Schroder Real Estate (SREI)
12/06/2024
Results analysis from Kepler Trust
Intelligence
Schroder Real Estate's (SREI)
final results to 31/03/2024 saw a positive NAV total return of
1.1%. The components of this positive total return were an
increased 3.34pps dividend (+4%) and NAV decline of 2.7p (-4.4%) to
58.8p. SREI has outperformed the benchmark on a rolling three-year
basis with a 5.5% per annum total return compared to the
benchmark's 0.8% per annum.
Schroder Real Estate (SREI)
and its closest peers continue to trade on wide discounts to NAV,
in SREI's case c. 26%, which may be a signal that investors are
happy to sit on the fence until a rate cut actually comes, unsure
of whether property assets really are at attractive valuations. Two
things strike us, the first is that SREI's net initial yield is
about 200bp higher than 10-year gilts, and the estimated rental
value (ERV), 8.4%, is clearly much higher than that. The spread
between property yields and the 10-year gilt is an age-old rule of
thumb for property investors, with 200bps often seen as the 'right'
number. Earlier on in the interest rate cycle, our analysis
suggested that UK REITs share prices were actually at about the
right level, as opposed to being undervalued, compared to gilts at
the time, but this calculation has shifted now, with SREI's yield
at NAV now being at the 'right' level, and therefore one can
suggest, based on long-established convention, that the share
price, a discount of 26% to the NAV, and the dividend yield of over
8%, undervalues the portfolio. The second thing that strikes us is
that SREI's portfolio valuation levelled off in the final quarter
of the year, and while one must of course treat this as just one
small datapoint, it's interesting that it occurred just as the net
initial yield reached our so-called 'right'
level.
SREI's adoption of specific
sustainability criteria, overwhelmingly approved by shareholders in
December 2023, is based on a pragmatic assessment that buildings
that can demonstrate higher sustainability performance are very
likely to generate higher rent, and thus higher returns for
shareholders. The team has already completed a number of asset
management initiatives where capital expenditure on upgrades has
been exceeded by increases in rental income, and by adopting a
strategy of improving existing assets rather than simply purchasing
a portfolio of sustainable buildings, the trust's entry price is
likely to be much lower. While ESG mandates more widely, for
example ESG equity funds, remain somewhat polarizing, within real
estate the focus on the sustainability performance of buildings is
far more mainstream even among investors that haven't adopted
formal targets such as SREI, so in our view the adoption of the
formal policy should widen the appeal of SREI rather than restrict
it to investors with their own specific ESG
goals.
Overall, SREI has generated
further rental growth, has an attractive net initial and
reversionary yield compared to government bonds, more so when
measured at the share price discount of 26% and a strategy of
adopting sustainability performance as a key part of asset
management, ahead of the peer group, at a point when in our view
such a strategy will only become more mainstream over the next few
years.
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