Recently, I wrote an article on three reasons to be bullish about EC World Real Estate Investment Trust (SGX: BWCU), or ECW for short. As a counter to that article, I thought it might be useful to also highlight some of the risks of investing in the REIT.
Short history as a listed REIT
ECW was only listed towards the end of 2016. This makes it among the youngest REITs in Singapore. With such a brief history, it is difficult for investors to assess the capability of management and whether the REIT can manage its tenants well over a long period.
Concentrated property portfolio
ECW’s property portfolio consists of seven properties diversified across e-commerce logistics, specialised logistics and port logistics. However, six of seven of its properties are located in Hangzhou, China, making it concentrated geographically.
Furthermore, three of its six properties are master-leased. As such, the REIT is vulnerable to any disputes with its main tenant. Another two properties are described as multi-tenanted but only consist of two tenants.
High cost of debt and low interest coverage ratio
Perhaps the most worrying aspect of ECW is its high interest cost. As of the start of 2017, ECW had an annualised running interest cost of 4.5%.
The high cost of debt may be a hindrance to ECW’s ability to borrow more to expand its portfolio. It has also resulted in a low interest cover ratio of 3.16. This makes the REIT vulnerable to interest rate fluctuations and rental cash flow decreases.
Downsides of having assets in China
ECW’s third quarter results for 2017 illustrated the disadvantages of having assets located in China.
For one, when the REIT attempts to transfer the money to unitholders, it needs to pay a repatriation tax. This was also the main reason the trust cited for lower than expected distributions for the quarter.
Secondly, ECW earns its income in Renminbi, making it susceptible to any fluctuations in the currency. The weakening of the currency in the third quarter also contributed to lower distribution per unit.
The Foolish bottom line
ECW may have many positives going for it like a high distribution yield, low price-to-book ratio, low gearing ratio, and stable and high occupancy rate. However, there are risks to its business that investors should keep an eye out on. Hopefully, these two articles give investors a more holistic view of ECW.
Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns units in EC World Real Estate Investment Trust.