Elite UK REIT aims to principally invest, directly or indirectly, in real estate and real estate-related assets in the UK. The REIT has three sponsors: Elite Partners Holdings, Ho Lee Group and Sunway RE Capital. Its portfolio, valued at GBP416 million ($717 million) as of Dec 31, 2024, consists mainly of freehold and virtual freehold properties, providing social infrastructure to UK government departments. The manager plans to leverage this stable income stream and capitalise on growth sectors like the living sector, including student accommodation and built-to-rent assets.
1. What differentiates Elite UK REIT from other S-REITs?
Firstly, we are the only UK REIT listed on the Singapore Exchange and trading in pound sterling, with government-backed rental income from the UK. The UK is reputed for its quality real estate backed by strong rule of law, property and tax regulations. Almost all our leases are signed with the UK government at the ministerial level and are essentially sovereign in nature.
Secondly, most of our properties are tenanted to the DWP (Department for Work & Pensions) and are utilised as JobCentres. The DWP administers working-age, retirement, disability and ill health benefits across the UK. In recent months, various government initiatives have been introduced that are likely to intensify the usage of JobCentres within our portfolio.
The government-backed cash flows are resilient, countercyclical and collected in advance, which we deploy to reduce debt and optimise finance costs. Elite UK REIT is also insulated from fluctuations in foreign currency as our assets and liabilities are in pound sterling, thereby providing a natural hedge. With more than four-fifths of our interest exposure hedged, the impact of interest rate volatility has also been largely mitigated.
Elite UK REIT’s portfolio of 148 properties is geographically diversified across the UK and consists of mainly freehold and virtual freehold properties. The properties are mission-critical social infrastructure assets strategically located in town centres near amenities and transport nodes and largely utilised as JobCentres.
With our stable and diversified portfolio and prudent capital management, we are able to offer a differentiated investment gateway to income-producing UK real estate and provide attractive and stable returns to our unitholders.
2. Elite UK REIT increased its distribution payout ratio to 95% in 2H2024 from 90% in 1H2024. Can you continue to maintain or even increase the payout ratio in the future?
We increased the payout ratio to 95% for the 2H2024 distribution following the mitigation of multiple risk factors, a steady increase in portfolio valuation and an overall healthier financial position. As we enhance income resiliency and future-proof assets, barring unforeseen circumstances, we are confident about sustaining the distribution payout of at least 95% this year.
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3. The DWP is your largest tenant. What is the impact of having the DWP as your largest tenant and how are you managing it?
While DWP is our largest tenant, we are also one of the largest providers of mission-critical social infrastructure to the UK government. Many of our leases have an expiry in 2028 and we are actively engaging with our tenants on early lease renewals ahead of the lease expiries.
We are optimistic about progressing on lease renewals this year, with good potential for rental reversions and diversification of our lease expiry profile. Our expansion of investment strategy to living sector assets such as purpose-built student accommodation (PBSA) and built-to-rent (BTR) residential assets would also support the diversification of our rental income sources in the future.
4. How does the current interest rate environment affect Elite UK REIT?
Against inflationary pressures and economic growth challenges, the Bank of England reduced interest rates by 75 basis points (bps) since the start of 2024. That said, the interest rate environment is envisaged to be higher for a longer time.
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The REIT has entered into interest rate swap arrangements to hedge its exposures, raising the proportion of debt on fixed rates to 86% as at end-2024. This is estimated to bring about GBP2 million in savings in borrowing costs annually and a 30 bps reduction in borrowing costs to 4.9%.
The loans are also 100% sustainability-linked, providing room for further reduction in interest margins as the energy performance ratings of Elite UK REIT’s portfolio improve. In FY2024, all sustainability performance targets agreed with lenders were met.
5. Why did Elite UK REIT change its name from Elite Commercial REIT last year?
The name change better reflects our portfolio of mission-critical social infrastructure assets in the UK. At the same time, we announced our expanded investment strategy to include living sector assets in addition to our existing focus on UK government-leased assets. The living sector, which includes PBSA and BTR residential assets, is countercyclical and non-discretionary in nature and also has similar location attributes as our existing assets.
Broadly speaking, in addition to government-leased properties that could be accretive investment opportunities, we now have the mandate to evaluate opportunities within the living sector. Given our present cost of capital, the near-term strategy for the living sector would be to convert existing assets where we have achieved vacant possession instead of acquiring assets from third parties.
6. What are the biggest opportunities in Elite UK REIT’s pipeline? Are there any plans for expansion beyond the core government-leased property segment?
We intend to continue providing investors with a UK pure-play investment mandate and exposure by diversifying our portfolio in terms of asset classes, tenant mix and lease expiries. Elite UK REIT’s assets are in quality locations and some of them could have potential for repositioning into living sector assets.
For instance, Lindsay House in Dundee, Scotland, is strategically located within walking distance of leading universities and transportation nodes and it could be transformed into a 168-bed PBSA.
Another way we have created value is at Peel Park, Blackpool, which saw a 35.5% y-o-y increase in valuation to GBP32.8 million following a planning application submission to the local authority for a data centre development site. We have also secured 120 megavolt-amperes power and the planning application is in its final stages. We hope to maximise value for unitholders by actively exploring the potential monetisation of the Site after we receive planning approvals.
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7. What is the group’s biggest risk or challenge in the next 1–3 years that shareholders should be most concerned about? And how is the group preparing itself for it?
While we have had some new leases and rental reversions in FY2024, the majority of our leases end in 2028. In this regard, extending and diversifying these leases is a key challenge that we are confident we can address sooner rather than later. We started early dialogues with the main occupier, the DWP, in 2024 and believe that the mission-critical nature of our assets supporting the UK government’s social agenda will help with negotiations.
Our strong relationship with tenants, aided by partnerships with government tenants to co-invest in energy-efficient and sustainable features in the portfolio, will support this process. In the event of any new vacant assets, Elite UK REIT is well-positioned to explore various potential alternative uses for the assets according to the real estate market conditions and economic dynamics of the submarkets or divestments to recycle capital.
8. One of your strategic priorities is to improve liquidity. How are you progressing on this front?
We have been actively working to broaden research analysis and media coverage. By increasing our visibility among analysts and media, we aim to enhance market awareness of our investment proposition. In 2024, four brokerages and analysts initiated or restarted coverage of Elite REIT.
We are also stepping up investor engagements through regular investor roadshows and participation in conferences. These efforts are designed to deepen relationships with existing investors while also attracting new ones, fostering a more active and diverse shareholder base. As we expand our portfolio and scale our operations, we expect this growth to naturally translate into improved trading liquidity over time.
9. Why is Elite UK REIT seeking approval from unitholders for a unit buyback mandate during the upcoming AGM on April 30?
Whilst there are no immediate plans to exercise the mandate, it is still sensible to obtain this mandate and prepare the infrastructure for future buybacks. This signals our strong belief that we should be trading at a higher price-to-book ratio for a portfolio of mission-critical assets with an essentially government-backed rental income.
10. What can investors look forward to from Elite UK REIT this year?
There are still more initiatives for the management to deliver in the near term.
On the asset management front, we hope to provide more visibility on lease renewals this year and will also consider accretive acquisitions. As part of our asset repositioning strategy, we intend to capitalise on the living sector demand to reposition some of our assets and may look to monetise Peel Park to recycle some capital. As we progress on these initiatives, we aim to further increase value creation for our unitholders.
Asset management efforts will also positively impact gearing reduction. Proceeds from opportunistic divestments will also enable us to reduce borrowings.
Our capital management efforts last year will pay off this year. We refinanced and hedged our debt in mid-2024 and reduced our cost of debt to 4.9% as at Dec 31, 2024. We also incorporated a debt structure where we could now start to use rents paid in advance to us by our government tenants to optimise our debt levels. We estimate that we will save our unitholders GBP2 million in annual interest and this year should see the full-year effect of our capital management and treasury initiatives.
10 in 10 – 10 Questions in 10 Minutes with SGX-listed companies
Designed to be a short read, 10 in 10 provides insights into SGX-listed companies through a series of 10 Q&As with management. Through these Q&As, management will discuss current business objectives, key revenue drivers as well as the industry landscape. Expect to find wide-ranging topics that go beyond usual company financials. This report contains factual commentary from the company’s management and is based on publicly announced information from the company. For more company information, visit https://www.eliteukreit.com/.
Raphael Lim is associate director of research and FinLit at the SGX Group
