Investment Trusts

Focused opportunities in continental European real estate

Investors are increasingly turning to real estate to gain exposure to real assets that produce an attractive income return as well as the potential for capital growth. The new Schroder European Real Estate Investment Trust offers investors access to the dynamic continental European real estate markets, as well as the extensive experience of a dedicated investment team based in the target markets, led by Tony Smedley at Schroder Real Estate Investment Management (REIM).

2 March 2016

Tony Smedley

Tony Smedley

Head of Continental European Investment

The Schroder European Real Estate Investment Trust launched on 9 December 2015 targeting investment opportunities in continental European cities with large, liquid real estate markets that offer superior growth potential. It aims to provide investors with an attractive income return and the potential for capital growth through investment in a diversified portfolio of institutional grade income-producing real estate assets. It will invest primarily in the traditional real estate sectors of office, retail and logistics but may also consider investment in “mixed use” assets and “alternatives” which include residential, student, hotel or care accommodation.

A highly experienced real estate manager leading a well-resourced team

Schroder REIM comprises over 110 real estate professionals located in important hubs across Europe, including London, Paris, Frankfurt and Zurich. With experienced teams in key locations, the team is well positioned to capitalise on real estate market inefficiencies, sourcing attractive investments and actively managing assets to enhance value. The Trust is managed by Tony Smedley, who has over 25 years of real estate experience and has lived and worked in Continental Europe for most of his career. Tony is a member of the Schroder Real Estate Investment Committee and is responsible for investment and fund management across all of Schroders’ continental European real estate funds.

We caught up with the Schroder Real Estate Team to find out why now is a good time to invest in continental European real estate.

An interesting entry point

As the economic recovery progresses, the team is beginning to see increased demand for space in Europe’s largest and most dynamic cities. Coupled with limited supply, this is leading to improved rental growth prospects in certain parts of the market.

The team explains that many local real estate markets across Europe are beginning to recover from a low point in their rental cycles. There has been a prolonged period of economic uncertainty. Banks have been unwilling to provide development finance and the focus has been on residential development or conversions. A gradual improvement in demand for offices is therefore likely to lead to shortages of good quality accommodation in key markets, boosting rental growth prospects.

Over the past couple of months there have also been signs of improvement in the labour market and a strong recovery in consumer spending supported by low inflation and energy prices, which are benefitting the retail sector.

The fact that the economic recovery across the region is not uniform provides the opportunity to access markets at slightly different points in their economic and real estate cycles.

Of course there are risks to consider. For example, strong investor demand could trigger a sharper fall in yields and higher total returns in 2016 than we anticipate, although that would probably be at the expense of weaker returns in 2018-2019. Another risk is that an external shock forces the European Central Bank to abandon its policy of quantitative easing and raise interest rates, which in turn would reduce economic growth and depress occupier and investor demand for real estate.

As with all investments, it is important to note that the value of the capital invested, and the income from it, can go down as well as up and investors may not get back the amount originally invested. A financial adviser is well placed to help investors figure out the right level of risk for their situation.

Focused on the most attractive opportunities

As a general rule, Schroder REIM is targeting large, liquid cities whose growth prospects exceed those of their domestic economies. A new wave of urbanisation will continue to draw young, talented people to these centres along with companies seeking to attract and retain a highly-skilled workforce.

Schroders’ team is however convinced that it’s not just important to be in the right city, you need to focus on being in the right location or sub-market.

As such, the team favours locations where people want to live as well as work and where there are competing demands for different uses. They also find interesting opportunities in areas with new or improved infrastructure.

Within the office sector, the team is biased towards cities with strong economic fundamentals, with growing occupier demand and constrained supply. Their preferred cities include Berlin, Hamburg, Munich, Stuttgart, Paris, Brussels, Stockholm, Madrid and Barcelona.

In industrial real estate, the team favours modern warehouses and parcel delivery centres in urban areas that are relatively supply constrained and that benefit from good transport links.

In retail the team is focused on sub-sectors which are relatively immune to e-commerce and those which are a key part of multi-channel retailing.

“We favour convenience stores and supermarkets in affluent neighbourhoods and would generally avoid large hypermarkets,” Tony says. “We also consider flagship stores and high street units in core city centre locations and at the other end of the spectrum, large, dominant shopping centres.”

Diversification benefits for UK real estate investors

Schroder REIM doesn’t believe the Trust should be viewed as a replacement for UK real estate exposure but sees the two as complimentary.

They explain that Continental European markets typically follow a different economic and real estate cycle to the UK. This provides an opportunity for investors to diversify risk and benefit from the return prospects generated at different points in a market cycle. Investing in continental Europe also provides investors with greater choice and the potential for a better diversified allocation to different types of real estate in key investment markets.

The structure of leases is another key difference between the UK and continental Europe. Most leases in Continental Europe are linked to inflation rather than following the typical rent review mechanism commonly associated with the UK market. Linking to inflation provides support to the income return, with rents being adjusted to market at the time of a lease break or expiry.

To summarise the benefits of the fund, Tony concludes, “The Schroder European Real Estate Investment Trust provides liquid access to key continental European real estate markets with a focus on growth cities. Investors could stand to benefit from the expertise of a well-established team with strong local expertise. This attractive opportunity enabled the Trust to raise £107.5 million* in the initial placing to fund the portfolio.”

As with all investments, it is important to note that the value of the capital invested, and the income from it, can go down as well as up and investors may not get back the amount originally invested. A financial adviser is well placed to help investors figure out the right level of risk for their situation.

Schroders launched its first investment trust in 1924 and their range provides investors with access to a range of nine distinctive investment opportunities including: UK and Japanese equities, Pan-Asian equities and real estate.

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What are the risks?

  • Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
  • Companies which invest in a smaller number of assets carry more risk than those spread across a larger number of assets.
  • The Company may invest solely in property located in one country or region. This can carry more risk than investments spread over a number of countries or regions.
  • The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the assets purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
  • The fund holds investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall.
  • The dividend yield is an estimate and is not guaranteed.

*Source Schroders as at December 2015.

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