Schroder Real Estate taps into hunger for offshore investment
Plans to list its European REIT on the JSE.
Feeding South Africans’ seeming insatiable desire for rand-hedge stocks, Schroder Real Estate is planning to launch a European Real Estate Investment Trust (REIT), which will have a primary listing on the London Stock Exchange with a secondary listing on the Johannesburg Stock Exchange.
Both listings are expected to complete in early-December 2015.
Schroder Real Estate is part of global asset management firm Schroders, which has £295 billion in assets under management (AUM). The real estate portion of the business is smaller but well established with AUM of £50 billion distributed across a number of funds.
The Schroder European REIT will be focused on investment into A- and B-grade continental European property.
The reason for the dual listing is two-fold says Tony Smedley, head of Continental European Real Estate Investment. “South African investors have expressed interest in high-yielding, real-estate interests in Europe. The local listing of this fund will provide them with the opportunity to invest in an actively managed and income-focused fund.”
For Schroders, which is building a presence in South Africa, the listing will also help to diversify its sources of capital.
While continental Europe is at an earlier stage of its economic recovery than the UK, Smedley says the strategy is to identify cities in the Eurozone region where there is evidence of rental growth as a consequence of constrained supply.
“We will be targeting institutional grade assets in strong performing “clever towns” across Brussels, the Paris region, and key German cities such as Berlin, Hannover, Frankfurt and Dusseldorf,” he says. “These are regions where the economy is growing faster than the national GDP.”
For Paul Duncan an investment manager with property specialist Catalyst, the investment thesis makes perfect sense. “There are markets overseas where the property fundamentals are better and where there is a wider spread between the cost of capital and the yield on investment.
“It makes sense for South African investors to seek out these kinds of rand hedges.”
This is exactly what firms like Resilient and Growthpoint have done so successfully. More recently the likes of Texton, Rebosis, Tower Property Fund and Vukile have tapped into the offshore market.
However there is a concern that the hunger for offshore rand hedges is driving investors to pay a premium for what could potentially be a second rate product.
Take Intu Properties as an example, he says. South Africans have had a love affair with this company – the old Liberty International – for years. However the fund has significantly underperformed UK retail peers such as Hammerson plc. “There is a strong argument to suggest that Intu has been a bad investment relative to its peers. But South African investors don’t have the choice – unless they are willing to use their offshore allowance – so they have to settle for second best.”
This is not to suggest that Schroders will launch a second rate fund.
“Schroders has simply seen a demand and is creating a product that meets that demand. I see the logic in that. However many of these products are sold on the back of investor fear and excitement. My question is are they sustainable, long-term investments?”
The fund has no assets and as such has no track record but a potential portfolio has been identified, Smedley says. The potential portfolio amounts to about €130 million with an indicative property initial yield of 6.1% and an indicative rental reversion yield of 6.5%. Terms are currently being negotiated to acquire these assets.
The initial target equity raise locally and in the UK is up to £150 million. In the longer term the intention is to grow the fund to over £500 million.
What may comfort investors is that Schroder Real Estate will invest up to 10%, or a maximum of £15 million in the fund, providing some alignment of interest.
Investors can expect a dividend of 5.5% per year, but this is only once the initial capital is fully invested and debt is drawn down. Smedley expects the fund to pay a small dividend in June 2016, gradually ramping up to the 5.5% yield as the asset begins to deliver.
