Elite UK Reit expands into the ‘living sector’, but still plays it safe

ELITE UK Reit , the only UK-focused real estate investment trust (Reit) listed in Singapore, is now expanding into what it calls “living sector” assets – which includes purpose-built student accommodation and build-to-rent residential assets – as it seeks to diversify its government-backed income stream.

The Reit’s portfolio is currently unique in that more than 99 per cent of its real estate assets are leased to the UK government. Its main tenant is the Department for Work and Pensions (DWP), which runs Jobcentre Plus offices that support citizens in finding employment.

This broadened investment strategy beyond commercial assets has spawned a change in name too. The Reit was previously known as Elite Commercial Reit, before it became Elite UK Reit in May this year.

Yet Joshua Liaw, chief executive officer of the Reit’s manager, emphasised that this foray into a new sector is not a pivot.

“There’s nothing wrong with government credit… it’s the best sort of credit you can get in the UK,” he told The Business Times in an interview. “But what could work better, is if we had a Plan B.”

That means having more options to manage assets returned to Elite UK Reit, in the event their leases are not renewed by the UK government.

The Reit now aims to reposition vacant offices into student accommodation or build-to-rent residences as an alternative to divesting or re-letting them to other tenants, said Liaw.

For the nine months ended Sep 30, 2024, Elite UK Reit’s revenue dipped marginally to £28 million (S$47.8 million) from £28.5 million the year before, due to the return of seven vacant assets.

Still, it posted a 3.9 per cent rise in distribution per unit year on year to 2.13 pence. Liaw attributed this to tax savings and higher distributable income, which came from the Reit increasing its rental rates by 13 per cent and removing lease breaks.

The Reit’s capital structure has also improved under Liaw’s leadership.

When he took the helm in June 2023, his first priority was to reduce the Reit’s gearing ratio – more than 46 per cent at that time.

“Some investors and analysts said that if our gearing is that high, we might not survive; they will not be able to cover our stock or invest in us,” he recalled.

To address this, the Reit carried out an equity fundraising exercise in December 2023 to raise £28 million. Liaw also sought out the relationship banks of the Reit’s three sponsors – Elite Partners Holdings, Ho Lee Group and Sunway RE Capital – to extend its debt for 3.25 years.

As at Oct 7, the Reit’s net gearing ratio stood at 43.6 per cent. Borrowing costs declined by 20 basis points to 5 per cent from 5.2 per cent through refinancing and hedging 87 per cent of its exposure.

Sticking to safe bets

Even as it intends to diversify its rental income, Elite UK Reit is still playing it safe with its asset classes.

“After speaking to investors, it’s apparent that many of them have invested in us because they like the government credit,” said Liaw.

“They like the non-discretionary, counter-cyclical nature of the real estate that we own. For example, in times of recession and economic stress, the job centres are even more utilised.”

Student accommodation and build-to-rent residential properties similarly offer stable and counter-cyclical cashflows, he noted.

During downturns, more people tend to head back to school to prepare for economic recovery. At the same time, higher mortgage rates in the United Kingdom are making renting more attractive than buying homes, he said.

Asian parents may also be more inclined to send their children to further their studies in the UK now, instead of the United States, he added. This is especially given the latter’s uncertain state, with president-elect Donald Trump set to take office in 2025.

Said Liaw: “The demand-and-supply dynamics for both asset classes are very favourable for us right now.”

Other players are already capitalising on these tailwinds. On Dec 19, CDL Hospitality Trusts said that it was venturing into the student accommodation business with the purchase of a purpose-built student accommodation in Liverpool.

Liaw believes Elite UK Reit is in an advantageous position.

Most of its existing assets, such as DWP Jobcentre Plus offices, are strategically located in town centres, and close to key transport nodes and amenities. This makes them optimal sites for conversion into student housing – especially those in university towns – and build-to-rent residences, he said.

While he declined to disclose possible targets for conversion, the Reit singled out Lindsay House in Dundee – which was returned in March 2023 – in a recent analyst briefing as “being well-placed” for student accommodation.

Focus on organic growth

For now, Liaw does not have a target allocation for commercial assets and living-sector assets in Elite UK Reit’s portfolio.

The Reit’s base case is to renew most of its government leases – many of which are expiring in 2028 – over the next 12 months. Only then will he have more clarity on the availability of vacant assets for repositioning.

Separately, the Reit has been busy with the planned development of an 80-megawatt data centre campus at Peel Park, Blackpool – which it aims to sell eventually.

It owns the entire site, spanning 15.65 hectares of freehold land. Only one-third is currently occupied by buildings leased to the DWP, with the rest comprising woodland.

Describing the investment as “opportunistic”, Liaw noted that the site benefits from a new sub-sea cable that connects Blackpool to Dublin and extends to Europe and the US, thereby offering low latency to data centre operators and end-users. There are also plans to power the centre with renewable energy from local offshore wind farms.

Both the lease renewals and sale of Peel Park will help to “move the needle” in paring Elite UK Reit’s debt further, he added. Peel Park had a valuation of £25.2 million as at end-June 2024.

Thus, Liaw sees a “good chance” of reducing the Reit’s gearing ratio to below 40 percent in 2025. The Reit will also be receiving proceeds from the divestment of three UK properties – all sold at a premium – in the last three months.

When it comes to acquisitions, Liaw remains prudent.

“Inorganic growth is truly quite difficult with our current cost of capital,” he said, adding that any acquisition will need to be accretive “to be worth the time of the management and unitholders”.

“We do come across deals from time to time, but to be honest, anything that’s accretive right now will be more in the government assets rather than in the living sector.”

He has no plans to acquire any purpose-built student accommodation or build-to-rent residential properties for now.

A bigger priority for Liaw is improving Elite UK Reit’s trading liquidity.

His ambition is for the Reit to be part of indices in the next three to five years so as to appeal to more investors.

That means having to at least double the Reit’s market capitalisation, he said, noting that this is a function of assets-under-management growth and subject to market conditions.

Units of Elite UK Reit closed at £0.29 on Friday (Dec 27), giving the counter a market capitalisation of £170.3 million and a price-to-book ratio of 0.72 times. Year to date, the Reit has generated total returns of 15.1 per cent.

In a report published on Dec 18, KGI Securities analyst Alyssa Tee initiated coverage of Elite UK Reit with an “outperform” rating and a 12-month target price of £0.37.

She highlighted the Reit’s resilient cash flow from government tenancies and exploration of alternative revenue streams such as student accommodation, while pointing out that currency risk is also minimised, as its operations and revenue generation are denominated in pounds.

Said Liaw: “We are a bit of an underdog; we’re not a household name like Mapletree or CapitaLand... so we don’t take things for granted.”