Valuation declines slow at Schroder European Real Estate Investment Trust

The team at Schroder European Real Estate Investment Trust (SERE) has had a busy year, securing a 3 per cent increase in EPRA earnings with rental growth offsetting the impact of higher interest rates.

The portfolio valuation declined 3.6 per cent as investor sentiment and higher interest rates weighed on the portfolio valuation. However, the decline was almost entirely weighted towards the first half of the year, with the team noting that “recent observations indicate a stabilisation in valuations”.

There are some risks in the portfolio as it has several leases coming up for renewal. One, a data centre in Apeldoorn (Netherlands), is let to KPN and Schroders and represents 18 per cent of contracted rent. When asked about the back-up plan should negotiations fail, fund manager Jeff O’Dwyer said they would speak to other data centre companies or consider selling off land for residential development for which they have zoning. “One of the big positives is that we’ve got power, and that’s becoming a scarce resource in the Netherlands,” he said.

As ever, with smaller real estate investment trusts (Reits), the question naturally turns to how they intend to eliminate their discount to net asset value (NAV). “We’re possibly looking at a small share buyback, given the discount that we have…but being a small vehicle we don’t want to do too much of that, because you’re making yourself smaller,” said O’Dwyer.

While the uncertainty around tenant negotiations does create some risk, it also leaves open the possibility for upside. It also trades at 11 times forward earnings, according to a note from Panmure Liberum. Nonetheless, we remain circumspect about the wider European economy, particularly in Germany. Hold.

Last IC view: Hold, 28 June 2023