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A Brexit-proof REIT?

Singapore, 17 February 2020Victor Song was all smiles after Elite Commercial REIT (Elite REIT) got off to a flying start in its trading debut on Feb 6. Singapore’s first sterling-denominated REIT with a focus on assets in the United Kingdom opened at GBP0.705, 3.7% higher than its IPO price of GBP0.68. The counter later ended its first trading session at GBP0.71. “I’m very happy for our share price to pop on Day 1 and there is sufficient volume to support this… The REIT’s success is based on the strong support we received,” says Song, managing director of Elite Capital Partners, the sponsor of Elite REIT.

To be sure, Elite REIT is testing uncharted waters with its Singapore listing. Raising just GBP130.9 million ($235.5 million), its IPO size was smaller compared to last year’s REIT listings. On hindsight, the REIT was perhaps received positively due to its portfolio quality and IPO yield.

For 2020, Elite REIT’s IPO price translates into a forecast distribution yield of 7.1%, which is relatively high for a portfolio with almost no counterparty risk.

Both Elite REIT’s placement and public tranche were oversubscribed. While the international placement of 108.95 units attracted subscriptions of GBP234.3 million, representing a subscription rate of 3.2 times, the retail offering of 5.73 million units attracted a subscription rate of 8.3 times. Overall, the offer was 3.4 times subscribed.

“We want to leave some meat on the table to allow both the pre-IPO and IPO investors to benefit from the upside with a decent yield from the counter-cyclical tenancy. This is taking into account the benchmark for commercial REITs in Singapore is closer to 6% while that of commercial REITs in UK is closer to 4%. Elite REIT’s yield is also more than 600bps above the UK 10-year Government bond yield of 0.85%,” Song explains.


According to Elite REIT’s IPO prospectus, PartnerRe, the reinsurance arm of Exor, is a cornerstone investor. Exor is controlled by the Agnelli family of Italy and has a market cap of some $33 billion. Pre-IPO investors included Malaysia’s Sunway Group, Singapore’s Lian Beng Corp and Apricot who have all rolled their holdings in the initial portfolio into the REIT.

Notably, Tan Kim Seng, who has an interest in Kim Seng Holdings, acquired around 4 million more units during the IPO exercise, according to Singapore Exchange filings. Kim Seng Holdings – owned by Tan’s family – had rolled its pre- IPO interest in the portfolio into Elite REIT units. As of Feb 11, Tan owns a 9.65% stake.

However, financial bloggers and local media have questioned the quality of cornerstones and intimated that the Elite REIT’s placement tranche was distributed to High Net Worth Individuals (HNWIs).

Song, who is aware of the criticism, is unfazed, “Contrary to certain media reports, we have good support from institutions and corporations which accounts for approximately 22% of the register.”

“Going forward, we will continue to expand the investor mix with institutions, private banks and HNWIs to allow sufficient liquidity for the REIT,” adds Song.

To be fair, the listing performance of Elite REIT stands in stark contrast to issues with larger offerings last year such as Eagle Hospitality Trust (EHT) and ARA US Hospitality Trust.

Furthermore, the tenant of Elite Commercial REIT’s portfolio of 97 commercial properties across the UK is none other than the UK government’s Department of Work and Pensions (DWP) which is on triple net leases with inflation adjusted uplifts.

In contrast, hospitality trusts need either minimum rent guarantees or master leases to minimise the inherent volatility in hospitality assets. Even the upcoming student portfolio that Singapore Press Holdings is likely to IPO via a REIT (See story on Pages 10 & 11), would need a significant amount of property management to maintain high occupancy levels. Moreover, student accommodation requires high maintenance because of the nature of students in the UK.


As of Aug 31, 2019, Elite REIT’s property portfolio has an appraised value of GBP319.1 million and 100% occupancy rate. Its properties are used to provide crucial welfare, pensions and child maintenance services for approximately 20 million claimants.

DWP serves the UK population in good times and bad. Since many of the properties are leased to Jobcentre Plus, these properties are a hive of activity during economic downturns and are seen as being recession- and Brexit-proof. “The counter-cyclical nature of the occupier makes this a very stable portfolio,” says Shaldine Wang, CEO of Elite REIT’s manager.

According to Wang, claimant count – a measure of the number of people claiming unemployment-related benefits – as well as job centre footfall and DWP benefit spending are highly correlated to unemployment. During the Global Financial Crisis of 2008, the number of claimants saw a jump of 74.3%.

Furthermore, Jobcentre Plus should see greater demand following the April 2013 introduction of Universal Credit, a monthly benefit payment intended to simplify working-age benefits and incentivise paid work.

Before Universal Credit, claimant count was simply the number of people claiming jobseeker’s allowance. Since the introduction of Universal Credit, the claimant count is measured by the number of people claiming jobseeker’s allowance plus the number of Universal Credit claimants who are deemed to be looking for work.

As more people are brought within the coverage of the claimant count, the figure is set to rise noticeably over time. And given job centres are used to facilitate the rollout of Universal Credit, usage of the job centres are expected to rise in tandem with the alternative claimant count, as studies have shown.

Meanwhile, the leases to DWP undergo rent reviews every five years based on the UK Consumer Price Index (CPI), subject to an annual increase of minimum 1% and maximum 5%. Over 99% of the gross rental income of Elite REIT’s IPO portfolio comes from the triple net leases to DWP. The UK Government is also rated AA and Aa2 by S&P and Moody’s respectively and has one of the lowest debt-to-GDP ratios among the G7 nations.


In 2018, DWP signed new 10-year leases on Elite REIT’s portfolio after it had conducted an extensive review of its entire estate across the UK. DWP rationalised the properties into 808 buildings across 1.4 million sq m and also drew up a new internal estate management structure and a capital projects framework, along with new contracts for facilities and furniture supply management as well as security, landlord and lease management.

Of the 808 buildings, over 75% are customer-facing Jobcentres while the remainder are a mixture of back office, support and corporate sites. DWP has said it plans to further rationalise the portfolio down to 770 buildings across 1.2 million sq m.

Chances of break clause low

“The government has been using these properties for a very long time. This shows the resilience of these properties, and DWP has gone through a rationalisation programme and these are the assets they chose to renew,” Song explains. “In the event of a break, it is the fiduciary duty of the REIT manager to find a replacement tenant, do asset enhancement initiatives or capital recycling,“he adds.

At any rate, it is the role of the asset and property managers to have an active leasing and active tenancy management strategy to reduce re-leasing risk. Indeed, the DWP is integral to the social fabric of the UK and the assets in the IPO portfolio are used to provide crucial services that support claimants across the different cross sections of society.

In fact, 86.3% of Elite REIT’s Jobcentre Plus properties are front-facing, with no other Jobcentre Plus facilities within a three-mile radius, which further lowers re-leasing risk. And a key focus of the DWP review was to ensure that the UK population continues to have easy access to Jobcentre Plus services.

“These are properties that provide essential services to the local population at town centres and transportation hubs. The UK government specifically requires the assets to be within walking distance from public transport and that on average, every person in the UK can reach one of them within 25 mins by public transport,” Song elaborates.

“While this means that the government is likely to need these assets over the reasonably long term, the location and quality of properties can also be repositioned as refurbished office space or for alternative usage including residential and student accommodation.”

As one of the largest owners of DWP assets in the UK, Song and his team maintain a regular dialogue with DWP to understand the latter’s medium- to long-term plans for each asset in the portfolio.

Since the signing of new leases in 2018, the WALE of Elite REIT’s IPO portfolio stands at 8.6 years. Most of its 10-year leases have a break clause at the five-year mark – which falls on April 2023 – subject to a 12-month notice. If that does not materialise, the lease runs to 2028.

Another concern revolves around the co-terminus of the leases, which happens when all the leases come due on the same date in 2028. “Our tenancy management strategy is built around developing a long term relation with DWP… In our role as a manager, we don’t wait until the last minute. We work constantly on asset management,” says Jonathan Edmunds, CIO of Elite REIT’s manager.


Of the REITs that have listed in the past 12 months, Elite REIT is the smallest. Due to the timeline of the acquisition for Fund I (Nov 2018), and Fund II (Dec 2019), it was not practical to inject both funds to the REIT for the February 2020 listing, Song says. Hence, Fund II is now a right of first refusal (ROFR) pipeline portfolio for the REIT.

Fund II comprises 62 assets with WALE of more than five years. The properties are located in London, Southeast England, Birmingham, Cardiff, Edinburgh and Manchester. Once again, counterparty risk is almost non-existent. Like the IPO assets, these properties are strategically located, and in close proximity to transport hubs. The UK government remains the tenant, but with some diversification away from DWP. Other tenants are the Ministry of Defence, HM Courts and Tribunals Service, National Records of Scotland, UK Visas & Immigration, and National Resources of Wales.

Fund II’s shareholders are planning to roll their investments into the REIT as well.

In addition to a ROFR for Fund II, one of the IPO properties – The Peel Park asset in Blackpool – has excess gross floor area which could provide upside if developed.

The asset is currently used by DWP as a technology hub but also consists of 11.7ha of undeveloped grassland. Edmunds says that the untapped land provides opportunities to either work with DWP to increase its footprint on the site, or carve out a portion of the land for alternative uses in the future.

Blackpool’s Council Plan 2019-2024 includes new visitor attractions, thanks to a GBP300-million investment in Blackpool Central for new conference facilities and museums, as well as improved transport and housing infrastructure and a 144ha Airport Enterprise Zone.

“We are in talks with the government on built- to- suit projects to increase our pipeline further,” Song says.

Song is not new to property fund management. He was one of the founders of Viva Industrial Trust (VIT) which merged with ESR-REIT in 2018. The sponsors of VIT – which included Ho Lee Group – and Song then decided to set up a new real estate management platform, which was Elite Capital Partners.

The IPO portfolio was the former Hayhill Portfolio put up for tender in 2018 by Telereal Trillium. “We bought the assets when Theresa May was handling Brexit. There were a lot of uncertainties but we believe that the UK is a mature investment market and therefore has a higher degree of resilience. In addition, the leases were directly with the UK government for provision of crucial infrastructure providing crucial welfare services in support of the country’s social fabric,” Song recalls.

And although Elite Capital Partners was not the highest bidder, it was able to complete the transaction because it had the financing ready.