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Fund Profile

Schroder European Real Estate 08 August 2023

Disclaimer

This is a non-independent marketing communication commissioned by Schroder Investment Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
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Overview

Schroder European Real Estate (LON:SERE) is a unique diversified UK listed REIT, with a focus on commercial property in the strongest cities in Continental Europe. A key difference between European and UK commercial property is that there is often explicit inflation CPI links in lease terms in Europe, which is referred to as ‘indexation’. Approximately 80% of the portfolio income is subject to indexation leases, with the balance still having some form of annual rental increase hurdle.

SERE is managed by Jeff O’Dwyer, who oversees the practical implementation of Schroder Capital’s ‘winning cities’ strategy, which focuses on European cities with faster-than-average GDP, population, and employment growth. As a result, there is a bias towards Germany, France, and the Netherlands in the portfolio. Local implementation of the strategy relies on Schroder’s extensive network of multi-sector property experts across Europe and their operational real estate approach to ensuring a strong and sustainable relationship between owner and occupier which is increasingly key to asset performance. The team is constantly assessing ways to invest in the portfolio to enhance its sustainability credentials, which is an increasingly important factor in driving long-term rental growth.

SERE’s current dividend has been recently rebased to a fully covered basis and provides a dividend yield of c.6.3% and a more solid basis to grow the dividend in future years.

SERE has modest gearing of 23% LTV net of cash, and has a range of debt maturities from 2023 to 2027, with a significant refinancing of its main 2023 debt already completed. SERE trades on a discount of c.34% compared to its five-year average of c.20%.

Analyst's View

Rising interest rates are naturally a primary concern for investors. SERE, like almost every other REIT, has seen its valuations reduced in response to higher rates. A well-timed recent disposal has positioned SERE favourably, reducing office allocation and increased its cash position with a view to reinvesting into the portfolio to improve sustainability and asset quality together with the potential for new investments.

As we discuss in the Gearing section, SERE has a number of refinancings due over 2023/24. The first of these was successfully executed recently, with Jeff reporting that there were competitive bids from several banks given the strength of the underlying assets. The cost of debt has increased, however Jeff says that margins remain competitive for good quality real estate managed by strong specialists like Schroders. The overall rate remains attractive and below the yield on the portfolio, providing the all-important positive spread between the two.

Jeff reports that there have been no issues with tenants refusing to accept indexed rent rises as higher inflation has fed through to higher rents. This explicit link to inflation helps explain why SERE’s portfolio valuation has fallen less than the average for UK REITs. In a low inflation environment perhaps investors might have seen indexation as a somewhat hypothetical diversifier, but the last year has cast a new light on this important feature of European commercial property.

Bull

  • European diversification is backed by an extensive team of local experts
  • 80% of the portfolio has inflation-linked leases
  • Cash available to invest in the portfolio or make acquisitions at attractive prices

Bear

  • Debt refinancings are likely to result in a higher cost of debt over the next few years
  • Dividend has been rebased to 100% cover, resulting in a 20% fall
  • Gearing can amplify both negative and positive returns
Continue to Portfolio

Fund History

20 Mar 2024 Fund Analysis
SERE's high and covered dividend is arguably undervalued by a very wide discount...
08 Aug 2023 Fund Analysis
SERE: European diversification isn’t just hypothetical…
02 Jun 2023 Investing for income in a world of inflation
The attractive alternatives to cash for UK income investors...
19 May 2023 Podcast: Trust Issues #15 - Finding opportunities in European real estate, with SERE's Jeff O'Dwyer
We talk inflation, valuations, gearing negotiations and more...
30 Dec 2022 Investment Trusts: The benefit of real estate investment
Explore the diversifying benefits of UK and European real estate through Schroders Investment Trusts...
16 Dec 2022 Investment Trusts: opportunities in all market conditions
How are current market conditions impacting the Schroders investment trust range?
16 Sep 2022 Fund Analysis
SERE offers a yield of over 6% from a diversified real estate portfolio based in strong European growth cities...
31 Jan 2020 Vive la difference
Schroder European Property REIT has clear appeal for investors seeking diversification away from the UK, with a yield of 5.5% and a portfolio positioned for growth...
26 Feb 2019 A property fund with a difference
Schroder European Real Estate Investment Trust offers a yield of 5.9% and - unlike most funds of its type - has zero exposure to Brexit sensitive UK commercial property, yet it trades on a significant discount...
07 Mar 2017 A challenge of perception
Asian Total Return Investment Company chairman David Brief says the trust's total return focus is misunderstood by many investors....
02 Feb 2017 Fund Analysis
A route to income diversification not correlated to traditional equity income sources, which could benefit from Brexit...
View all

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