Lock Mun Yee and Natalie Ong of CGS International have kept their "add" call and £0.38 target price for Elite Commercial REIT, following its intention to broaden its investment mandate to include so-called living sector properties.
On April 15, the REIT, which holds a portfolio of commercial properties in the UK largely rented to the local government, will be widening its portfolio mix to include purpose-built student accommodation (PBSA), built-to-rent residential (BTR), senior living and social housing and other government housing.
To reflect this broader investment strategy, ECR plans to change its name to Elite UK REIT down the road at a date to be determined.
"The broader investment mandate would enable ECR to benefit from defensive cashflow backed by government tenancies, while deepening and broadening its focus into defensive sectors in the UK as a UK pure-play SREIT," state Lock and Ong in their April 15 note.
As of end-FY23, 93.2% of ECR's rental income was derived from the Department for Work & Pensions (DWP) and 96.6% of its portfolio lease is expiring in FY2028.
"In addition, we think broadening its strategy would also likely position the REIT for growth as well as future-proof the portfolio by capitalising on segments with favourable demand-supply fundamentals, such as PBSA and BTR," the analysts add.
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According to management, the UK PBSA sector is a countercyclical asset class that remained resilient even during the pandemic and is under-supplied due to a growing student population.
The student accommodation market has attracted significant interest from investors other than ECR. On April 12, private-held Mapletree Investments announced the acquisition of 8,192 operational beds across 19 cities in the UK and Germany, as well as an operating platform from Cuscaden Peak Investments for £1 billion ($1.7 billion).
The deal will increase the overall bed count within Mapletree’s UK portfolio to over 17,000, solidifying Mapletree’s position as one of the largest owners of student housing assets in the UK.
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Meanwhile, the UK BTR segment is underbuilt, accounting for only 2% of the UK’s total private rental stock and benefiting from increased demand from renters and limited supply.
However, instead of purely buying new assets, ECR is eyeing the repositioning of some of its existing properties for a start.
The CGS analysts estimate that in the medium term, any potential valuation uplift from these enhancement opportunities could enable ECR to pare down its proforma post-preferential offer gearing of 43.7%.
Meanwhile, they've maintained their "add" call and dividend discount model-based £0.38 target price on the counter, for its stable income profile with inbuilt growth through its inflation-linked rental structure.
From Lock and Ong's perspective, potential re-rating catalysts could come from the faster-than-expected completion of value-creation opportunities and the earlier-than-expected resumption of a higher dividend payout ratio.
On the other hand, downside risks include tenant concentration exposure to DWP and longer and higher-than-projected interest rate trend.
ECR units changed hands at £0.25 as at 11.46 am, up 2.08%.
