Is it time to leave London? That's the big question in the commercial property industry, after a schizophrenic rebound that has buoyed values in the capital and depressed office and shop values elsewhere. If it is, shares in Schroder Real Estate Investment Trust (SREI) is a good way to play the eventual recovery in the provinces.
- Regional property high-yielding
- 18 per cent discount to net asset value
- Paying down debt
- Clear recovery plan
- Provincial property values still falling
- Uncovered dividends
Investors should be under no illusions: the regional waters in which Schroder Reit fishes are murky. The IPD benchmark for property values outside London fell 5.8 per cent last year. Retailers are shrinking their store portfolios, and few businesses are expanding. Where deals are done, they suggest that rents continue to fall.
Yet the bottom must be close. Property values have halved from their 2007 peaks in many towns, pushing rental yields to unprecedented levels. Many regional offices are now valued at about half their construction cost and the "more adventurous institutions" are looking for regional deals, says Toby Courtauld of Great Portland Estates, a pure London player.
When the recovery spreads beyond the M25, it may be patchy, favouring well-managed property in better locations. That's why it makes sense to buy Schroder Reit, which has outperformed the market despite its nondescript portfolio: offices in Brighton and Uxbridge, a business park in Brentford, a long tail of high-street shops. Over the nine months to 30 September, the latest full data available, the company’s portfolio produced a total return (income plus capital) of 3 per cent, compared with 1.2 per cent for the IPD index.
| SCHRODER REAL ESTATE INVESTMENT TRUST (SREI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 38p | MARKET VALUE: | £135m | |
| TOUCH: | 37.5-38p | 12-MONTH HIGH: | 42p | LOW: 32p |
| DIVIDEND YIELD: | 9.3% | TRADING PROP: | nil | |
| DISCOUNT TO NAV: | see text | |||
| INVESTMENT PROP: | £263m | NET DEBT: | 49% | |
| Year to 31 Mar | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 107.8 | -89.6 | -25.3 | 6.75 |
| 2009 | 43.8 | -183.9 | -55.0 | 4.33 |
| 2010 | 52.4 | 36.0 | 10.7 | 3.52 |
| 2011 | 50.9 | 11.1 | 3.0 | 3.52 |
| 2012 | 50.6 | 12.1 | 3.1 | 3.52 |
| % change | -1 | +9 | +3 | nil |
Normal market size: 7,000 Matched bargain trading Beta: 0.4 | ||||
That's partly because the portfolio is lighter on shops and heavier on the south-east than the index. But the approach of the fund's manager, Duncan Owen, has probably helped. He aims to sell an asset he would no longer buy, which explains a run of recent disposals. The most notable of these is Minerva House, an office building near the Shard at London Bridge. "When an area's trendy, it's time to get out," he explains.
He is using the proceeds to pay down debt ahead of the expiry of a £36.8m loan in July 2014. This involves incurring break costs and crystallising losses on interest-rate swaps. Yet it puts Schroder Reit in a strong position to refinance at attractive rates because its net loan-to-value ratio is now just 31 per cent. In addition, because the rental yields on properties sold were less than the company's interest costs, selling property to pay back debt has boosted earnings and the trust's inadequate dividend cover. Like most property investment trusts, Schroder Reit has been reluctant to cut its dividends even further, so payouts are funded partly from cash reserves, compounding the downward pressure of falling property prices on net asset value.
