• We visited 12 assets in three of CERT’s key markets, namely the Netherlands, France, and Italy, which account for 62% of CERT’s portfolio. Assets visited were enviably located near highways and train stations.
• Key office and logistics markets benefitting from positive fundamentals; portfolio largely insulated from inflation.
• Local expertise championing value creation through off-market deals and portfolio optimisation through AEIs/redevelopments and divestment of non-core assets.

Company Background

Cromwell European REIT (CERT) was listed on the SGX in November 2017. Its portfolio comprises 115 predominantly freehold properties with an appraised value of approximately €2.5bn as of April 2022. Its assets are located in or near major gateway cities in the Netherlands, Italy, France, Poland, Germany, Finland, Denmark, Slovakia, the Czech Republic and the United Kingdom with an aggregate lettable area of c.1.8mn sqm and more than 800 tenant-customers. The portfolio consists predominantly of  office and light industrial/logistics assets which make up c.52% and c.43% of total assets respectively.

Investment Merits

1. Key office and logistics markets benefitting from positive fundamentals. Approximately 43% of CERT’s portfolio is in light industrial and logistics assets. 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 CERT’s AUM, continues to experience rental growth on the back of favourable demand-supply imbalances.

2. Largely insulated from inflation. CERT’s portfolio occupancy is at an all-time high of 94.8% with a WALE/WALB of 4.6/3.4 years. 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 CERT’s earnings.

3. Boots on the ground executing rebalancing strategy in spades. Local expertise has allowed CERT 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 CERT 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. CERT completed €212.6mn/€344mn in light industrial/logistics acquisitions at a blended 6.3%/6.5% NOI yield since FY21/FY20.

4. €250mn in redevelopment and new development potential to be unlocked. CERT has identified a €250 million development pipeline over the next few years. Initiatives are expected to rejuvenate the portfolio, command higher rents, and in some cases, increase portfolio NLA.

Key Risks

1. Country risk. CERT is exposed to country risks including economic, political or policy changes in the EU or in countries where its assets are located.
2. Foreign currency risks. While DPUs are Euro denominated, earnings from three out of nine – Denmark, Poland and the Czech Republic – are paid in their respective currencies. and account for c.15% of earnings.

Investment Actions

No stock rating or price target provided, as we do not have coverage on CERT.

We visited 12 assets in three of CERT’s key markets, namely the Netherlands, France, and Italy, which account for 62% of CERT’s the portfolio. We met with the local asset managers and independent property consultants to gain deeper understanding of CERT’s top three key markets.

Figure 1: Portfolio breakdown by country and asset type

Other property assets consist of 3 government-let campuses, 1 retail asset and 1 hotel, all located in Italy.

Source: Phillip Capital Research - 28 Jun 2022