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Schroder’s European Reit also sees Brexit upside

Joins the rank of its Europe peers.

Schroder European Real Estate Investment Trust (Sereit) is also expecting that the UK’s decision to leave the European Union (known as Brexit) will be a boon in the long term for the Western Europe-focused property company, as it sees an upside to leasing activity in the prime and growth towns it invests in.

Sereit has joined the growing number of offshore property companies including Germany-focused and JSE-listed Sirius Real Estate that is expecting Brexit to be an earnings fillip.

Arguably, it’s early to measure the benefit of Brexit as the UK will only map out its actual exit from the 28-member bloc from March next year when Article 50 (a law that outlines the procedure for the actual exit) is triggered.

The company’s head of Continental European investment Tony Smedley says there could be a shift of corporate tenants from the UK to continental European cities including France and Germany as a result of Brexit.

If this move materialises, it might be to the benefit of Sereit as it owns a property portfolio of seven retail and office properties in Germany and France that are worth €148.2 million (R2.2 billion at the time of writing) as of September 30.

“I don’t think it [tenants moving from the UK to other areas] is going to be an overnight transformational shift because companies don’t typically work that way,” Smedley tells Moneyweb.

Given the volatile pound and imminent changes in the tax dispensation, market watchers are anticipating UK-based businesses to move their operations to other regions.

“Tenant demand is already on the increase and rents have been rising in markets that we are invested in. Whether that is a result of the referendum, I don’t know. My suspicion is that it will take longer to see the benefits,” says Smedley.

In its maiden annual results since listing on the JSE and London Stock Exchange in December 2015, income-chasing investors were rewarded with dividend payouts of €1.7 cents per share for the year to September 30.

Sereit revealed its net asset value which stood at €157.8 million (R2.3 billion). Smedley says the company is on track to declare an annualised dividend yield of 5.5% in euros.

Scale building

During the period under review, the company acquired its first set of properties comprising of seven retail properties that are located in German towns such as Berlin, Hamburg, Stuttgart, Frankfurt and the French towns of Paris, Biarritz and Rennes. Post the reporting period it also planned to acquire an office building in Paris for €30.1 million (R438 million).

Its acquisitions have been made possible by the €166.5 million (R2.4 billion) capital it raised through its initial public offering (IPO) and two subsequent capital raises.

Smedley says the fund has identified a pipeline of assets worth more than €60 million (R873 million), as it plans to grow the property portfolio value to more than €500 million (R7.3 billion) in the next two to three years.

Working in its favour for further deals is a conservative loan-to-value of 22%, which can be raised to 35% by the board and low-interest rates in Europe. On the latter, Sereit is concluding deals on debt costs of 1.2% while average yields on properties are 5.6%.

Says Investec Asset Management sector head for property Peter Clark: “Sereit has done a good job at deploying the capital it raised at IPO and in two subsequent offerings into seven assets in Germany and France. The average investment yield of 5.6% is attractive compared to the long-term funding secured at 1.2%. However, our forecasts suggest rental growth in these markets is largely non-existent.”

In line with the offshore property stocks that have been on the back foot given the rand strength in recent months, Sereit’s stock on the local bourse has been down by 39% in the year to December 14.

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Hmmmmm – the snake oil salesman from abroad is prepared to say anything to get even more of your hard earned money. Beware!!

The SeReit portfolio consists of mediocre properties managed by mediocre managers – there is many better alternatives managed by property entrepreneurs with plenty of skin the game.

Besides – never invest in a REIT managed by corporate bureaucrats! You will only get pedestrian results.

‘Smedley says the company is on track to declare an annualised dividend yield of 5.5% in euros’

Not quite.

What their latest announcement actually says is:

‘Once fully invested, including the debt being drawn, the Company will target an annualised euro dividend yield of 5.5%, based on the euro equivalent of the issue price as at admission.’

I am still curious how achieved property yields of 5.6% less cost of debt will get them to 5.5%.

End of comments.

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