SINGAPORE (Sept 25): The market has been awaiting the listing of Cromwell European Real Estate Investment Trust. But with all the bad press its sponsor has suffered, not to mention the likes of CapitaLand Commercial Trust and Manulife US REIT sapping liquidity from the market with their rights issues, it seems that CE REIT is having difficulty getting off the ground. That is bad news for the local REIT market.
As its name suggests, CE REIT will offer exposure to real estate in Europe, a part of the world that is not currently well represented in the local REIT market. It is also supposed to be relatively sizeable for a newly launched REIT, with an initial portfolio of 81 properties worth more than €1.8 billion ($2.9 billion). The only other pure-play European property REIT in the local market is IREIT Global, which owns five properties with a combined value of just €455.8 million.
CE REIT was supposed to have registered its prospectus on Sept 21, and trading was supposed to have kicked off this coming week, on Sept 28 at 2pm. However, as The Edge Singapore went to print on Sept 21, there was no sign of the registration.
According to market sources, one reason for the delay in CE REIT getting off the ground is the lack of investor support in the wake of a number of less than positive developments. Partly due to its planned IPO, some units of its sponsor Cromwell Property Group are on the verge of suffering a downgrade of the Baa2 rating on their senior secured debt by Moody’s Investors Service.
Maurice O’Connell, a Moody’s vice-president and senior credit officer, says the recent “review for downgrade” action was taken because the group’s net debt as at June 2017 was high, at 7.6 times its earnings before interest, taxes, depreciation and amortisation. One of the reasons for this is that Cromwell Property Group had taken on new short-term loans to fund the purchase of a 12.7% stake in CE REIT.
Then, there is all the talk about the fees that Cromwell Property Group stands to earn from the listing of CE REIT. According to CE REIT’s draft prospectus, 67 of the initial 81 properties placed in the REIT, comprising 78% of the portfolio’s value, will come from funds managed by Cromwell Property Group. Of these 67 properties, 47 will involve the sale by investors of their interests in these funds. The remaining 20 fund properties will involve the sale by the funds of their interests in investment holding vehicles.
For FY2018, CE REIT’s manager is expected to earn €5.25 million, while its property management fees are projected at €12.81 million. Together, these fees represent 1% of the REIT’s assets under management, 11% of its revenue and 19% of its distributable income. CE REIT’s fees are the highest among the local REITs when measured against AUM. However, at least 11 REITs have higher fees as a percentage of distributable income.
Fortunately, CE REIT’s manager will have a battle-hardened CEO at its helm in the form of Philip Levinson, who was CEO of Cambridge Industrial Trust’s manager from 2014 to 2016. At the time, CIT was reeling from tense relations with some of its unitholders, and its manager had been denied a general mandate to issue new units, which made it hard for the REIT to grow. The manager has since changed hands, and CIT is now called ESR-REIT. The manager’s general mandate to issue new units has also been restored.
So, what are the chances of CE REIT making it to market? It’s hard to tell. But the road could be tough, given the size of its IPO. CE REIT is looking to raise around €952.85 million from retail investors. Cornerstone investors are expected to take up units worth a further €187.66 million. The retail and cornerstone investors will own a combined 87.3% of CE REIT at the point of its listing. The rest of it will be owned by Cromwell Property Group. The REIT will initially have a debt-to-asset ratio of 31.1%.
Still, whatever its shortcomings, CE REIT would have added an interesting new dimension to the local REIT market. Besides offering investors a sizeable play on European real estate, the REIT would also have brought a clutch of new REIT backers to the local market.
One of the largest unitholders of CE REIT apart from Cromwell Property Group would be Cerberus Singapore, which will own around 7% of it. CE REIT is acquiring 14 of its initial properties, accounting for 22% of the value of its initial portfolio, from Italian funds owned by Cerberus SICAV-SIF. All 81 of CE REIT’s properties are freehold and they span the retail, industrial and office sectors. Their weighted average lease to expiry is 5.1 years and their average occupancy is 89.3%. That provides some room for organic growth.
CE REIT is projected to pay distributions per unit of 4.27 euro cents in 2018 and 4.34 euro cents in 2019. While its IPO price has not been set, market sources are expecting it to come in at a level that offers a 2018 yield of about 7.5%.
