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Hard Brexit doesn’t scare Schroder European Real Estate

4 December 2018

‘The cities that will be winners from a hard Brexit are Berlin, Paris, Amsterdam and Dublin, and we have exposure to them,’ says fund manager Jeff O’Dwyer as three-year-old investment trust nears full deployment and achieves its dividend target.

Schroder European Real Estate (SERE) is just €15 million (£13.4 million) away from full investment, which fund manager Jeff O’Dwyer hopes will trigger a narrowing in the trust’s discount.

Shares in the £150 million real estate investment trust (Reit) trade 13% below net asset value (NAV) which means the growth in the portfolio has not been fully passed to shareholders over the past three years. In its financial year to 30 September, which it reported on yesterday, SERE delivered a total return on net assets of 7.5%, up from 6% the year before.

A 42% increase in dividends to 7.4 cents per share meant the euro-denominated trust achieved the 5.5% yield target set at launch in December 2015. The payouts were covered by earnings. At the current share price of 111.75p it offers a 6% yield.

O’Dwyer said the wide discount has been due to the ‘penalty’ of ‘not being fully invested’ but after a number of acquisitions this year the listed fund was close to full deployment.

‘We are closer to full investment today,’ he said. ‘These results will help show a stronger appetite for the trust.’

The past year has seen O’Dwyer hunt down industrial properties to invest in, and after selling two retail assets in France for €44.8 million – a €4.9 million premium – the money was reinvested in five new buildings, mostly consisting of industrial warehouses.

He purchased one data centre in the Netherlands, one warehouse in the same country, and three warehouses in France for a total of €52 million and a net average income yield of 8%. The purchases have brought the weighting to the industrial warehouse sector to 13% but O’Dwyer has not finished yet.

The trust is in exclusive talks on another French warehouse that will take the exposure to 20%, which is ‘a weight we are comfortable with’, he said.

Selling out of retail and buying into industrials has been the game plan for a number of Reits over the past few years, as the rise of e-commerce has seen demand for ‘last mile’ delivery warehouses increase and a corresponding decline in high street footfall.

However, O’Dwyer believes he has found an advantage in this increasingly crowded market, by targeting smaller warehouses which are ‘below the radar of the larger investors’.

He said smaller warehouses offer ‘6-7% net initial yield, which is attractive given large units sell at a yield of sub-4.5%’.

‘We feel the smaller lots are better value from a yield perspective and having smaller warehouses in last mile conurbations is appealing because not everyone needs a big warehouse,’ said O’Dwyer.

‘They’re not always looking for 150,000 square meters, and big isn’t always best.’

He added that prime logistics rents are likely to increase ‘with growth typically running around 2% a year’.

Although O’Dwyer has sold two retail assets, he is still interested in the sector. ‘Retail, it’s a dirty word in the UK but that is unfair and it will still perform well in some cases,’ he said.

‘We like convenience and supermarket retail – we like it when it serves urban areas or dominant shopping centres that have entertainment or leisure…There are specific problems in the UK but they have not felt as much pain in Europe.’

The permeation of online shopping isn’t as great in Europe as it is in the UK, with e-commerce accounting for 20% of shopping sales in the UK but just 10% in France, 5% in Spain, and 3% in Italy. ‘The same friction isn’t there,’ he said.

Problems on the high street may not be investors’ biggest concern when investing in Europe, with Brexit and a slowdown in China affecting the outlook for the region but O’Dwyer isn’t concerned by either.

‘The cities that will be winners from a hard Brexit are Berlin, Paris, Amsterdam and Dublin, and we have exposure to them,’ he said.

While he said there would be a slowdown in Europe, it is a region of ‘500 million people and there is still a lot of confidence’.

‘Eurozone economic growth will slow, albeit slightly, to 1.75-2% through the rest of the year, and 2019 given slower growth in major economies across the world,’ he said. But he added that consumer spending remains underpinned by increased employment and rising real wages.

Investment company news brought to you by Citywire Financial Publishers Limited.

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