After a visit to Cromwell European REIT's (CEREIT) assets in the Netherlands, France and Italy, PhillipCapital analyst Natalie Ong is positive on the REIT's prospects due to their favourable locations.
In an unrated report dated June 27, Ong says the 12 assets in the three key markets mentioned account for 62% of CEREIT’s portfolio are enviably located near transport hubs like highways and train stations.
On top of that, key office and logistics markets are benefitting from positive fundamentals.
“Approximately 43% of CEREIT’s portfolio is in light industrial and logistics assets,” writes the analyst. “Demand for these asset types is well supported by increased e-commerce penetration, pivot to just-in-case inventory management and on-shoring of production.”
“While structural, economic and geopolitical risks headwinds for the Polish and Finnish office markets remain, the Netherlands office market, which represents 23% of CEREIT’s assets under management (AUM), continues to experience rental growth on the back of favourable demand-supply imbalances,” Ong adds.
CEREIT’S portfolio is also largely insulated from inflation. Its portfolio occupancy stands at an all-time high of 94.8% with a weighted average lease expiry (WALE) and weighted average lease break (WALB) of 4.6 and 3.4 years respectively.
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“European leases have inflation-linked annual escalations embedded in the lease, while energy and utility costs are passed through to the tenant, minimising impact to CEREIT’s earnings,” she says.
Local expertise has allowed CEREIT to source off-market deals at favourable yields and discounts to valuation, while simultaneously divesting non-core assets above valuations.
“Having boots on the ground allows CEREIT to accelerate its rebalancing strategy, pivoting towards its target 60% light industrial/logistics and 40% office asset allocation from its current 52% office and 43% light industrial/logistics allocation,” Ong writes.
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CEREIT completed a respective €212.6 million ($311.1 million) and €344 million in light industrial and logistics acquisitions at a blended 6.3%/6.5% net operating income (NOI) yield since FY2021/FY2020.
Looking forward, CEREIT has identified a €250 million development pipeline over the next few years, with the initiatives expected to rejuvenate the portfolio, command higher rents, and in some cases, increase its portfolio net lettable assets (NLA).
Downside risks, in Ong’s view, are the country risks where the REIT’s assets are located.
“CEREIT is exposed to country risks including economic, political or policy changes in the European Union (EU),” she writes.
Foreign currency risks are also something investors should pay attention to, as earnings from the REIT’s assets in Denmark, Poland and the Czech Republic, are paid in their respective currencies. The assets in these countries account for some 15% of the REIT’s total earnings.
As at 10.28am, units in CEREIT traded 2 cents lower or 0.99% down at €2.00.
