QuotedData recently attended an investor property tour with Schroder Real Estate Investment Trust (SREI) and here we delve into the detail behind some of the group’s biggest assets. The tour took in three of the fund’s assets and the company revealed the strategies it has adopted to date and future asset management initiatives for the schemes.
The tour comprised site visits to SREI’s Stacey Bushes industrial estate in Milton Keynes, the St John’s Retail Park in Bedford and its Bloomsbury property in central London, which is currently let to a university. In attendance were chairman Duncan Owen, head of UK investment Nick Montgomery and investment manager Frank Sanderson as well as a handful of asset managers.
Stacey Bushes
The Stacey Bushes industrial estate is one of the best performing assets in SREI’s £460m portfolio, achieving sustained rental growth and big capital value uplifts. The estate, which has benefited from its location in the supply-starved market of Milton Keynes, is made up of 42 multi-let industrial units totalling 345,000 sq ft of space and is fully let.
In the 12 months to the end of June 2019, the asset recorded an 18.0% total return, comprising an income return of 5.5% and a capital return of 11.9%.
SREI bought the estate in 2014 for £9.2m and shortly after acquired the adjoining Heathfield Industrial Estate for £5.1m (both estates are now referred to as Stacey Bushes). In total, including asset management initiatives, SREI has spent around £17m and the latest valuation of the combined estate stands at £37.7m, reflecting a 5.1% net initial yield.
One obvious strategy open to SREI is selling the asset and crystallising the significant value uplift. The management team, however, believes that it can extract further rental growth from the estate. Rents on the Heathfield part of the asset, which are smaller units and therefore attract a higher rent, have hit £10/sq ft. Overall, the wider estate has an average rent of £6/sq ft – more than 60% up on the £3.67/sq ft average when it acquired the two assets less than five years ago. It takes confidence from the severe lack of supply in the region coupled with the fact that there is no development activity in the Milton Keynes area. SREI said it was important to have short-term leases across the estate to drive further rental growth by relocating tenants at the end of their lease and re-letting the unit at improved rents. It is currently in discussions with one of its tenants to surrender its lease on a unit where it believes it can achieve a 20% uplift on the current rent.
SREI is also pressing ahead with the development of six new units on surplus land behind the current Heathfield estate. The land had no apportioned value when it bought the site, and so is a bit of a gift for the company. It will build 15,441 sq ft of space across the six units and is targeting a rent of £12/sq ft or £185,292 a year and a completion date of June 2020. It will cost SREI £3m in total building costs, equating to a healthy 15% profit on cost.
The company said it would love to do more new development on the estate and is in active discussions with adjacent landowners to acquire parcels of land.
St John’s Retail Park
It is no surprise that retail has caused SREI its biggest headache recently. Its St John’s Retail Park asset in Bedford is the biggest retail asset in its portfolio (with retail making up 24.5% of its wider portfolio by value). The asset produced a total return over a 12-month period to the end of June 2019 of -9.1%, comprising an income return of 5.2% and a capital return of -13.6%.
SREI was left with a big void in the park when Homebase executed a company voluntary arrangement (CVA) in December 2018 and announced that the 36,214 sq ft unit would close immediately. It has recently signed leases with Lidl and Home Bargains, that will see it split the store with Lidl taking 21,630 sq ft and Home Bargains 13,950 sq ft. The headline rents agreed with the two new retailers is far superior to the original lease with Homebase.
Lidl will pay £335,000 a year (or £15.50/sq ft) for its unit, while Home Bargains will pay £190,000 a year (or £13.62/sq ft). Homebase had been paying a rent of £353,000 a year (or £9.75/sq ft). The leases also come with rent reviews every five years, with Lidl agreeing to reviews in line with CPI capped at 2% and Home Bargains agreeing to upwards only rent reviews.
The lease agreements are conditional on SREI carrying out refurbishment works, which it has commenced and is targeting an opening for trade of Q2 2020. SREI estimated these works will cost it £3.7m, with the end value of the property being £10.25m. It has also conceded incentives to get the two new tenants, to the tune of £510,000.
The park has also been hit with the closure of a Mothercare unit, which has a rental value of £176,000 a year and has been vacant for 15 months, and SREI is also seeking alternative occupiers for a smaller unit currently occupied by Majestic Wines but is likely to close. A third vacant unit, a standalone building formerly let to Maplin Electronics, is being marketed as a potential drive-thru restaurant.
Ongoing asset management initiatives at the park also include a rent review with Costa Coffee at a 17% uplift, an agreement with Currys PC World to remove a break clause in 2021 and extend the term to 2029 in return for six months’ rent free, and discussions with Wren Kitchens about a re-gear ahead of an October 2020 expiry.
SREI’s management team said that despite the ongoing troubles in the retail sector, the retail park was in a strong position with the Lidl store expected to have a material impact on footfall and encourage more retailers to the park once it opens in the second quarter next year. They also said that the park is let on sustainable rents of around £18/sq ft, which compares favourably to competing retail parks in the area that are overrented at around £40/sq ft.
Store Street, Bloomsbury
The final stop on SREI’s property tour was at its asset on Store Street, in Bloomsbury, in London’s West End, which it owns in partnership with an unlisted Schroder fund. The asset comprises two adjacent buildings totalling 85,000 sq ft that are let to the University of Law until 2026. The tenant is a strong covenant with the majority of the higher education’s students being sponsored by the big UK law firms.
The University of Law is currently paying a rent equating to around £34/sq ft; however a rent review is due in December this year that is linked to the higher of RPI or open market value. The current rental value of the asset is around £50/sq ft or £3.8m.
SREI’s 50% stake in the asset is valued at £36.5m, reflecting a net initial yield of 3.7%. The asset produced a total return in the 12 months to June 2019 of 4.8% comprising an income return of 4.0% and a capital return of 0.8%.
The management team believe that the Bloomsbury area of London is the next big growth district in the capital and is flooded with development opportunities. It is located close to the Tottenham Court Road Crossrail station as well as several office headquarter buildings including Facebook’s new 247,000 sq ft office in Rathbone Square. The Tottenham Court Road area has witnessed a bit of a renaissance in recent years with several multinational companies moving to the area and retailers on Oxford Street heading further east away from Oxford Circus.
In the medium-term, SREI is looking at redeveloping the site, which could incorporate many different uses, including offices and residential. The buildings are low rise and have a low site coverage of 68%, making it a prime redevelopment opportunity. SREI is in active discussions with adjoining owners regarding wider site assembly. It has also carried out initial planning, rights of light and massing studies. Once SREI gets planning permission in place for a new scheme, the site will be worth more as a development site than an investment asset and it may look to cash in and sell it before undertaking the development risk. It could also bring in a development partner to share the risk.
SREI today confirmed the details of the refinancing of long-term debt that will see its dividend jump 19%. The company has paid a break fee of £25.8m to extend the £129.6m fixed rate loan with Canada Life Investment from 8.5 year to 16.5 years and reduced the total interest rate paid from 4.4% to 2.5% a year. The £2.5m a year interest saving will be ploughed into dividends, increasing the annual dividend to £16.0m equating to an increase of 19%. It has paid the break fee from cash reserves that it has built up through recent sales. The results of the refinancing will be attractive to new investors, especially with the company trading at a 17% discount. The company has a strong and experienced management team in place and is working through some asset management initiatives that should increase income over time.
SREI : QuotedData takes a closer look at Schroder REIT