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Schroder European Reit looks to Netherlands and logistics

6 December 2017

Jeff O'Dwyer, new manager of Schroder European Real Estate, reveals plans to invest its €30 million cash pile to take advantage of region's rental growth.

Schroder European Real Estate (SERE), an investment trust generating a 5% yield from properties in the Continent’s ‘winning cities’, is poised to make its first acquisition in the Netherlands and is also eyeing opportunities in the highly sought-after logistics sector, according to its new fund manager Jeff O’Dwyer.

Having just stepped up to replace Tony Smedley as lead manager of the two-year-old real estate investment trust (Reit), O’Dwyer stressed that his promotion did not signal a change in direction for the £154 million fund. ‘I’ve been heavily involved since pre-launch,’ he said, ‘and had a key part in its acquisition strategy,’ he added.

But speaking after annual results showing €30 million left in the company’s acquisition chest, O’Dwyer did reveal he was looking outside the French and German office and retail sectors that currently dominate the nine-strong portfolio.

Top of the shopping list is a Dutch data centre let to a telecom company offering a long lease, a strong covenant and exposure to a sector that was ‘uncorrelated’ to its other holdings. O’Dwyer said his team were in exclusive talks with the owner and if due diligence went well, hoped to complete the deal in the first quarter of next year.

The rapid growth of online shopping in Europe is having a profound impact on commercial property, as demonstrated by the agreed merger today between shopping centre Reits Hammerson (HMSO) and Intu (INTUP) and also the proposed launch of a European logistics income trust by Aberdeen Standard.

O’Dwyer said e-commerce was creating strong demand for well-located distribution centres in cities for the ‘last mile’ delivery of goods ordered online. ‘This is a target investment sector for the company and it has an identified pipeline of assets under consideration,’ he told shareholders.

A transaction in the Netherlands would be SERE’s second outside France and Germany, having bought a shopping centre in Spain for €26.2 million in May. The company is in advanced discussions with a leisure company which it hopes will be an anchor tenant for Seville’s Metromar mall and shore up its appeal to consumers who might otherwise stay at home and shop online.

SERE has spent between €10 million (£8.8 million) and €40 million (£35 million) on its acquisitions so far which means it probably has capacity for a couple more deals before either turning to shareholders for more money or increasing its borrowings. Its current debts represent a 25% loan to value against a maximum cap of 35%.

Having raised just over £120 million from its flotation in December 2015 and a share placing two months later, SERE has said it would like to double the size of the company when the time was right. It raised a further £15 million in September last year.

The trust’s progress has been steady in the past year with net asset value (NAV) per share rising 2.4% to 133.3 euro cents (117.6p). Including quarterly dividends the total NAV return was 6%. The final dividend of 1.5 cents takes the total for the year to 4.6 cents, covered by earnings.

For investors who bought in at launch this year’s dividends represent an annual yield of 4.4% if they took them in euros or 5.3% in pounds. This compares to an original yield target of 5.5%. At today’s price of 113p, down 2p, the shares yield 4.8%.

The outlook for property was good, according to O’Dwyer, with rental growth in the right locations underpinned by Europe’s strengthening economic recovery and buying interest from European and Asian investors tempted by yields well above 10-year government bonds.

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