around 99% of the properties by rental income are occupied by Jobcentre Plus, a unit of the U.K. Government’s Department for Work and Pensions, on 10-year Full Repair and Insurance leases with built-in rent uplifts, which commenced on April 1, 2018 and expire on March 31, 2028.

Since the properties are Jobcentre Plus properties, their locations are in town or city centres, within 5-10 minutes’ walk from transportation nodes. Jobcentre Plus is a UK government-funded employment agency and social security office that can be found in most cities, whose aim it is to help people of working age find employment in the UK.

For risk management, this REIT ticks various boxes. Although there are 97 properties, the REIT has only one tenant, the UK government. UK’s sovereign rating is currently rated Aa2 - the third highest grade. Moody's Investor Service stripped Britain of its top-notch AAA rating in 2013, before downgrading it again in 2017. Still, the tenant’s credit quality is probably the best among Singapore’s 40 REITs and its counterparty risk is almost non-existent.  

The commercial risk is linked to lease renewals. In general, weighted average lease to maturity is around 6.5 years or so. More clarity on lease renewals is likely to be in the prospectus when it is released.  All other REITs with long WALE have some form of commercial risk as most commercial properties are rented to corporates or start-ups.

On the macro front, uncertainties surrounding Brexit are over and the UK has a stable government. In addition, the current government has promised to spend. The Queen’s Speech on Dec 20 included a spending boost for the National Health Service, and infrastructure development with a £100 billion-pound national infrastructure strategy to be set out alongside the government’s first budget, focusing on transport, decarbonisation and digital infrastructure.

With no rental risk, or commercial risk in the short term in terms of renewals, distributions should be extremely stable. The initial yield is likely to be between 6% and 7% compared to the UK’s risk free rate of 0.77% for yields on 10-year bonds. While the new REIT is small compared to the 40 listed S-REITs, pipeline properties and right of first refusal properties are likely to be announced in the prospectus to be lodged on Jan 15.