Schroder European real-estate investment trust, a company that invests in European growth cities and regions, says higher interest rates have resulted in a fall in the value of its direct property portfolio.
The company said on Monday that its direct portfolio, independently valued at €214.1m, recorded a quarterly like-for-like decrease of 1.9% or €4.2m (R83m).
Continued outward yield movement drove this, as investor sentiment continues to be affected by the higher interest rate backdrop. As the value of property falls due to decreased demand in the environment of higher interest rates, the yield continues to rise.
Schroder owns properties in Paris, Stuttgart, Hamburg, Frankfurt and Berlin. It also has a 50% stake in a joint venture in Seville, Spain.
Jeff O’Dwyer, a fund manager at Schroder, told Business Day that the market continues to price in factors such as cost and availability of debt, inflation, economic growth, cost of construction and structural shifts among those that affect property valuation.
O’Dwyer said investment volumes remain modest and valuers have limited comparable investment data. As a result, they value assets based on sentiment.
“We think the fund’s retail and industrial assets have seen a floor. There may be some further valuation pressure on the office [segment] especially as valuers price in structural changes such as work from home,” said O’Dwyer.
He said that since the pandemic office occupiers are yet to fully unveil their intentions regarding space requirements and what they are willing to commit to. Hybrid working is another consideration for them.
Schroder’s office portfolio recorded a marginal valuation decrease of €0.75m or 0.9%. The St Cloud, Paris, yield was unchanged, while Hamburg and Stuttgart fell about 10 basis points and 35 basis points respectively, with the latter offset by rental growth reflective of the tight market supply.
The industrial portfolio value fell 2.6% or €1.9m, driven by 25 basis points of outward yield shift across the French logistics portfolio and select Dutch investments.
Its German retail portfolio valuation declined 3.6% or €1.5m due to a 25 basis points outward yield shift in the Berlin DIY investment.
Schroder said that at September 30 values and following the recent Dutch industrial loan refinancing the portfolio loan-to-value (LTV) is about 33% based on gross asset value and 24% net of cash.
O’Dwyer said their retail exposure is in DIY and grocery in the liquid cities of Berlin and Frankfurt. The assets are defensive in nature as this type of retail is performing well given the economic environment.
He said that in the case of Frankfurt, for example, the company is busy with asset management strategies to complete the re-gearing of leases, adding that following this exercise, Schroder may look at disposal options.
Berlin remains a long-term hold for Schroder given its income profile and alternative use potential.
“Our French logistics portfolio is performing well and we will continue to hold these assets — logistics is a sector where we will see further rental growth,” said O’Dwyer.
Demand for logistics is growing as e-commerce creates demand from an occupational and investment perspective, which bodes well for Schroder.
O’Dwyer said better quality investments in first-tier cities will continue to outperform regional and secondary investments.
He said their focus on Berlin, Hamburg, Stuttgart, Frankfurt and Paris would create opportunities. Operational expertise and tenant relationships will be key in driving returns, occupancy retention and income.
“We are actively looking at improving the quality of the portfolio to make our assets more relevant and liquid from an occupational and investment view.”
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