5 Reasons Why You Should Buy Cromwell European REIT

April 10, 2023

For REIT investors who aren’t aware, Cromwell European REIT (SGX: CWBU) (SGX: CWCU) is the largest SGX-listed REIT that has a 100% exposure to European real estate.

It is also a dual currency stock that allows investors an option to trade in either the Euro shares (SGX: CWBU) or SGD shares (SGX: CWCU).

Cromwell European REIT has a resilient European commercial portfolio worth €2.5 billion (S$3.6 billion) with a 46% exposure to the light industrial or logistics segment.

The REIT’s portfolio has a net lettable area of 1.9 million square metres and these are located on predominantly freehold properties.

Investors who are looking to benefit from the rapidly-increasing demand for warehouse and logistics properties in Europe will find Cromwell European REIT to be an interesting addition into their portfolio.

Here are five reasons why I think investors should consider buying shares of Cromwell European REIT.

1. Booming logistics market in Europe

Cromwell European REIT benefits from the positive outlook for the European commercial real estate market, especially the logistics sector, which accounts for 49% of the REIT’s portfolio.

Source: Cromwell European REIT’s H2 and FY2022 Results Presentation

The logistics sector has seen strong demand from e-commerce and logistics tenants, as well as benefitting from limited supply of modern facilities, resulting in rental growth and capital appreciation.

Cromwell European REIT also has exposure to the office sector (46% of portfolio by value), which is expected to recover as vaccination rates increase and lockdown measures ease across Europe.

Source: Cromwell European REIT’s H2 and FY2022 Results Presentation

During FY2022, Cromwell European REIT’s logistics portfolio saw its occupancy rate stand at 98.1% with a strong positive rental reversion of 8.2%.

The average logistics vacancy is at a record low of 2.4% in all of its eight logistics markets, reflecting the strong market rent growth for the logistics sector.

The solid performance is also in line with the overall market performance in Europe.

According to a report by BNP Paribas Real Estate, the logistics market in Europe proved resilient despite a difficult political and economic environment.

Low vacancy rates and limited land availability continue to push rents up – magnified by construction costs.

Take-up decreased by 10% in 2022 in the six leading European countries.

In another report by Knight Frank, despite inflationary pressures and economic headwinds, occupier market fundamentals remain strong, with positive rental growth expectations underpinned by a continued demand-supply imbalance.

Knight Frank, one of the world’s leading independent real estate consultancies headquartered in London, said in a report that large-scale infrastructure projects across Europe driven by decarbonisation targets are creating huge opportunities in the logistics market.

Location, access to transport links and multi-modality are key factors for logistics operators as the speed of delivery and reliability matter more than ever.

2. Strong balance sheet

Aside from the strong earnings growth prospects driven by the exposure to the logistics sector, Cromwell European REIT also has a strong balance sheet with a gearing ratio below 40%.

It has a high interest coverage ratio of 6.1 times and has ample liquidity with about €200 million in cash and undrawn revolving credit facility.

Given higher interest costs amid the rising interest rate environment, this will be vital to ensure the sustainability of earnings from the REIT.

About 78% of its borrowings are also hedged to fixed rates, which helps to mitigate the impact of the rising rates.

3. Divestments and developments to enhance portfolio

Cromwell European REIT is also proactive in rejuvenating its assets to provide long-term growth.

Last year, the REIT started an asset rejuvenation programme with selective divestments of non-strategic assets to fund developments and improve its liquidity.

These efforts have helped put the REIT in good standing for the next few years to better manage risk.

A total of €400 million in non-strategic asset divestments will be staggered over the next two to three years to fund its €250 million development plan – all while maintaining its gearing ratio below the 40% level.

Source: Cromwell European REIT’s H2 and FY2022 Results Presentation

Cromwell European REIT has started its third phase of redevelopment for Parc des Docks Paris after completing stages 1 and 2.

Other project developments in the pipeline include the new development of Lovosice ONE Industrial Park in the Czech Republic, and Nove Mesto ONE Industrial Park I/III in Slovakia.

Source: Cromwell European REIT’s H2 and FY2022 Results Presentation

4. Attractive distribution yield and currency diversification

Cromwell European REIT offers an attractive 12-month forward distribution yield of around 9.7%.

This is higher than the average distribution yield of 5.4% for its peer group of European REITs, and also higher than the average dividend yield of 3.6% for the STOXX Europe 600 Index.

It is also higher than the average distribution yield of 7.6% for SGX-listed REITs.

Aside from that, investors will also get currency diversification given its exposure to European markets and the fact that it’s a dual-currency REIT.

5. Low concentration risk among its customers

The top 10 tenants contribute less than 30% of the REIT’s total headline rent and no single tenant industry trade sector represents more than 14% of the portfolio.

Source: Cromwell European REIT’s H2 and FY2022 Results Presentation

The commercial portfolio is primarily dominated by government agencies’ offices, large multinational corporations, and well-established domestic corporations, which form the majority of tenants.

These entities contribute significantly to the stability and growth of the industry, as they tend to occupy more significant portions of commercial spaces and engage in long-term lease agreements.

On the other hand, small and medium-sized enterprises (SMEs) account for a relatively minor portion of the headline rent; approximately 8%.

Interestingly, the top 10 tenants have an impressive weighted average lease expiry (WALE) of 4.7 years.

This indicates a secure revenue stream and long-term commitments from these organisations to their respective commercial spaces.

Attractive REIT opportunity for European exposure

In conclusion, Cromwell European REIT presents an attractive investment opportunity for investors looking to benefit from the growing logistics market in Europe.

The REIT has a strong balance sheet, divestments and developments, attractive distribution yield, and low concentration risk among its customers.

Its portfolio is worth €2.5 billion with a 46% exposure to logistics and a net lettable area of 1.9 million square metres.

With its proactive approach to rejuvenate its assets and strong earnings growth prospects, Cromwell European REIT is well-positioned to provide long-term growth and responsibly manage risks in the European commercial real estate market.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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