Schroder Real Estate Investment Trust see 48% increase in profits – Schroder Real Estate Investment Trust (SREI) use the headline “winning cities focus and asset management driving outperformance” for the full year results for the year ended 31 March 2018.
The company’s NAV rose by 6.4% and delivered a NAV total return of 10.5%. It outperformed the MSCI peer group benchmark.
This performance was driven by the asset management activity of the investment management team. This activity has improved the portfolio’s defensive qualities and contributed to income growth above the benchmark.
Lorraine Baldry, the chairman of the company reported that average UK real estate values have remained robust despite continued political and economic uncertainty, largely supported by an attractive yield premium compared with other asset classes. She went on to say that, whilst capital growth is likely to slow in response to a cyclical slowdown and rising interest rates, structural changes are arguably having a greater impact and will lead to increased polarisation of returns across the real estate market.
Highlights
- Sustained real estate outperformance of 1.0% over the MSCI/IPD Benchmark over the past 12 months, 2.3% p.a. over 3 years and 1.4% p.a. since IPO in July 2004
- NAV total return of 10.5% for the year to March 2018
- Increased dividend cover of 109% for the year to March 2018
- 93% of the Company’s portfolio located in Winning Cities
- Positive weighting to office and industrial sectors of 64%
- No City of London or shopping centre exposure
- Low loan-to-value of 25.3% on long-term debt
Winning Cities and Regions strategy
The company’s objective is to own a portfolio of larger properties in Winning Cities and Regions with high growth diversified local economies, sustainable occupational demand and favourable supply and demand characteristics. These properties should offer good long-term fundamentals in terms of location and specification and be let at affordable rents with the potential for income and capital growth from good stock selection and asset management.
Real estate portfolio
The company’s real estate portfolio has outperformed the MSCI/IPD Benchmark by 1.0% in the year to March 2018.
As at 31 March 2018 the real estate portfolio comprised 44 properties valued at £477.5 million. This includes the share of joint venture properties at City Tower in Manchester and Store Street in Bloomsbury, London.
The portfolio produces a rental income of £27.1 million per annum, reflecting a net initial income yield of 5.3%. The portfolio also benefits from fixed contractual annual rental uplifts of £2.7 million by March 2020, and Other Income from items such as lease surrenders which totalled £1.5 million in the year to 31 March 2018. The independent valuers’ estimate that the current rental value of the portfolio is £33.6 million per annum, reflecting a reversionary income yield of 7.0%, which compares favourably with the MSCI/IPD Benchmark at 5.7%.
Over the course of the financial year, the company sold properties including Riverside West, Sheffield at significant premiums to the valuation. A priority for the next financial year will be to invest in properties with strong fundamentals in Winning Cities and Regions to support further net income growth. The company has cash for investment and whilst being selective it is proactively seeking value-added opportunities.
Outlook
“Ongoing political, economic and structural change means UK real estate investment requires a disciplined approach at this point in the cycle. There will, however, be opportunities to grow net income and improve the defensive characteristics of the portfolio.
The Company has consistently focused on fundamentals and its total return by growing net income. In the current environment this will be important. The underlying real estate portfolio has now outperformed its Benchmark over the long term by 1.4% per annum since its IPO in 2004.
Over the next twelve months we have budgeted for approximately £10 million of capital expenditure on our existing portfolio in areas which will generate attractive income returns. Similar returns cannot easily be identified in a competitive investment market. In addition, we have identified a number of significant opportunities which have the ability to increase net income and improve the defensive characteristics of the Company. These actions will be prioritised.”