The Motley Fool

Why EC World Real Estate Investment Trust Is a Staple of My Portfolio

I’ve owned units of EC World Real Estate Investment Trust (SGX: BWCU) for a few years.

However, the China-focused REIT with a portfolio of specialised and e-commerce logistics properties has faced some downward pressure in recent weeks as investors fret over the impact of the trade war and China’s devaluation of its currency.

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Despite the near-term headwinds, EC World will likely continue to be a key component of my portfolio for the foreseeable future. Here’s why.

Portfolio of properties with favourable leases

One of my main investment theses for EC World REIT is that it will provide stable or even growing dividends in the foreseeable future. This is because its portfolio of China properties have favourable lease terms with its tenants. Four of its seven properties have master lease agreements with built-in rental escalations of between 1% and 4%.

Its other three properties are multitenanted. One of them has negotiated a rental escalation with tenants of between 4.5% and 5.% per annum, and another has leases that will increase up to 10% upon renewal. These upward revisions and built-in rental escalations will provide EC World with visible rental income growth over the next few years at least.

Low gearing and acquisitions to drive growth

EC World also flexed its financial muscle by acquiring an eighth property in August this year. The acquisition is at a 7.5% discount to the average valuation if the property is handed over a master lease agreement.

It’s also fully funded by cash and debt, so unitholders will not see any dilution through an equity offering.

Based on pro forma calculations, the acquisition if purchased in January 2018 would have increased 2018 net property income by 16.4% and, more importantly, increased 2018 DPU by 1.6%.

It would have also boosted book value per unit to 88.19 Singapore cents from 86.94 Singapore cents.

Attractive yield and valuation

EC World also has an inexpensive valuation and attractive yield. Based on its DPU for the first half of 2019, the China-focused REIT has an annualised yield of 8.46% and trades at a 15% discount to its book value.

Its yield also compares favourably against the average REIT yield of 6.2% in Singapore at the time of writing. 

The Foolish bottom line

There are many things to like about EC World REIT. Although I appreciate that the weakening Chinese yuan continues to put pressure on EC World’s near-term Singapore-dollar denominated distribution, its relatively high yield and position for both organic and inorganic growth make it an appealing counter to own.

As such, EC World will remain an integral part of my portfolio for the foreseeable future.

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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.