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2 Key Risks With EC World Real Estate Investment Trust

I recently wrote an article on why I own units of EC World Real Estate Investment Trust (SGX: BWCU). Besides its relatively high 8.4% yield, the China-focused REIT also has favourable tenant leases with annual built-in rental escalations and recently made an acquisition that will boost its distribution per unit (DPU) down the road. 

Although I believe EC World REIT does have the potential for good returns, there are still risks that come with it. In this article, I highlight two key risks and when I will consider selling.

Risk #1: Risk of weakening Chinese yuan

As EC World REIT collects its rent in Renminbi, the REIT’s Singapore dollar-denominated DPU will be affected if the Chinese yuan weakens. This is exactly what has happened over the last couple of months; the Chinese yuan has weakened from one Singapore dollar to 4.98 yuan a year ago to 51.6 yuan.

This will most certainly have a drag on EC World REIT’s DPU in the future. If the Chinese yuan continues to go lower, there could be further downward pressure on EC World REIT’s DPU.

Risk #2 Reliance on key tenants

Another key risk of EC World REIT is its reliance on two main tenants — Hangzhou Fu Gang Supply Chain Co and Forchn Holdings Group Co. Ltd.

The table below shows the rental contribution from the REITs ten largest tenants in 2018:

Source: EC World REIT 2018 Annual Report

From the table, you can see that the two largest tenants contributed 67.4% of the REIT’s total rental income last year.

The large reliance on these two tenants give them negotiating power against EC World REIT and also exposes the REIT to concentration risk. Should any of these two tenants fail to renew their contracts or fall into liquidity issues and are unable to pay their rent, EC World REIT will face a large fall in rental income.

Scenarios in which I might sell

As for now, I believe the returns afforded by the EC World REIT’s high yield and organic growth opportunities outweigh the currency and concentrated tenant risks. However, this could change in the future. 

Depending on China’s negotiations with the US over the trade wars, we could see the Chinese yuan weaken further against the Singapore dollar. 

I will also be keeping a close eye on its two key tenants. For now, all seems to be well, especially with Forchn Holdings signing an early renewal of its leases last year. However, if the situation changes,  I will need to reconsider my position with EC World REIT.

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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.