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Fund Profile

Schroder European Real Estate 20 March 2024

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
SERE's high and covered dividend is arguably undervalued by a very wide discount...
Overview

Schroder European Real Estate (SERE) is a diversified REIT focussing on European commercial property with an emphasis on 'winning cities’ in Europe. Manager Jeff O'Dwyer says it's not enough to focus generically on winning cities though, and a clear understanding of location is required, be it proximity to the right junction of a major road, a commuter transport hub, supply-constrained, or a location with strong alternative use potential. With over 200 professionals in local offices across Europe, the management team is very well-placed to assess each asset in ways that might not be obvious from a desk in London.

SERE is managed by Jeff O’Dwyer, who oversees the practical implementation of Schroder Capital’s ‘winning cities’ strategy, which focusses 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.

A key difference between European and UK commercial property is that there are often explicit inflation links via CPI in lease terms in Europe, which is referred to as ‘indexation’. SERE's portfolio is 100% exposed to some form of local indexation, and Jeff reports that even at higher inflation rates, indexed rents have all been accepted by tenants. SERE's dividend yield of 6.3% is fully covered, following a rebasing of the dividend in 2023.

SERE has modest gearing of 24% LTV net of cash and completed a number of refinancings against specific assets on good terms in 2023, maintaining the positive carry between property yield and interest cost. The trust has c. €26m of cash available either for earnings accretive acquisitions or upgrades to the existing portfolio. At the time of writing SERE trades on a discount of c. 36% compared to its five-year average of c. 20%.

Analyst's View

One of the issues on investors’ minds in the last year or two has been debt refinancing, particularly when it comes to REITs. SERE executed a number of refinancings over that period, and as we discuss in the Gearing section, the terms have been favourable and despite higher absolute costs, spreads have reduced and the positive carry between debt costs and property yield remains in place. With the dividend now rebased to a fully covered position, and leases in the portfolio 100% indexed against local inflation, SERE is well-positioned. In addition, it has retained c. €26m of cash and commenced sustainability audits across the majority of the portfolio to assess ways to invest in and improve asset quality. This will assist in growing earnings and enhance liquidity to occupiers, lenders, and investors.

With €26m of cash, SERE has the capacity for further acquisitions or capex on the current portfolio. The manager believes there is a significant ‘green premium’ to be earned through upgrading buildings, which can lead to higher occupancy and rents. Although SERE doesn’t explicitly follow an ESG strategy, Jeff says that the benefits of higher ESG scores are measurable, and paying attention to detail in this area is something the manager is very well-resourced to do. With modest gearing and a covered dividend, SERE’s discount at the time of writing of c. 36% is wide compared to UK equivalent REITs and we think it could perform very well in a recovery scenario for European property.

Bull

  • SERE trades on a wide discount compared to UK equivalents
  • Dividend is fully covered
  • Strong balance sheet, limited leverage and €26m of cash available to grow earnings and improve portfolio quality

Bear

  • European economic outlook remains weak
  • One asset is notably over-rented (by c.50%) with remaining assets leased at market
  • Leverage can amplify losses as well as gains
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...
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