Cromwell European REIT portfolios valuations only 1.6% lower for the six months to 30 June 2023

Cromwell EREIT Management Pte. Ltd., the manager (the “Manager”) of Cromwell European Real Estate Investment Trust (“Cromwell European REIT” or “CEREIT”), wishes to announce that CBRE Ltd and Savills Advisory Services Limited have carried out respective independent valuations for 111 properties in CEREIT’s portfolio as at 30 June 2023, resulting in a total portfolio valuation of €2,294.7 million.

1. Introduction

The Board of Directors of Cromwell EREIT Management Limited, the manager of Cromwell European Real Estate Investment Trust (“CEREIT”, and the manager of CEREIT, the “Manager”), wishes to announce1 that CBRE Ltd (“CBRE”) and Savills Advisory Services Limited (“Savills”) have carried out respective independent valuations (“Valuations”) for 111 properties in CEREIT’s portfolio as at 30 June 2023, resulting in a total portfolio valuation of €2,294.7 million2.

CEREIT’s Valuations as at 30 June 2023 declined slightly by 1.6% or €36.1 million as compared to Valuations as at 31 December 2022, after taking into account the benefit of valuation increases on properties under development in Italy and the Czech Republic and prior to capital expenditure.

Simon Garing, CEO of the Manager said: “It is pleasing to note that CEREIT’s June 2023 portfolio valuations only declined by a modest 1.6% as compared to December 2022 levels. Taking into account the recent sale of Piazza Affari, Italy, we now expect to report CEREIT’s net gearing3 at around 38.2% as at 30 June 2023, well inside loan covenants. NAV per unit is expected to be €2.30, which is 32% above CEREIT’s most recent €1.57 unit price4,5.

CEREIT has now achieved the aim of being majority weighted to the logistics / light industrial sector, which continues to contribute positively to NAV. This sector recorded a 0.8% or €9.1 million valuation gain to c. €1.2 billion in June as compared to December, on a like-for-like basis, continuing to reflect the low 2.3% overall market vacancy and positive market rent growth across Europe.

Tenant demand for quality ESG-certified office space is now a key factor in driving both occupancy and higher prime office rents in European cities, especially in good locations, driving a bifurcation in investor demand away from Grade B/C and second tier city locations. This trend towards modern, energy-efficient and high-amenity offices, especially in CEREIT’s Dutch and Milan assets, coupled with the relatively higher (~65%) physical office occupancy in European cities, helped temper CEREIT’s office portfolio valuation decline to a moderate 3.9% (€43.8 million) to c. €1.1 billion.

Overall, CEREIT has recorded 74 bps higher property capitalisation rates over the past 12 months since the ECB commenced its rate increase cycle and the global economy has slowed. However, CEREIT’s portfolio valuation has only reduced by 3.2% over the past 12 months, supported by strong performance from active leasing / renewals of over 30% of the portfolio in the last 18 months, high annual inflation indexation growth and continued positive rent reversions.

Cromwell’s experienced local asset managers are an important component of this valuation resilience, maintaining close to a record high 96% portfolio occupancy and a WALE over 4.5 years.”

2. Portfolio valuations commentary

The impact from weakening economic environment, high inflation and rising interest rates on CEREIT’s portfolio valuations so far has been relatively minor due to a number of reasons:

i. The majority of CEREIT assets are well-located in good micro locations which are experiencing tenant demand, market rent growth and low market vacancies with little new competitive supply;

ii. The majority of CEREIT’s leases have annual inflation indexation clauses, contributing to sustained strong rent reversion (+5.7% in FY 2022 and even stronger +6.7% in 1Q 2023);

iii. Successful leasing and asset enhancement programmes and sound demand/supply tenant fundamentals led to 26% of the portfolio being re-leased in 2022 and a further 5% in 1Q 2023, lifting occupancy levels to a record 96%;

iv. CEREIT portfolio’s relatively high weighted average initial yield of 5.9% has provided a conservative cushion to rising European interest rates, a result of CEREIT’s acquisition strategy aimed more at small to mid-size Core+ and Value-add assets, rather than the generally larger and lower yielding prime assets most impacted from the recent rise in interest rates;

v. CEREIT’s average reversionary yield is 7.4%, representing the valuers’ views of higher future net property income, is approximately 150 bps higher than CEREIT’s portfolio’s current initial yield; and

vi. Properties under development in Italy and Czech Republic and other asset enhancement initiatives have created additional value.

3. Country and sector valuations commentary

Key performance numbers by country and sector are outlined in the table below. The light industrial / logistics sector valuation reversionary yield is now 6.8%, 110 bps lower than CEREIT’s office portfolio valued at a reversionary yield of 7.9%, validating CEREIT’s pivot to logistics. Further portfolio details will be provided in the 1H 2023 results due for release on 14th August 2023.

3.1 Positive country movements
Valuation increases were recorded in the predominantly light industrial / logistics portfolios in the United Kingdom (the “UK”) (+7.0% or €4.0 million), Slovakia (+5.2% or €3.4 million), Denmark (+4.4% or €5.3 million), the Czech Republic (+4.2% or €3.1 million) and France (+0.8% or €3.6 million).

Favourable movements in Slovakia, Denmark and France were generally due to higher passing rents, new leases signed, reduced vacancy and ongoing rent inflation indexation. Czech Republic’s valuations also increased because of a slight compression in cap rate and income growth and lower capital expenditure and following the completion of Lovosice I accretive asset enhancement.

The 7.0% rebound in the UK valuations was supported by some cap rate compression and a more favourable exchange rate following the 21% decline recorded at December 2022. Both indicators improved in the first six months of 2023 after the country’s political turmoil in the second half of 2022 caused massive interest rates rise and collapse of the sterling.

3.2 Negative country movements
Sound market fundamentals and Grade A office low market vacancies averaging +4.4% across major cities in the Netherlands6 underpinned the performance in CEREIT’s Dutch office portfolio, CEREIT’s largest office market exposure. Active and successful leasing led to improving Grade A occupancy and would have resulted in a 1.3% or €7.0 million valuation uplift for the Dutch office portfolio and 0.9% or €5.8 million increase for the entire Dutch portfolio. However, the Dutch portfolio valuation was negatively impacted by a recent 240 bps increase in the Dutch transfer tax to 10.4%, leading to overall valuation down 2.6% or €16.9 million.

Valuation declines were also recorded in Italy (-1.1% or €4.7 million), Germany (-2.6% or €5.7 million) Finland (-9.1% or €7.8 million) and Poland (-9.5% or €20.6 million). The drop in the low-yielding German light industrial / logistics portfolio was largely due a weaker economy and slower leasing pace, resulting in further cap rate expansion as compared to six months ago. The successful leasing campaign at CEREIT’s Nervesa, Milan office development saw a valuation gain recorded, partly offsetting the decline in some of the B Grade Office assets outside of Milan. Poland’s office decline was due to continued weak Grade B office market trends and significant new supply which further dampened office occupancy and rent levels. The suburban office Finnish portfolio was also impacted by further widening in cap rates of around 50 bps in the first half of 2023, on the backdrop of a reduced investment liquidity and negative sentiment towards secondary office locations.

Viale Europa 95, Bari Italy was excluded from the 30 June 2023 valuations and is not shown in the “other category” below, based on the recent execution of the conditional Notarial Deed with the Guardia di Finanza

4. Asset-level valuations

The Valuations summarised below will be reflected in CEREIT’s financial statements for the financial period ended 30 June 2023 expected to be released on 14th August 2023. 

The valuation reports will be available for inspection by prior appointment at the Manager’s registered office during business hours, for three months from the date of this announcement.

By Order of the Board

Simon Garing
Executive Director and Chief Executive Officer

1 Pursuant to Rule 703 of the SGX-ST Listing Manual
2 Excludes Piazza Affari as it was sold on 28 June 2023 for €94 million and Bari Europa as it has been reclassified as an asset held for sale and carried at its sales price. In addition, Sognevej 25, is being compared to its book value as at 31 December 2022 as it was not valued at that time
3 Net gearing is calculated as aggregate debt less cash over total assets less cash.
4 As at 21 July 2023
5 Both subject to the finalisation of the 1H 2023 Financial Statements which will be announced as part of the 1H 2023 results release on 14 August 2023.