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Schroders builds cash ahead of ‘obsolete’ high street crash

21 May 2019

Schroder Real Estate Investment Trust has cut debt, exited a series of properties and banked cash as it looks for opportunities to 'reinvest opportunistically' following a commercial property crash.

Schroder Real Estate Investment Trust (SREI ) has cut debt, exited a series of properties and banked cash as it looks ahead to opportunities to 'reinvest opportunistically' following a commercial property crash.

The managers of the £358 million listed commercial property fund said they had a total of £80 million in capital on hand, with an undrawn credit facility accounting for £52 million of that total, up from £25 million a year ago. That suggests the portfolio is approaching 10% of assets in cash.

The trust disposed of £50 million in sales last year, with just £21.8 million of that reinvested in the period.

Chair Lorraine Baldry said: ‘A combination of cash and undrawn revolving credit facilities provides an opportunity to reinvest following a market correction at higher yields.  This places the company in a strong situation.

‘Outside of the retail sector, however, we would expect the extent of any valuation declines to be mitigated by limited new development, lower debt levels than past cycles and supportive monetary policy.’

The fund has also reduced its loan to value to around 22% net of cash, versus 29% last September.

Co-manager of the trust and global head of real estate at Schroders Duncan Owen said some sub-sectors with significantly stronger long-term prospects were likely to be hit by a general fall in liquidity.

‘The UK real estate market cycle has remained positive for an unusually long period since 2009,’ he said.

‘It is now, however, experiencing falling values in some sectors especially in City of London office and retail sectors. There is significant polarisation between the relative performance of different sectors due to factors including political risk and long-term structural shifts such as urbanisation and consumer behaviour impacting occupational demand.

‘The UK’s regional office markets have remained more resilient due to a greater proportion on domestic demand. This is reflected in higher total returns for the year of 6.8%, compared with central London offices which returned 5%.’

He added that high profile failures and increasing use of lease restructuring were likely to lead to major write-off in retail properties. But this would also hide significant underlying disparities.

‘During the year approximately 2,500 units were affected by retailer administrations or CVAs which has led to falling rents and a negative average total return for the year of -3.2%.

‘Although some retail assets are functionally obsolete and values will fall across the sector, parts will stabilise and recover. We favour convenient retail locations let at affordable rents, with good transport infrastructure and serving robust local economies.’

Over the year to 31 March SREI made a 4.5% total return on net assets although the underlying property portfolio did better, returning 7.2% versus an IPD benchmark of 5.2%.

Adjusted EPRA earnings per share of 2.9p covered quarterly dividends totalling 2.53p per share.

The shares, up 0.24p at 58.24p today, stand on a discount of 13% below net asset value per share of 68.7p and offer a prospective yield 4.5%. 


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