Schroder European REIT cautious in the face of sector woes

Shares in Schroder European REIT (SERE) pulled back on release of half-year figures detailing an 11 per cent year-on-year fall in net asset value (NAV), together with accompanying news that the trust's next interim dividend is to be rebased as economic conditions bite, with management citing “the potential impact of higher interest costs on the company's earnings and more patient capital deployment strategy”.

Property values have been under pressure across Europe, a consequence of changing work patterns, geopolitical disruption and tighter monetary policy. It is now thought that this phase of the interest rate cycle will drag on longer than generally anticipated.

NAV total return came in at negative 4.7 per cent, compared with a positive 5.5 per cent in the same period in the year prior, although underlying earnings increased over 50 per cent to €3.8mn (£3.3mn). Nonetheless, the Reit still swung to an IFRS loss of €8.7mn, from a profit of €10.9mn last year.

Despite sector challenges, the dual-listed property investor portfolio increased by 4.4 per cent to €220mn, while net rental income rose to €6.9mn from €5.8mn last time around.

The Reit’s shares trading in London and Johannesburg headed in opposite directions in response to the release. The reduction of the quarterly target dividend rate to €0.0148 per quarter was never likely to play well with investors, but you could argue that it is prudent in view of sector-wide pressures, not least of which the rising cost of capital. Management can point to operational progress, as evidenced by solid rent collection, but the 26 per cent discount to NAV is by no means an outlier. Hold.  

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