Trust CommentarySchroder Real Estate Investment Trust
Chairman's Outlook - November 2023
The UK has so far avoided recession, with measures of consumer and business confidence improving over the period, and consumer prices now rising more slowly than wages. Whilst the impact of higher interest rates will increasingly be felt by consumers refinancing mortgages, this will be offset, at least in the short term, by factors including cost-of-living grant payments and public sector pay deals. The economic outlook should also improve as the headline rate of Consumer Price Index (‘CPI’) inflation falls over 2024. The latest producer output data points to falls in food, core goods and energy prices, with markets expecting CPI to be between 3% and 4% by mid-2024, still above the Bank of England’s target of 2%.
Whilst labour market strength and longer term structural factors, such as the investment required to decarbonise the economy, mean that the 2% target may not be achievable on a sustainable basis, a slowdown in price and wage growth should mean interest rates are at, or close to, their peak, with the potential for easing during 2024. Market expectations that interest rates are peaking will also be key to a recovery in sentiment towards real estate, with current transaction volumes 50% below 2022 levels. These volumes also reflect the high cost of hedged bank debt, and borrowers experiencing a sharp rise in interest cost when refinancing. Although leverage in the UK real estate market is low compared with past cycles, bank-led disposals and redemptions in some open-ended funds could weigh on a recovery in values during 2024. The Company is well positioned in this respect with a long-term, low-cost, debt profile.
There are early signs that the recent volatile period of historically high inflation and interest rates may be easing, but risks remain due to a fragile economy and geopolitical uncertainty. Whilst an easing in monetary policy rates should provide support to real estate values in 2024, there will be no return to the ultra-low rates of the past 15 years. Consequently, future returns will be led by income and rental growth, driven by long-term structural trends such as urbanisation, technological change, demographics and sustainability. Although the short-term outlook clearly remains uncertain, prudent steps taken by the Manager to secure low cost, long-term debt for the Company, and increase exposure to higher growth sectors, means the Company is well positioned to deliver on its investment objective and provide a progressive dividend over time.
What are the risks?
Investments in real estate are relatively illiquid and more difficult to realise than equities or bonds.
Yields may vary and are not guaranteed.
The use of gearing is likely to lead to volatility in the Net Asset Value ("NAV") meaning that a relatively small movement either down or up in the value of the Company's total assets will result in a magnified movement in the same direction of that NAV.
There is no guarantee that the market price of shares in a UK Real Estate Investment Trust such as SREIT will fully reflect their underlying NAV.
The value of real estate is a matter of a valuer's opinion rather than fact.
This UK Real Estate Investment Trust should be considered only as part of a balanced portfolio, of which it should not form a disproportionate part.