Schroder European Real Estate's NAV declines amid 'unprecedented' backdrop

140.8 cents per share

Eve Maddock-Jones
clock • 2 min read
In the reporting period it completed 14 new leases across three Western European countries in cities including Paris, Berlin, Frankfurt, Hamburg and Stuttgart.
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In the reporting period it completed 14 new leases across three Western European countries in cities including Paris, Berlin, Frankfurt, Hamburg and Stuttgart.

The Schroder European Real Estate investment trust reported muted results for 2022 as it struggled to overcome a tough property market.

In its full year results for the year ended 30 September 2022, the management of the trust revealed its net asset value per ordinary share was 140.8 cents at the end of the year, down 5.8% on 2021's results of 149.2 cents per share.

This reflects the payment of €12.8m in special dividends, which was caused by the "exceptional asset management profits from the Paris BB repositioning", excluding which the NAV would have increased by 0.75%.

Combined with the portfolio's capital growth, the NAV total return was 7.3% for the year, which management said had been driven by valuation uplifts in the industrial and DIY portfolio.

The trust invests in commercial real estate in continental Europe. During the reporting period, it completed 14 new leases across three Western European countries in cities including Paris, Berlin, Frankfurt, Hamburg and Stuttgart.

Additionally, the industrial exposure increased to 26%, focusing on supply constrained sub-markets in France and the Netherlands.

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Most of the retail exposure is in grocery and DIY, both segments the management said have benefited from "strong underlying fundamentals, underpinning robust performance".

In the report, chair Julian Berney said a "key benefit of the strategy" was the concentration of assets in highly accessible locations, with competing demands for uses and leased off affordable rents.

He said: "Given the current pressures facing occupiers, particularly around inflation, labour and operating costs, we expect affordability to be an increasingly key factor in tenants' occupational decisions.

"In addition, modest rents allow for the ability to feasibly reposition investments, improving sustainability and certification."

He also highlighted the strength of not being tied to the UK and its "inflation-linked indexation".

Despite the optimism the management recognised the difficult macroeconomic background facing markets generally. Indeed the managers called it an "unprecedented backdrop".

They said: "The pricing of real estate and risk during the latter part of 2021 was biased towards the underwriting of ESG and Covid-19 impacts.

"Today, these risks remain but have been somewhat overshadowed by recessionary concerns, inflation, cost and availability of debt and the Ukrainian crisis."

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Consensus forecast is for eurozone GDP to fall over the next nine months with minimal growth over 2024 to 25.

In addition, the latest consensus forecast for October 2022 now expects eurozone inflation of 8.3% over 2022, 5.8% in 2023 and a return to a more manageable level of circa 2% for the medium term thereafter.

They said a benefit of European leases is the inflationary hedge characteristics as a result of rental indexation being linked to annual movements in the consumer price index, taking some of the sting out of the outlook.

The trust is currently trading on a 36.8% discount, according to the Association of Investment Companies.

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