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Elite Business REIT

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Elite Business REIT (“Elite” or the “REIT”) is the primary UK-focused REIT to be listed on SGX with greater than 99% of the properties being leased to the UK authorities.

Elite is providing 114,686,200 Items for subscription at 68 pence per unit (or $1.21) of which, 5,734,300 items will probably be accessible for public subscription. As well as, 77,827,900 items had been allotted to Cornerstone traders. 

The IPO will shut on 4 Feb 2020 at 12pm and begin buying and selling on 6 Feb 2020 at 2pm.

Portfolio

The portfolio includes 97 high quality business buildings positioned throughout the UK and is primarily occupied by the Division for Work and Pensions (“DWP”) – the most important public service division chargeable for essential welfare, pensions and little one upkeep providers for ~20 million claimants. 

There are 96 freehold properties (and 1 property with lease until 19 Could 2255) throughout United Kingdom with a 100% occupancy price. The weighted common lease expiry (“WALE”) is 8.6 years.

Distribution

The primary distribution interval will probably be from itemizing date to 30 June 2020 and will probably be paid on or earlier than 30 Sep 2020. The distributions will probably be declared in GBP and until traders elect to obtain in GBP, it will likely be transformed to SGD on the change price at that cut-off date. The distributions won’t be topic to additional tax in Singapore. 

The second distribution will probably be in Q1 2021 (inside 90 days of shut). 

Monetary Forecast


The forecasts above used a decrease foreign exchange price of GBP 1 : SGD 1.76. On this regard, in case you are “bullish” on brexit and optimistic on the motion of GBPSGD price, then your yield will probably be greater than 7.1%

You’ll be able to see the international change price sensitivity evaluation on web page 124 of the prospectus.  

What I like concerning the REIT


  • Over 99% leased to the UK Authorities – that means there’s a very low chance of “dangerous debt”.  As proven within the chart under, the yield of seven.1% represents a ramification of ~6% to UK authorities bonds (rated AA by S&P and Aa2 by Moody’s)
  • Embedded rental progress from inflation linked rental escalation – The leases are reviewed each 5 years primarily based on UK CPI topic to annual minimal improve of 1% and most of 5%
  • Freehold properties and lengthy WALE of 8.6 years  – the properties are freehold and the lengthy WALE offers certainty and stability of earnings 
  • Social advantages as soon as given out, is tough to remove – the properties are used to supply essential social advantages, which for my part, is hard for any authorities to “take away”  
  • REITs are presently the “taste” of 2020 and the leverage of 33.6% is manageable – REITs have been performing effectively till the coronavirus hit the market final week. The leverage just isn’t too aggressive
  • Proper of first refusal for 62 business properties positioned in UK which can be on long run leases to the UK authorities

A few of my issues

  • Single nation danger – Traders have to be comfy that they’re taking over each the sovereign (authorities) and geographical danger of United Kingdom. Having mentioned that, the properties are effectively diversified throughout totally different areas throughout UK
  • GBP danger – with the brexit out of the way in which, it really offers extra readability and certainty for traders. Traders at the moment are taking over GBP/SGD danger and GBP is at 52 week excessive in opposition to SGD. Any depreciation of GBP will decrease the yield to traders
  • No main shareholders or Sponsor – The most important shareholder is Ho Lee Group Belief at 10.8% (assuming over-allotment is exercised), adopted by Sunway RE Capital at 8.2% and Kim Seng Holdings at 6.9%. The highest 3 successfully controls 25.9% of the REIT, whereas the Sponsors solely maintain 19% on a mixed foundation. I would like a stronger alignment of curiosity 
  •  Cornerstone traders are primarily HNWIs – the issuance are broadly distributed to the wealth banking shoppers of UBS, BOS and CIMB they usually maintain 23.4% of the enlarged share capital and usually are not topic to any lock-ups. The HNWIs are provided leverage to take up this IPO
  • Belongings usually are not “grade A” places of work – whereas the buildings are leased to “AA-rated” authorities entities, it does not imply there’s a prepared use for the constructing ought to the lease be prolonged. The worth will most likely “drop” if the federal government not desires to lease them or resolve to relocate 
  • Synthetic “yield” resulting from fee of administration charges in items –  had the items been paid in money, the 7.1% yield would have dropped to six.3% in FY2020


Honest worth

At an yield of seven.1%, i assumed the issuance is attractively valued but it surely was so troublesome looking for the worth to guide ratio. Why cannot the issuer simply state the determine on the market. Is it intentional to not present the NAV per unit? Some bloggers computed and mentioned the worth to guide is round 1.17x primarily based on “historic” and 1.03x primarily based on appraised values. No concept who is correct or improper however i definitely don’t prefer to be digging excessive and low on the determine within the prospectus. 

Chilli Rankings

I’ll give this IPO a 1.5 chilli rankings.  


Please observe that this IPO just isn’t for flipping however extra for setting up a portfolio of REITs for earnings manufacturing. 

I just like the steady and sovereign credit score backing the rental cashflows and the 7.1% yield, which is fairly respectable in present market. The truth that the supervisor is electing to obtain its charge in items additionally present some assurance (if we expect positively) that the long run outlook is favorable. In any other case, they might have elected to obtain the charges in money.

The scale of the general public tranche is fairly small at 5.7m items and the Wuhan coronavirus, Brexit uncertainty, GBP publicity, poor market sentiments and over-allotment to personal banking shoppers could delay some traders.

You’ll be able to resolve if you wish to apply on the IPO or purchase it later put up issuance. You must nonetheless, evaluate it in opposition to different listed REITs earlier than deciding whether or not you want to purchase Elite Business REIT. Do observe that put up IPO, the buying and selling of GBP denominated REIT is untested.

Glad IPOing