Cromwell European REIT: On the ground in Europe
- Stock trades at an attractive 8.1% yield, close to +1 standard deviation as market is pricing in risks of a slowing European economy
- Pivot to logistics and positioning in key capital cities in Europe with relatively stronger economies places CREIT well to deliver resilient returns
- CERT’s local teams in key European cities provide them an edge in the sourcing for deals
- Maintain BUY with lower TP of EUR2.60, as we revise our risk-free rate assumptions
We recently went on a site tour with CERT 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 three markets that account for c.67% of CERT’s portfolio.
COVID-19 appears to be “a thing of the past”.Being physically on the ground in these three markets, we were pleasantly surprised by the bustling cities and influx of tourists. The COVID-19 outbreak in Europe felt like it was in the distant past as we saw troves of both locals and tourists lining up for attractions and splurging on retail and dining. As the sun only sets past 9pm in the evenings, due to the current transition into the summer season, the extended daylight probably keeps people out later everyday. The streets bustling late into the night drive optimism for retail and dining, and we believe business activities will only intensify as summer arrives.
Within CERT’s portfolio, the light industrial and logistics segments outperformed in the last two years amidst the COVID-19 pandemic. E-commerce, digital transformation, and the shifting habits of manufacturers led to the explosion in demand for high-quality light industrial and logistics properties, especially for assets that are strategically located. The entire European bloc shares a very rich history and large parts of European cities are being conserved. This makes property intensification and redevelopment very challenging or impossible in some cases. Active property investors like CERT have to constantly scour the markets to pick up on opportunities and identify the next locale to enter, as the cities gradually expand outwards. Having capable local teams also allows CERT to sniff out off-market deals that are typically initiated by private individuals and families. With capital continuing to pour into Europe and cap rates continuing to compress, market consultants believe that a value-addition strategy and off-market deals still present opportunities for attractive yields.
Europe on the forefront of ESG
Being on the forefront of ESG, properties in Europe are on a whole different level when it comes to environmental sustainability and renewable energy. Reduction of emissions and the zero-carbon footprint target is a concerted effort between both landlords and tenants. Instead of focusing on assets with a “green premium”, landlords and investors are now looking to avoid assets with a “brown discount”. High green ratings and minimal carbon footprints are now the norm that all tenants come to expect, and rather than paying a premium for properties with good environmental ratings, discounts are being applied to assets with low sustainability scores.
- Demand still mainly driven by 3PL and e-commerce; prime rents are currently c.EUR58 psqm p.a.
- C.4.0m sqm of expected new supply in FY22 and FY23; although close to 50% is speculative builds, absorption remains very strong and almost all the new supply is expected to be committed upon completion
- Prime yields in Milan have hit a record low of 3.85%
- With rising inflation, assets with long-term fixed leases with little or no rental upside potential have started to see an expansion in cap rates (50-100 bps expansion)
- Older assets with potential for rental upside are now trading at lower yields than new Grade A facilities
- Close to 50% of upcoming supply in Milan is speculative builds, but demand expected to far exceed new supply
- Prime yields in Milan have also hit a record low of 2.9%
- Yields of other office properties in the city centre average 3.8%; yields for assets in the city centre are expected to continue compressing
- Rents in Milan are plateauing at a peak of c.EUR640 psqm p.a.
- Buyers want assets with upside potential; those that can generate higher yields through redevelopment, AEIs, upgrading green ratings, etc.
- Located in the heart of Milan’s CBD, where supply of Grade A office space is very limited with vacancy at a low 2.7%, per CBRE.
- The Milan Stock Exchange is adjacent to the property
- Close to full occupancy at 99.7%; NLA of c.7,800sqm
- Passing rents have increased from EUR450 psqm (when acquired in FY17) to c.EUR600 psqm currently
- Located in the Porta Romana district, just outside the ring road and c.20mins from the Milan city centre
- Market vacancy of only c.4.5%; property expected to enjoy strong take-up, as it is located just 100m from the Brenta metro station
- EUR27m redevelopment expected to be completed by end-FY23, subject to board approval.
- Redevelopment to provide an additional c.20% in NLA due to the “Green Credit” bonus scheme
- Property will be transformed into a BREEAM Platinum Grade A office with an NLA of c.10,000sqm
- Expected to achieve rents of EUR330-340 psqm p.a. after redevelopment
- Previous tenant was in the multimedia sector; expected to attract similar types of tenants once completed
- Located in the West Milan submarket, where there are zero vacancies and rents have been increasing
- Prime light industrial rents in the area are c.EUR53 psqm p.a.
- ABB’s lease will expire in two years. CERT is confident of extending the lease, given the lack of high-quality light industrial facilities in the submarket
- Close proximity to Milan is crucial in attracting and retaining staff
- Houses ABB’s mechanical and robotics plant. Activities carried out in the property include manufacturing of mechanical parts and engine components, maintenance of electric engines, R&D, and storage
- Demand for light industrial space remains strong, with tenants continuing to ask for larger spaces (more than 4,000sqm)
- Take-up of logistics space is increasingly happening outside of the “logistics corridor” linking the North of France to the South
- Demand was traditionally centred in Lille, Paris, Lyon, and Marseilles
- Lack of supply and constraints in these markets are now pushing logistics players to take up space outside of these cities
- Vacancy rate in Paris is c.5%, mainly contributed by supply in the suburbs; no supply in the city centre
- Yield for light industrial is c.4.0% and logistics facilities is c.3.25%
- Yields for light industrial are currently very tight and are expected to flatten going forward
- Yields for logistics, on the other hand, could still compress by another c.25bps
- Recent leasing transactions in Greater Paris involve larger leases (more than 10,000sqm)
- Overall vacancy rates of c.7% due to spike in supply in FY21 and FY22
- Wide gap between prime rents and average market rents (c.EUR900 vs. c.EUR420 psqm p.a.)
- Rental incentives remain high, averaging more than 24% currently
- Prime office yields are c.2.5%; yields are very tight and we do not expect any further compression
- Light industrial property that consists of both office and warehouse space (mostly the latter)
- NLA of c.19,000sqm, with only c.225sqm vacant on the property (office component)
- Passing rents of c.EUR130 psqm p.a. for office component, and c.EUR110 psqm p.a. for warehouses
- Triple net leases with all maintenance and utility costs recoverable from tenants
- Adjacent to highway linking Paris to the North and South of France
- Located just 7km north of Paris with excellent transport links
- Fully occupied with a total NLA of more than 10,000sqm
- Major tenant, AMP Visual TV, is a production company specialising in live broadcasting; occupies more than 50% of the property
- AMP Visual TV may be leaving sometime in May’2023 when its lease expires because its business has grown and it requires a much larger space.
- We understand that AMP Visual TV will be relocating to a larger property that is currently being built
- CERT is not concerned with the impending vacancy, as it will be able to lease out the space readily at potentially higher rents, given the lack of supply in the precinct
- Located just 1km north of Paris in the Saint-Ouen suburb, from which the city centre is easily accessible
- Consists of office, warehouse, and light industrial space with a total NLA of more than 73,000sqm and its multi-tenanted property with Rexel as one of the major tenants.
- Prime asking rents in the precinct are c. EUR170/sqm p.a., but older Parc des Docks is achieving c. EUR150/sqm p.a.
- Neighbouring properties are offering up to three months of rent-free incentives per year of lease, while Parc des Docks is only offering one month rent-free at most
- Currently has five vacant units, but CERT is seeing an increase in tenant enquiries and is confident of leasing out the vacant units soon
- Rejuvenation of the suburb to transform it into a work-live-play community makes Parc des Docks an ideal candidate for redevelopment into a logistics focused mixed-used development, which CREIT team are working on.
- It is flanked by newly built residential developments and is walking distance to the upcoming Paris metro line extension
- Demand for logistics continues to far outstrip supply in Amsterdam; competing need for more residential units means no permits will be granted for further logistics/light industrial use
- Conversely, seeing some conversion of logistics/light industrial land into residential land, driving scarcity further
- This will drive further land intensification (i.e., multi-storey facilities) – although very costly and requires significantly longer building times, that will be the only way forward for Amsterdam
- Demand for light industrial is driven by last-mile distribution, dark stores, etc.
- Yields of logistics and light industrial are currently c.3.0%; expected to remain stable and could even see compression in well-located assets
- Rents for logistics are c. EUR70/sqm p.a., while light industrial rents are now c. EUR90/sqm p.a.
- Hybrid working arrangements were common in the Netherlands way before the COVID-19 pandemic
- Spike in new supply in FY23 and FY23 due to construction delays over the past two years
- Despite this, vacancies in the five key markets are still expected to compress
- Expect new demand from tenants in the technology, fintech, and life sciences industries, as well as tenants shifting in from other smaller satellite towns
- Fair bit of redevelopment of older Grade B and Grade C offices planned
- Five key markets are Amsterdam, Rotterdam, The Hague, Utrecht, and Eindhoven
- Net supply has fallen steadily over the past decade but is now gradually increasing, as new supply comes to market
- Most of the new supply has been pre-committed
- There is still a lack of prime Grade A offices available
- Prime rents in Amsterdam are EUR500-600/sqm p.a.
- Rents in the other key markets are easily half that of Amsterdam; very common for firms to have offices split between Amsterdam and one of the other key markets
- Prime yields for offices are c.2.85%
- Cap rates in Amsterdam expected to remain stable, given lack of supply
- But higher interest rates are already causing some cap rate compressions in secondary markets, especially for older and lower grade offices
- Located right next to the Amsterdam Central Station and right on the waterfront of the Amsterdam-Rhine Canal
- Master leased to KVK (Chamber of Commerce) until FY25
- CERT working on redeveloping the property when KVK’s lease expires
- Potential to more than double NLA from c.12,000sqm to c.25,000sqm; will have to comply with the requirements of the city council, sustainability requirements, UNESCO, height limit, etc.
- Redeveloped property expected to have floor plates of more than 2,200sqm; area lacks Grade A office buildings with large floor plates
- Located in the eastern central part of Amsterdam, a 10min drive from the city centre, it has a total NLA of c.22,000sqm
- Property is zoned for light industrial and office use and serves as a logistics and distribution centre for many businesses due to its ideal location and the lack of warehouse space in Amsterdam
- Fully occupied with a diverse tenant mix that includes those from the F&B, logistics, black store, general services, and many other sectors
- Passing rents of the property are EUR120-150/sqm p.a.; expect rents to continue its upward trajectory, given lack of supply and the property’s ideal location
- Located in the heart of The Hague CBD and adjacent to major motorways connecting to Amsterdam, Rotterdam, and Utrecht
- 150m away from the RandstadRail station, which is part of a light rail network connecting the metropolitan areas of The Hague and Rotterdam
- Total NLA of more than 68,000sqm, and underwent an AEI to the main lobby eight months ago
- Home to Nationale-Nederlanden (one of the Netherland’s largest insurers) and McDermott (engineering and construction solutions provider to the energy industry)
- Nationale-Nederlanden lease is expiring in January 2025 and CERT is confident of renewing it, given the excellent location of the property and the tenant’s large capex spent on refurbishing its space
- Passing rents are c. EUR185/sqm p.a., well in the middle of asking rents in its neighbouring office properties (asking rents at older properties are c. EUR170/sqm p.a., while newer properties have asking rents of c. EUR220/sqm p.a.)
- Currently has three vacant floors, but confident of backfilling the space in the near term; office demand in The Hague is mainly from tenants in the finance, oil & gas, and government sectors
Located directly opposite the Rotterdam Central Station
- Located directly opposite the Rotterdam Central Station, only a 45min train ride to Amsterdam
- Office buildings have an NLA of c.23,000sqm and the retail podium has a further c.10,000sqm NLA
- State-owned Holland Casino occupies c.6,000sqm in the retail podium, and a further c.3,000sqm in the office tower
- Largest tenants include Coolblue (e-commerce company with a presence in the Netherlands, Belgium, and Germany) and KPMG
- Passing rents for retail space are EUR250-350psm p.a., and office rents are EUR185-220psm p.a.; in line with current market asking rents
- Office demand driven by tenants from the finance, oil & gas, legal, and marine sector
- Located next to the railway and walking distance to the city centre and Central Station
- Property underwent an expansion in 2005 to add new wings to the rear; the asset’s total NLA now stands at c.32,000sqm
- Major lease is to the headquarters of Essent N.V., NL’s largest utility company. Essent is owned by a German listed energy company that specialises in renewable energy
- Passing rents at the property of c. EUR165/sqm p.a. are in line with market rents; closest competitor is a brand-new building just across the railroad that has asking rents of at least EUR175/sqm p.a.
- Vicinity undergoing rejuvenation with the recent opening of a five-star hotel just opposite Bastion
- Located in Tilburg and at the entrance of highways linking to Rotterdam, Antwerp, Amsterdam, and Eindhoven
- On a 10-year lease with Agile, an established shoe and fashion retailer in Europe (brands include Sascha, Manfield, etc.)
- Passing rents for the property are c. EUR54/sqm p.a., in line with market rents
- Property GRI yield at acquisition is estimated to be c.4.4%
- CERT owns one side of the asset, while the adjoining section on the other side of the warehouse is still held by private owners
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.
CERT’s portfolio is on the forefront of environmental sustainabilityand many of the properties exceed local ESG requirements. CERT 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 CERT’s assets are well poisitioned to retain and attract tenants, which increasingly look for a green rating. Having well-established local teams in the cities it operates, CERT benefits from forging close relationships with its tenants and timing its asset enhancement work in an efficient manner. The wealth of experience and diverse expertise within its local teams give CERT an edge in identifying opportunities within its portfolio to carry out redevelopment and improvement projects. The team is currently working on the redevelopment of Via Nervesa 21 (Italy) and an extension development at Lovosice ONE (Czech Republic), and is in the advanced stages of planning the redevelopment of several other properties.
Demand in most cities continue to outstrip supply, especially for light industrial and logistics spaces. CERT’s portfolio also enjoys the added benefit of being located close to city centres, where supply remains tight, and the expected new supply in the coming years is located further away from the cities. The strategic location of its office properties also ensures that it will continue to appeal to a wide array of tenants.
Although the ongoing conflict in Ukraine continues to create an overhang, there seems to be minimal direct impact on western Europe. Even as CERT’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.
Interest rate risk is overblown.While markets are focused on rising rates as a risk to distributions, we believe that CREIT is well positioned and is fully hedged till Oct’22 but is expected to remain subtantially high at c.77% in the medium term. We note that CREIT’s high interest coverage ratio of 6.8x.
Maintain BUY with TP of EUR2.60. As CERT 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 CERT with first-hand insights into the various markets. By having well-established local teams on the forefront, CERT 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 CERT to benefit from arbitrage through more attractive yields, and complete acquisitions in a shorter amount of time.
Interim Income Statement (EURm)
FY Dec | 2H2020 | 1H2021 | 2H2021 | % chg yoy | % chg hoh |
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Gross revenue | 93.3 | 99.0 | 101 | 8.3 | 2.1 |
Property expenses | (33.7) | (34.7) | (35.3) | 4.7 | 1.6 |
Net Property Income | 59.6 | 64.3 | 65.8 | 10.4 | 2.4 |
Other Operating expenses | (5.2) | (5.6) | (5.6) | 8.6 | 0.5 |
Other Non Opg (Exp)/Inc | (0.2) | 0.0 | 0.84 | - | nm |
Associates & JV Inc | - | - | - | nm | nm |
Net Interest (Exp)/Inc | (9.8) | (11.4) | (10.4) | (5.7) | 8.8 |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | - | - |
Net Income | 44.4 | 47.3 | 50.6 | 14.1 | 7.1 |
Tax | (17.4) | (14.9) | (13.4) | (23.0) | (10.0) |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 27.0 | 32.4 | 37.2 | 38.1 | 14.9 |
Total Return | 60.4 | 60.5 | 36.1 | (40.2) | (40.3) |
Non-tax deductible Items | (16.4) | (14.4) | 11.6 | (171.1) | (180.9) |
Net Inc available for Dist. | 44.6 | 31.6 | 47.5 | 6.5 | 50.4 |
Ratio (%) |
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Net Prop Inc Margin | 63.9 | 64.9 | 65.1 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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Source of all data: Company, DBS Bank
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HONG KONG | SINGAPORE |
INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected] | THAILAND |