It’s taken a long time (and many euros) but Europe is now clearly enjoying an economic recovery.
How should investors to take advantage?
One option is to go for the fastest growing European cities and buy properties in the best locations.
That, anyway, is the strategy being followed by Schroders European Real Estate Trust (LON:SERE) and Tony Smedley, its manager, is in an upbeat mood.
Outlook in Europe pretty good
“The outlook for Europe is best I’ve seen since I’ve been working in the [European property] sector,” he told Proactive.
A deep and very damaging crisis has passed, he adds, and money is again flowing into Europe’s major cities.
That point is key for Schroders. The European trust is the retail end of a €14bn property portfolio run by the fund manager.
‘Winning Cities’ is its theme says Smedley, who explains that rather than a general country approach Schroders goes for key cities as they more often grow faster than the underlying domestic economy.
So instead of Germany, France, or Spain, Schroders will select sites in Paris, Berlin, Hamburg, Seville and so on.
Nine properties currently make up the portfolio. Valued at about €210mln in total, two of the properties are in Paris but the rest are spread across seven other locations.
Diversification has appeal
Smedley likes this diversification. A broad allocation makes a lot of sense, he says. as rental values, leases and the type of client typically are all particular to a city.
“We don’t want to invest in very specific locations with very specific risks.
“For example, the risk in Paris is very different from Hamburg. Rents are growing at varying rates, the cultures are different and so are the infrastructures.”
Local knowledge
Schroders has 100 people on the ground in Europe. That gives it a lot of local knowledge and means it can drill down to the details.
Questions such as is the market oversupplied? What’s the development pipeline? What are rental levels and are there infrastructure improvements coming? - Paris for example will see the Grand Paris trainline transport upgrade complete in 3-5 years.
“After that we look at sub-markets and then at the asset.”
A good time to grow
Timing has helped the performance. A launch in December 2015 was probably a year or so after the eurozone’s absolute economic nadir, but it was still early enough to catch the current uptick.
Under its current funding criteria, the trust has about €30mln to spend before it is fully invested, but Smedley would like the portfolio to double in size over the next few years and believes now is a good time to grow.
Expansion in Spain, where the property in Seville was the trust’s most recent acquisition, is a possibility, while the Nordic countries are also attractive.
The debt/equity ratio is a conservatively set at a 35% maximum with loans secured on the individual properties.
Some £108mln in equity finance was raised when it first listed in London (and Johannesburg) followed by a further £15mln and £11mln a year and eighteen months ago respectively. The listing in Johannesburg adds liquidity said Smedley.
Modest discount
At 109p, Schroders European Real Estate is valued at £146mln, which is a very modest 3% discount to the last published net asset value of around 112p.
On the dividend side, the aim is for a fully covered 5.5% in euro terms once fully invested.
For UK investors the yield is currently 4.4% at an exchange rate of £1/€1.12.
The total return target for the portfolio is 8-10% a year and in June, broker Numis wrote: “The portfolio of assets is performing well (6.7% ahead of acquisition price) and is expected to benefit further from structural trends, infrastructure improvement and economic recovery."
“Moreover, we would expect the manager's access to a growing pipeline of potential investments and attractively priced, long-term debt to boost returns.”