Elite Commercial REIT - UOB Kay Hian 2020-05-22: Recession-Proof Counter-Cyclical Yield Play Anchored By UK Government


Elite Commercial REIT - Recession-Proof Counter-Cyclical Yield Play Anchored By UK Government

  • Elite Commercial REIT, Singapore’s first UK-focused S-REIT, is a recession-proof counter-cyclical yield play. Over 99% of its initial portfolio is leased to the UK government. The sole occupier, the DWP, is the largest public service department serving 20m claimants in the UK. The leases are full repairing and insuring triple net leases with long WALE of 8.6 years.
  • We estimate the step-up in rents at 7.9% for Apr 23 assuming average CPI of 1.5% in 2020, 2021 and 2022.
  • Initiate coverage on Elite Commercial REIT with BUY and target price of £0.88.


  • Elite Commercial REIT (SGX:MXNU) is Singapore’s first UK-focused REIT, and also the first REIT denominated in the British pound to be listed in Singapore. It invests in a diversified portfolio of commercial assets and real estate-related assets in the UK.
  • The initial portfolio consists of 97 quality commercial buildings across the UK, with a total net internal area (NIA) of about 2.6m sf and total site area of about 4.7ha. All of the properties have freehold tenure with the exception of one on a long leasehold tenure expiring in May 2255. 80 of the assets are used by the DWP as Jobcentre Plus, 12 of the assets as back offices and the remaining 5 are used as call centres. See PDF report attached below for Elite Commercial REIT's porfolio summary.
  • Over 99.0% of Elite Commercial REIT’s gross rental income is earned from its current leases with the UK government through The Secretary of State for Housing, Communities and Local Government (with the DWP being the occupier of each property). The assets in the initial portfolio are used by the DWP to provide crucial front and back-of-house services that help support claimants in different sections of the UK society.
  • The DWP is the UK government’s largest public service department that is responsible for crucial welfare, pension and child maintenance services for over 20m claimants and employs approximately 77,000 full-time equivalent staff. The DWP is also a uniquely counter-cyclical sovereign occupier, as claimant counts, job centre footfall and DWP benefits spending are all highly correlated with unemployment.
  • Elite Commercial REIT's management team
    • Chief Executive Officer – Shaldine Wang.
    • Chief Financial Officer – Cheah Zhuo Yue.
    • Chief Investment Officer – Jonathan Edmunds.
    • Senior Manager, Investor Relations – Leng Tong Yan.
  • See appendix II in PDF report attached below for more details of the management team.


Unique Counter-Cyclical Play Anchored by DWP

Portfolio highly relevant to DWP.

  • The DWP is the UK government’s largest public service department, and is responsible for crucial welfare, pension and child maintenance services. It serves 20m benefits claimants, about one-third of the UK’s population. As the largest public service department, the DWP has the biggest budget in the UK. For the financial year ending 31 Mar 19, the DWP provided benefits of £182.5b, which is about £9,000 per DWP claimant. It has a workforce of 77,000 full-time equivalent staff.
  • 82.5% of Elite Commercial REIT’s portfolio is used to provide claimant-facing front-of-house DWP services. It has 80 properties used as Jobcentre Plus. The remaining 17.5% provides back-of-house services, such as back offices (12 properties), including IT support, and call centres (5 properties). Demand growth for DWP services and usage of Elite Commercial REIT’s portfolio are expected to trend upwards, which will lead to more long-term tenant visibility and stability.

Jobcentre Plus is a social security office and is an integral part of the DWP.

  • It was formed by the amalgamation of two agencies − the Employment Service, which operated Jobcentres, and the Benefits Agency, which ran social security offices. Its main function is to help working age people find employment in the UK. The centre provides a broad range of services, such as consultations with career advisors, setting up of job interviews, review of CVs, provision of job-matching services and arranging for unemployment benefits.
  • Elite Commercial REIT’s 80 Jobcentre Plus assets are spread across the UK, of which 69 have no alternative Jobcentre Plus within a 3-mile radius (key metric used by the DWP).

Usage of Jobcentre Plus is highly correlated with unemployment.

  • The DWP is a counter-cyclical occupier as claimant count and Jobcentre Plus footfall generally rise with unemployment. Periods of contractions in real GDP growth are usually accompanied by an increase in DWP benefit spending. Thus, the relevance and usage of Elite Commercial REIT’s portfolio increase in tandem with higher unemployment.

Other essential DWP services.

  • The usage of other services by the DWP, such as pension services, are expected to rise with the burgeoning ageing population across the UK. Meanwhile, the usage of child maintenance and disability services is expected to remain stable and unaffected by economic conditions. The DWP is integral to the social fabric of the UK.

Stable Income With Low Re-Leasing Risk

Long WALE of 8.6 years.

  • Elite Commercial REIT derives over 99% of gross rental income from triple net leases to the AA-rated UK government. The UK government has the lowest debt-to-GDP ratio among the G7 countries. The government signed fresh 10-year leases in 2018. The portfolio has a long WALE of 8.6 years. As such, Elite Commercial REIT’s cash flow stability is expected to remain strong due to the strong credit-worthiness of its sole sovereign anchor tenant. The properties are let on full triple net leases, which places the landlord in a better position.
  • Elite Commercial REIT will not have any repairing or insuring liabilities and will bear no cost of any material repairs to the properties should they arise. Apart from pre-determined lease management fees, property management fees and Insurance fees, Elite Commercial REIT does not bear any additional property operating expenses. Thus, NPI margin was high at 97.1% during 8M19. Elite Commercial REIT does not incur any maintenance capex for all of its properties.

Embedded rental growth model with inflation-pegged rental escalations.

  • Rent reviews are conducted by Elite Commercial REIT every five years with rentals benchmarked against the UK CPI, essentially allowing for rent increases that are in line with national inflation. This built-in rental escalation clause is subject to an annual minimum increase of 1% and maximum of 5%, and provides a stable and predictable growth profile. The next rental escalation will occur in Apr 23. Assuming average CPI of 1.5% in 2020, 2021 and 2022, we expect the step-up in rents to be 7.9%.

Active tenancy management strategy.

  • Management has been proactive in maintaining open lines of communication with the DWP to understand the strategic plans for each asset across the portfolio. The DWP is required to provide one-year notice should they decide to vacate the premise of any individual asset, which reduces re-leasing risks.

Strong Growth Potential For Sponsor Pipeline

Sponsors have granted Right of First Refusal (ROFR) for all future UK acquisitions.

  • Elite Commercial REIT is able to tap on its sponsor group’s sourcing capabilities and pursue accretive acquisitions in order to grow its portfolio. One of Elite Commercial REIT’s main sponsors, Elite Partners Holdings (EPH), has looked at over £3b worth of potential acquisitions in the past two years, most of which are assets that tend to attract high-quality and credit-worthy tenants.
  • In particular, Elite Commercial REIT has been granted ROFR over 62 commercial properties across the UK, most of which have been leased long-term by the UK government. The ROFR was granted by Elite UK Commercial Fund II, which is a private trust managed by a wholly-owned subsidiary of EPH. These properties are stabilised assets located in the UK with a similar WALE profile from the existing portfolio, and primarily leased to various ministries of the UK government. The entire portfolio is worth more than £200m.
  • Elite Commercial REIT’s current aggregate leverage of 32% leaves it with ample headroom to embark on future acquisitions.

UK remains an attractive real estate market.

  • The UK has consistently ranked among the top most traded real estate market globally, and in the past five years has represented about 30% of all European real estate transactions. This level of market liquidity provides Elite Commercial REIT with ample opportunities to undertake accretive acquisitions on top of its existing sponsor pipeline.


Attractive yield spread.

  • We forecast DPU of 3.3 pence for 2020 and 4.2 pence for 2021.
  • Based on current share price of £0.66, Elite Commercial REIT provides an attractive distribution yield of 7.2% for 2020 and 7.3% for 2021. Yield spread is 7.0% for 2020 and 7.1% for 2021 above 10-year British gilts (yield for 10-year British gilts at 0.2%).

Peer comparison.

Nicola Ho UOB Kay Hian Research | Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-22
SGX Stock Analyst Report BUY MAINTAIN BUY 0.88 SAME 0.88