The manager of Asia’s only UK REIT — Elite Commercial REIT (Elite REIT) — recently underwent leadership renewal with CEO Joshua Liaw, who was appointed earlier this year.
Liaw’s first 100 days as CEO of Elite REIT’s manager have been “very exciting”, he tells The Edge Singapore. “The opportunity to manage a UK REIT that invests in UK’s social infrastructure is compelling, notwithstanding the challenges facing the REIT, market and the overall economy. I see potential in the REIT’s prospects — we are working on various strategic pathways to unlock value for unitholders.”
Liaw has nearly two decades of experience in real estate finance and fund management, bringing fresh perspectives and innovative ways of leading the REIT manager. He honed his skills in real estate and fundraising during his banking days at Standard Chartered and Citi.
After leaving the banking world in 2014, he spent nine years at Lendlease. He was part of the team that oversaw the IPO of Lendlease REIT in 2019 and the acquisition of Jem in 2022, which subsequently doubled Lendlease REIT’s portfolio valuation.
Key priorities
See also: First REIT’s strategic journey: balancing growth, stability and commitment to do good
Liaw has, for now, set his sights on near-term priorities to bring Elite REIT forward. “At the top of the list is to manage our vacant assets, and we have made good progress in the first six months of the year. We have also used a portion of the recycled gross proceeds to reduce our gearing.”
The REIT’s gearing improved to 46.0% in the middle of the year, down 60 basis points compared to March 31, with 62% of interest rate exposures fixed and no near-term refinancing requirements until November 2024.
With weighted average lease expiry at 4.5 years, Liaw also aims to future-proof Elite REIT’s property portfolio by diversifying the lease expiry profile and collaborating with its tenants to enhance the value of its assets.
See also: OUE C-REIT’s prime Singapore portfolio delivers sustained growth
For one, Elite REIT is collaborating with its largest occupier by gross rental income — the Department for Work and Pensions (DWP) — on a public-private asset enhancement initiative to improve the sustainability performance of occupied assets.
The DWP is the UK’s largest public service department and is responsible for welfare, pensions and child maintenance services. In line with the UK’s 2050 net-zero goal, the collaboration began in February 2022 and plans include replacing variable refrigerant systems, gas- or oil-fuelled boilers and air-conditioning systems with more energy-efficient systems and even insulating roofs and windows.
The innovative initiative was later expanded to include the asset occupied by the Ministry of Defence. According to Liaw, the collaboration has been “very well-received” by the DWP and is expected to be implemented further, in conjunction with the lease extensions for 2028.
Besides improving the energy efficiency of the REIT’s portfolio assets, the innovative partnership with enhancement works identified by the occupier offers the REIT’s manager valuable insight, says Liaw. “The occupier’s capital expenditure planning provides an indication of those assets they remain committed to.”
Beyond lease expiries, the asset enhancement helps with the long-term resilience of the REIT’s assets, he adds.
Finally, Liaw aims to improve the trading liquidity of Elite REIT. “That might be the hardest thing to do. We are working on broadening our current research coverage by the end of the year. We have also done radio, online and media interviews to broaden our engagements with retail investors. In fact, we have just finished a week of roadshows in Singapore, Kuala Lumpur and Bangkok. It has been a hectic first three months and I am enjoying the challenge.”
For more stories about where money flows, click here for Capital Section
Unique exposure
As the only S-REIT reporting in British pounds, Elite REIT offers a “unique selling point”, says Liaw. Aside from Asian currencies and the US dollar, investors in this region are most likely to hold assets and funds in pounds, Liaw adds, as they may own property in the UK or have children studying there.
Elite REIT’s most unique feature is its key tenant, as 99.3% of its gross rental income comes from the AA-rated UK government. In particular, 91.7% of Elite REIT’s gross rental income comes from the DWP.
According to the REIT, this provides credit stability and income certainty, and nearly 100% of the rentals are collected three months in advance.
The DWP provides very essential services to local communities throughout the UK, says Liaw. “It provides unemployment benefits, job matching and job training; pension benefits, as well as child maintenance benefits. It is a very important element of the social fabric and a key enabler of the UK’s labour policy and welfare.
As such, we expect the DWP to continue to occupy our assets for the long term.” The REIT’s occupied assets are on triple-net leases, where the responsibility for the repair of the external and internal parts, as well as the structure of the property, lies with the tenant.
Elite REIT’s leases also contain clauses on dilapidation settlements, a common feature in UK commercial lease agreements, where tenants have the responsibility to reinstate the building to its original condition at the end of the lease.
During the first six months of 2023, Elite REIT received GBP3.0 million ($5.12 million) in recycled gross proceeds, which includes total dilapidation settlements received for four assets as at June 30 and the estimated gross disposal proceeds from Openshaw Jobcentre in Manchester and John Street in Sunderland.
The REIT has entered into a sale and purchase agreement for the two properties at a consideration of GBP1.1 million. The sale consideration represents an approximately 14.4% premium to the properties’ valuation as at July 31.
In addition, the REIT is in advanced stages to divest three other vacant assets at above total book value. “The realisation of divestment proceeds at a premium to valuations clearly reflects the intrinsic value of the underlying portfolio of assets that we manage,” says Liaw. “In addition, the successful dilapidation settlement negotiations add on to the proven track record of our team’s investment and asset management efforts and capabilities in delivering a positive outcome for each asset via proactive tenant engagement strategies.”
1HFY2023 results
On Aug 7, Elite REIT posted distribution per unit (DPU) of 1.94 pence for 1HFY2023 ended June, up 6.4% q-o-q but down 24.2% y-o-y. Management has opted to retain 10% of distributable income, which will help strengthen Elite REIT’s financial position. At a 90% payout ratio, unitholders will receive 1.74 pence in DPU.
During 1HFY2023, the REIT’s revenue grew 3.4% y-o-y to GBP19.1 million, lifted by net annualised inflation-linked rent escalation of 13.1% for 136 assets and partially offset by the vacancy of eight assets, effective April 1.
As at June 30, Elite REIT’s portfolio occupancy rate was 92.1%, down from 97.9% at the previous quarter.
Net asset value per unit remained stable at 51 pence as at June 30. Borrowing costs grew to 5.2% as at June 30 from 4.9% at March 31. The manager expects interest rates to remain elevated as the Bank of England tackles persistent inflation, although the market is starting to see green shoots.
The UK’s annual inflation rate fell sharply to 6.8% in July from 7.9% in June. “The decrease in the inflation rate is meaningful and if the trend continues, the Bank of England will eventually cut interest rates within a year or so,” says Liaw.
That said, Elite REIT faces no foreign exchange concerns, adds Liaw. “We are listed in British pounds; our assets, loans and distributions are all in British pounds. Therefore, we are naturally hedged.”
Any additional cost of inflation on the property operating expenses are borne by the tenant due to the triple-net leases.
The British pound is considered one of the world’s most important reserve currencies, and Liaw thinks market pessimism on the UK is “a bit disproportionate”. “People do forget that the UK is the sixth-largest economy in the world. [The UK does] have a strong talent pool and some of the world’s largest and best-run companies.”
Photos: Albert Chua/The Edge Singapore
