Wrap Text
Annual Report and Accounts
SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC
(Incorporated in England and Wales)
Registration number: 09382477
JSE Share Code: SCD
LSE Ticker: SERE
ISIN number: GB00BY7R8K77
ANNUAL REPORT AND ACCOUNTS
WELL POSITIONED FOR FURTHER INCOME AND ACCRETIVE GROWTH
14 December 2016
Schroder European Real Estate Investment Trust plc (the "Company"), which invests in
European growth cities, hereby submits its annual financial report for the year ended
30 September 2016 as required by the UK Listing Authority's Disclosure Guidance and
Transparency Rule 4.1.
The Company's Annual Report and Accounts for the year ended 30 September 2016 are
being published in hard copy format and an electronic copy will shortly be available to
download from the Company's webpage www.schroders.co.uk/sereit. Please click on the
following link to view the document:
The Company has submitted its Annual Report and Accounts to the National Storage
Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.
Highlights
- EUR166.5 million (GBP121.7 million) raised at IPO and two placings
- Acquired seven commercial property assets yielding 5.6% in initial target growth cities
within Germany and France
- NAV of EUR157.8 million (GBP136.7 million) at 30 September 2016 (130.2 cps/112.8 pps)
- Dividends of 1.7 cps declared relating to the year to 30 September 2016 - of which 0.9 cps
to be paid by way of second interim dividend in January 2017
Good progress with assembly of high quality portfolio in winning cities:
- Invested in seven retail and office properties with attractive long term growth characteristics
- Portfolio valued at EUR148.2 million as at 30 September 2016, reflecting an uplift on
purchase price of approximately 5%
- 100% let with 6.5 years average lease term
- Portfolio to benefit from growth trends of urbanisation, demographics and infrastructure
improvements
- Post period end, a further EUR16.8 million (GBP15 million) raised through equity placing; and
contracts exchanged on an office investment in Paris for EUR30.1 million yielding 9.5%
Debt strategy accretive to returns
- Low cost, long duration debt financing at 22% LTV
- Annual interest cost of 1.19% vs 5.6% property yield generates geared income return of 7.7% (pre costs and tax)
Well placed to deliver target 5.5% Euro dividend and 8-10% property total return once
fully invested
- Existing portfolio and attractive investment pipeline on target to meet performance objectives
- EUR60 million investment capacity for further accretive acquisitions
Sir Julian Berney, Non-Executive Chairman of the Company, commented:
"The Company's strategic focus is on track. The acquisition of well located commercial real
estate in large, liquid and established continental European conurbations is expected to
generate long term income and capital growth for the Company. The key drivers are the
demand/supply imbalance of institutional grade assets, along with ongoing structural
changes such as urbanisation and infrastructure improvement. We are pleased with the
progress we have made to date, both in building our initial portfolio, as well as our debt
strategy, which is very accretive to shareholder returns.
"Looking forward, the Company will look to maximise investment performance from its
current portfolio, meet the dividend target and grow in a disciplined manner. As one of the
few public UK companies with a solely Continental European commercial real estate
portfolio, the Company is ideally positioned to offer investors access to growth markets,
significant portfolio diversification and a solid income return. Our ability to leverage the
strong track record of the Schroder European investment platform located in the target
markets, coupled with current market conditions support our strategic ambitions.
This underpins our optimism for the future prospects for the Company as we look to deliver
attractive investments and shareholder value."
Enquiries:
Duncan Owen/Tony Smedley
Schroder Real Estate Investment Management Limited Tel: 020 7658 6000
Ria Vavakis
Schroder Investment Management Limited Tel: 020 7658 2371
Dido Laurimore/Ellie Sweeney/Richard Gotla Tel: 020 3727 1000
FTI Consulting
Chairman's Statement
Overview
Significant progress has been made in the ten months since the IPO. The equity raised at IPO has
been invested in institutional grade, income producing commercial real estate in identified growth
markets of Continental Europe, helping the Company achieve its initial objective of building a
diversified portfolio generating regular and attractive income returns and positioning the Company to
deliver its 5.5% dividend target.
Income returns have been enhanced by applying leverage against assets where borrowing terms are
most accretive; the average cost of our debt is 1.19% which compares favourably with property
acquisition yields of 5.6%. The Company now has leverage of 22% LTV.
Moving forward, the Company has an identified pipeline of investment opportunities which are under
consideration by the Investment Manager and the Board and which fit with the stated investment objectives.
Strategy
The Company's strategic focus on large and established continental European conurbations is based
on the continuing demand/supply imbalance for good quality space and the ongoing structural
changes such as urbanisation and infrastructure improvement taking place in those markets. We
believe it will also position the Company well to take advantage of potential occupier shifts that are
likely to arise following the result of the UK referendum on membership of the EU in June.
Growing the Company in a disciplined way that enhances liquidity, economies of scale and
performance prospects for shareholders is an important objective for next year and beyond. To this
end, on 28 October 2016 the Company raised a further GBP15 million of equity under the placing
programme established at IPO. The first acquisition using these proceeds was of a new office in Paris
at a net initial yield of 9.5%. As stated at IPO the Company is targeting significant growth from its
current capitalisation and further capital raisings will be an important component of this strategy, in
order that the Company can take advantage of both existing and new investment opportunities.
Market
So far there has been little, if any, evidence of a significant change in occupier or investor behaviour
in Continental European markets following the UK's vote to leave the EU. As a Board we are not
complacent and rationally expect some market volatility as the negotiations between the UK and the
EU continue. We also believe investor interest in Continental Europe may increase as a result of both
diversification and occupier interest in those markets, as well as a period of uncertainty for the UK real
estate market, all of which should support our strategy moving forward.
We believe the focus of our strategy on long term growth markets and backing mega trends such as
urbanisation, demographic change and infrastructure is now even more appropriate. Such
environments are likely to prove more resilient in a downside scenario and have further upside
potential in the scenario where additional growth is generated through a progressive shift of occupiers
from the UK to EU markets.
Portfolio
Following a concerted period of investment, the Company now owns a portfolio of seven properties
valued at EUR148.2 million as at 30 September 2016, reflecting an increase of approximately 5% on the
purchase price. The assets are all 100% let on strong covenants, generating EUR8.7 million of annual
rental income. The average unexpired lease term is 6.5 years to first break and 8.2 years to expiry. All
leases are indexed, which is a positive characteristic supporting the ability to meet the dividend.
The asset in Paris the Company has committed to acquire post period end is expected to complete in January 2017.
Increasing the portfolio value to about EUR178 million.
Dividend
The Company is targeting an annualised euro dividend yield of 5.5% based on the euro equivalent of
the issue price as at Admission.
The Company paid its first dividend of 0.8 euro cents per share in September 2016. Directors have
declared a second interim dividend in respect of the period to 30 September 2016 of 0.9 euro cents
per share based on the number of shares in issue as at the publishing date of this Report. This represents
an annualised rate of 2.6% based on the Euro equivalent of the issue price as at Admission.
The interim dividend will be paid on 27 January 2017 to shareholders on the register on 13 January 2017.
The dividend is fully covered by contractual income receivable from the current portfolio. The total
dividend in respect of the 2016 financial year is 1.7 euro cents per share.
Balance Sheet and Debt
Prudent leverage is used by the Company with the objective of improving shareholder returns, whilst
maintaining a robust balance sheet, with overall leverage capped at 35% LTV at portfolio level. As at
30 September 2016, the Company had three debt facilities in place totalling EUR48.7 million, secured
against six of its assets and representing a loan to value of 22% against the Company's gross asset
value. The average debt maturity was 7.75 years and the average interest rate was 1.19% p.a.,
materially below the average net initial yield on the portfolio.
Outlook
We are grateful for the support of investors at IPO and in subsequent new share issuances, which
has enabled the Company to fulfil its initial objective and ensure that we are well positioned to take
advantage of favourable market conditions. As stated at IPO, there are a number of benefits for
shareholders from disciplined and accretive growth, including greater share liquidity, portfolio
diversification and beneficial economies of scale and this remains a priority.
Despite the competitive investment environment for yielding assets in Continental Europe and the
volatile macro-economic environment, the Investment Manager has been successful in acquiring
attractive assets for the Company in the target markets. The focus remains on finding value in those
markets and ensuring continued portfolio diversification. The Company will continue to take
advantage of Schroders' wider real estate fund management, research and strategy expertise
(GBP11.8 billion AUM and 81 real estate professionals as at 30 September 2016) to identify, acquire and
actively manage the growing portfolio. The Investment Manager is based in the target markets and
best placed to identify the growth segments of the market.
This has been a particularly active first reporting period for the Company and I would like to thank my
fellow Directors and the Investment Manager for their focus, diligence and skill in navigating this initial
phase. The next stage for the Company is to maximise investment performance from its current
portfolio, meet the dividend target and secure accretive new investments to support the medium term
growth strategy. Current market conditions appear conducive to such a strategy and we look forward
to working together to deliver this.
Sir Julian Berney Bt.
Chairman
13 December 2016
Investment Manager's Report
Results
The Company declared a NAV as at 30 September 2016 of EUR157.8 million (GBP136.7 million) or 130.2 euro cents per
share (112.8 pps). This reflects a decrease in euro terms of -5.2% compared with the capital raised.
The NAV total return including paid dividends was -4.6%, largely reflecting the costs of new equity
issuances and the acquisition costs of new investments over the reporting period.
The table below provides a breakdown of the movement in NAV during the reporting year:
EURmillion* % Capital
raised
Capital raised 166.5 100%
Issue costs - actual (3.4) -2.0%
Issue costs - FX movements on Rand/EUR exchange (1.6) -1.0%
Transaction costs of investments made during year (10.0) -6.0%
Unrealised gain in valuation of the property portfolio 6.6 4.0%
Unrealised FX loss on monetary items (cash/debtors/creditors) (0.2) -0.1%
Realised FX loss (0.1) -0.1%
Net operating profit 1.1 0.7%
Dividends paid (1.0) -0.6%
Adjustment for lease incentives (0.1) -0.1%
NAV as at 30 September 2016 157.8 94.8%
* Management reviews the performance of the Company principally on a proportionally consolidated
basis. As a result, figures quoted in this table include the Company's share of joint ventures on a line-
by-line basis and excludes non-controlling interests in the Company's subsidiaries. The Financial
Statements set out on pages 47 to 70 of the 2016 Annual Report are prepared fully in accordance with IFRS principles and
therefore include 100% of any majority interest on a line by line basis.
Market overview
The Eurozone economy has grown by around 1.5% p.a. (Source: Eurostat) since mid-2013 and is
expected to continue to recover. The recent vote on the UK's membership of the EU triggered a
downward correction in growth expectations but it is not expected to de-rail the recovery of the
Eurozone. While the boost from falling oil prices may fade, most countries look set to benefit from
rising employment and robust consumer spending. Low interest rates mean business confidence has
remained strong and low/negative bond yields should cut governments' borrowing costs and enable
them to raise spending in 2017. Exports are also likely to gather momentum next year, helped by
slightly faster growth in the US and a revival in emerging markets.
Offices
The improvement in the economy continues to impact on the office supply/demand imbalance in the
Company's favour. Agents' data (Source: JLL) suggests office take up rose in most of our target
European cities during 2016 with corresponding increases in prime office rents. Most of the growth
has been among the professional services, technology and media sectors. Office market
fundamentals remain supportive of further rental growth as vacancy continues to decrease and the
supply pipeline is limited.
Retail
Consumer spending continues to support the retail sector despite the structural change taking place
with online sales showing rapid growth and impacting the demand for physical retail space. Demand
for high street units/flagship stores in core city centre locations remains high. Dominant shopping
centres with a retail, leisure and food offer also continue to perform well. Secondary high streets and
small to mid-sized shopping centres remain under pressure. Supermarkets, convenience stores and
out-of-town retail warehouses are, however, expected to be more resistant to online encroachment,
as consumers still prefer the physical aspect of food, furniture, DIY and homewares and because
these stores typically have car parking and are convenient for click & collect sales.
Industrial
A result of the exponential growth of on-line retail has been the increasing demand for industrial
warehouses. Demand for big distribution warehouses has increased by 25% since 2013 (Source:
JLL), due mainly to internet retailers and third party logistics operators. Demand for parcel delivery
and fulfilment centres, including urban logistics, has also seen significant growth with demand far
outpacing supply to date.
Investment market
Although investment volumes have fallen since the start of the year from the high levels of 2015, the
investment market remains competitive. While capital inflows from Asian and North American
investors have been noticeably lower, European investors remain active, attracted by the large gap
between real estate and bond yields. There was a notable fall in activity in the UK since the start of
the year related to the UK referendum, with Germany replacing the UK as the go-to destination for
property investment following the vote on 23 June 2016 (Source: Real Capital Analytics). Early data
suggests that investment activity in continental Europe is unaffected and could further increase in the
coming months. Looking ahead, we expect investor sentiment will probably cool ahead of the
elections in the Netherlands (March), France (April/May) and Germany (October). This uncertainty
will affect not only real estate, but also equities and bonds in the eurozone. However, even if bond
yields rise, we expect that real estate yields will probably be relatively stable, given the prospects for
rental growth.
Strategy
The Company's strategy is set out on page 3 of the 2016 Annual Report.
Property portfolio
As at 30 September 2016, the Company owned seven properties independently valued at
EUR148.2 million, reflecting a net initial yield of 5.3% against the independent valuation and 5.6% against
investment cost. The retail properties in Biarritz and Rennes are owned in a 70/30 joint venture with
Mercialys, the French retail property specialist.
In addition, contracts were exchanged post year end for the purchase of the EUR30.1 million French
office building Le Directoire in Paris, reflecting a net initial yield of 9.5%. On completion, this purchase
will increase the portfolio value to approximately EUR178 million. The portfolio's net initial yield against
investment costs will increase to 6.3% as a result of purchasing Le Directoire.
All portfolio statistics in this section assume, unless stated otherwise, that the Company completes
the purchase of the Le Directoire asset in Paris. The statistics all reflect the 70% ownership share of
Biarritz and Rennes.
The table below gives an overview of the portfolio:
Property Country Sector Contracted rents Value
EURm % total EUR0-EUR20m EUR20m- EUR40m- >EUR60m
EUR40m EUR60m
Paris France Office 2.3 19.2 X
Berlin Germany Retail 1.6 13.2 X
Biarritz France Retail 1.3 10.2 X
Hamburg Germany Office 1.1 9.0 X
Rennes France Retail 0.9 7.7 X
Stuttgart Germany Office 0.8 6.6 X
Frankfurt Germany Retail 0.7 5.9 X
Portfolio at financial year end 8.7 71.8 EUR148.2 million
Paris, Le
Directoire France Office 3.4 28.2 X
Portfolio incl. committed purchase 12.1 100.0 EUR178.3 million
The portfolio's country and sector allocations, pre and post the Le Directoire commitment, is specified below.
Country Portfolio at Portfolio Sector Portfolio at Portfolio
allocation (% financial year including allocation financial year including
contracted rent) end committed (% contracted end committed
purchase rent) purchase
France 52% 65% Office 48% 63%
Germany 48% 35% Retail 52% 37%
Total 100% 100% Total 100% 100%
The assets are fully let, generating EUR12.1 million in annual rental income. The average unexpired
lease term is 5.2 years to first break and 7.2 years to expiry (this compares to 6.5 years to first break
and 8.2 years to expiry excluding Le Directoire).
Lease expiry profile
The lease expiry profile to earliest break for the portfolio is detailed in the 2016 Annual Report.
The near term lease expiries in 2017 and 2018 (based on the portfolio including the committed purchase) provide asset management
opportunities to re-negotiate leases, extend weighted average unexpired lease terms, improve income
security and generate rental growth.
Top ten tenants
The top ten tenants represent a significant proportion of the total contracted rent generated by the
portfolio and comprise a wide range of occupiers from different industry segments. As at the financial
year end, the ten largest tenants account for 95% of contracted rents. Post completion of the Le
Directoire purchase in St Cloud, Paris, the ten largest tenants in the portfolio will account for 71% of
the portfolio.
The table below gives an overview of the top ten tenants for the portfolio as at financial year end.
Tenant Property Tenant Contracted Contracted Unexp.
risk(1) rent rent (%)(2) lease
(EUR'000 p.a.) term
(years)(3)
1 ALTEN Paris Low 2,308 26 4.5
2 Casino Rennes & Biarritz Low 1,856 21 5.7
3 Hornbach Berlin Low 1,607 18 9.3
4 City BKK Hamburg High 797 9 8.4
5 Land Baden-
Württemberg Stuttgart Low 654 7 9.4
6 Lidl Frankfurt Low 347 4 10.4
7 Boulanger Biarritz Low 262 3 2.7
8 PTS Petereit Services Hamburg Low-Medium 218 2 6.3
9 PräventSozial Stuttgart Low 145 2 6.4
10 Westside Rödelheim Frankfurt Low-Medium 96 1 9.7
Subtotal 8,290 95 6.8
Remainder current portfolio 452 5 2.1
Portfolio at financial year end 8,743 100.0 6.5
Committed purchase 3,425 2.0
Portfolio incl. committed purchase 12,168 5.2
(1) Regular tenant risk assessments are undertaken for tenants above EUR100,000 contracted rents. Among other
considerations, our risk assessments are based on D&B ratings and D&B failure scores.
(2) Percentage based on total contracted rent as at financial year end.
(3) Unexpired lease term until earliest termination in years as at 30. September 2016.
Valuation
The current valuation of EUR148.2 million for the existing portfolio (excluding the committed Le Directoire
purchase) reflects an increase of 4.7% compared to the combined purchase price of the seven asset
portfolio. Over 60% of the transaction costs have been recovered through valuation uplifts since
acquisition.
Boulevard Jean Jaurès, Boulogne-Billancourt (Paris) 92100, France
The Group's first acquisition was in Boulogne- Billancourt (Paris), a 6,788 sqm fully leased office
investment acquired in March 2016 for EUR37.5 million, reflecting a net initial yield of 5.7%. The
investment has a number of characteristics consistent with our strategy; being leased off
modest/sustainable rents, located in a supply constrained area and where there is a high incidence of
competing uses as evidenced by recent office to residential conversions.
Asset management initiatives include:
- Managing neighbouring property easements, which have value in our favour;
- Continuing to work with the tenant regarding their longer term occupational intentions and
considering refurbishment to generate rental uplift; and
- Determining local planning potential, particularly the opportunity for conversion to higher value uses.
Großbeerenstraße, 12107 Berlin, Germany
This Hornbach DIY unit is located in a growing, densely populated, mixed use area in the south Berlin
suburb of Mariendorf. It was acquired in March 2016 for EUR24.3 million, reflecting a net initial yield of
6.2%. The investment is a relatively defensive long term income play underpinned by four hectares of
land in Germany's capital city, a city whose economic and population growth is expected to
outperform domestic and European averages.
Subject to tenant and local authority discussions there is further asset management potential given
the large site area. Initiatives include:
- Diversifying the retail offer with the addition of complementary uses such as food and beverage; and
- Rezoning part of the land for residential use.
Neckarstraße, 70190, Stuttgart, Germany
This attractive office investment is located in central Stuttgart. It was acquired in April 2016 in a
portfolio transaction with the Hamburg investment for a combined EUR28.9 million, reflecting a blended
net initial yield of 6.0%. The investment is located in a sub-market with minimal vacancy and is
expected to benefit from favourable rental growth, particularly with completion of "Stuttgart 21" in
2021, a large infrastructure and urban development project nearby.
The property provides a long term cash flow underpinned by the Federal state of Baden-Württemberg
and future asset management potential.
Hammerbrookstraße, 20097, Hamburg, Germany
"Tri-Tower C" is a fully let multi-tenanted office building located in one of Germany's top seven office
markets. It was acquired in April 2016 in a portfolio transaction with the Stuttgart investment for a
combined EUR28.9 million, reflecting a blended net initial yield of 6.0%. This asset was acquired for its
value characteristics. Passing rents are less than 50% of that achieved in the city centre, one metro
stop away. The sub-market is a popular back office location for a broad range of public and private
companies and is increasingly becoming a place where people want to live and work.
Asset management initiatives include:
- Extending two smaller office leases that expire during 2016;
- Discussing with City BKK a potential lease surrender payment and subsequent direct leasing
with sub-tenants.
Lorscher Straße, 60489, Frankfurt - Rodelheim, Germany
A multi let convenience retail centre located in a growing inner urban region of Frankfurt am Main. It
was acquired in May 2016 for EUR11.1 million, reflecting a net initial yield of 5.6%. A key point of
difference is the 1,600 sqm Lidl supermarket which is approximately double the size of discount
supermarkets in the region, therein providing for a broader grocery offer. The investment is a
combination of longer term, stable income with short term asset management potential including:-
- Improving the retail mix to enhance footfall;
- Potential to add further lettable area and services to the car park area; and
- Broadening the retail offer and strengthening the convenience nature of the centre.
Avenue de Bayonne, 64600, Anglet (Biarritz), France
Acquired off-market this investment is a fully let multi-tenanted retail asset located in a leading
regional tourism destination in France, Biarritz. A 70% interest was acquired in June 2016 in
association with the Rennes hypermarket for a combined EUR39.9 million, reflecting a blended net initial
yield of 5.0%. The investment rationale is predicated on acquiring well located retail schemes in
growth regions let at affordable rents and with alternative use potential. We specifically requested that
the vendor, Mercialys, retain a 30% stake as an alignment of interests.
This is an attractive long term income stream which is rarely traded in the French market with future
asset management potential to improve the retail offer..
Route de Saint Malo, 35760, Saint-Grégoire (Rennes), France
Acquired off-market with the Biarritz asset, this investment is a single tenanted hypermarket located in
the northern French city of Rennes. A 70% interest was acquired in June 2016 in association with the
Biarritz centre for a combined EUR39.9 million, reflecting a blended net initial yield of 5.0%. We
specifically requested that the vendor, Mercialys, retain a 30% stake as an alignment of interests. The
investment rationale is founded on acquiring dominant retail assets in growth regions. Rennes has a
population of c.700,000 people and its GDP and consumer spending are forecast to grow above the
national average.
This is an attractive long term income stream which is rarely traded in the French market with future
asset management potential to improve the retail offer.
The combined purchase price of the above seven assets was EUR141.6 million and EUR151.5 million including acquisition costs.
Post 30 September 2016, the Group entered into a conditional contract to acquire a fully leased office
building in Paris.
Le Directoire, Saint-Cloud (Paris), France
Fully income producing office investment comprising part of an established office complex in Saint
Cloud, a densely populated mixed use area in the west of Paris. A conditional contract to acquire the
property was signed in October 2016 at a price of EUR30.1 million, reflecting a net initial yield of 9.5%.
This is very accretive and, we believe, capable of long term growth given the relatively modest rents
currently being paid and the strong occupational track record of the property. The new Grand Paris
public transport connection will be completed alongside the building in 2025, which is expected to
provide significantly improved accessibility to this part of Paris and better property performance as a result
Finance
As at 30 September 2016, the Company's total debt was EUR48.7 million across three loan facilities.
This represents a loan to value of 22% against the Company's gross asset value.
The use of leverage is assessed on an asset-by-asset basis, secured only against those properties
that are most suitable for debt financing and where financing costs/terms are attractive.
The loans drawn are secured against the four German properties in Berlin, Frankfurt, Stuttgart and
Hamburg and the two retail assets in Biarritz and Rennes.
The current blended all-in interest rate is 1.19%, significantly below the portfolio yield of 5.6% p.a.
The average unexpired loan term is 7.8 years.
Lender Property Maturity Outstanding Interest rate
Date Principal
Deutsche Berlin/Frankfurt 30/06/2026 16,500,000 1.31%
Pfandbrief Bank Stuttgart/Hamburg 30/06/2023 14,000,000 0.85%
Credit Agricole(1) Biarritz/Rennes 29/07/2023 18,200,000 3M Euribor + 1.35%
Total* 48,700,000
(1) Reflects 70% ownership share for debt secured against Biarritz and Rennes properties
The German loans are fixed rate for the duration of the loan term. The French loan is based on a
margin above 3 month Euribor and the Company has acquired an interest rate cap to limit future
potential interest costs if Euribor were to increase. The strike rate on the cap is 1.25% p.a. The
market value of the interest cap is positive at EUR0.2 million as at end of September 2016.
Outlook
The current portfolio comprises high quality institutional grade assets with strong income profiles,
located in winning cities such as Paris and Berlin that are expected to benefit from further growth.
Each asset has a business plan and asset management upside delivered through teams based in the
target markets. Delivering on the opportunities to grow income and add value to these assets will be a
key driver of the Company's performance.
The next phase of acquisitions will provide further diversification to the portfolio and additional value-
add potential. The strategy remains unchanged and will focus on delivering income and capturing
growth through investing in major cities and regions. Favoured locations include those winning cities
with a diverse economic base, expanding populations, improving infrastructure and deep occupation
and investment markets. Within those cities our expert teams identify supply constrained locations,
areas where there are competing demands for different uses and affordable rents which are capable
of growth.
The Investment Manager remains vigilant to the investment risks during a time of economic and
political change. However, a long term investment strategy based on strong fundamentals should
enable the delivery of superior returns for shareholders.
As the Investment Manager continues the successful execution of the Company's strategy, the growth
in net income will help drive the earnings to shareholders and will support the Company as it
continues to build a portfolio of institutional quality assets with growth potential across Europe.
Tony Smedley
Head of Continental European Investment
Schroder Real Estate Investment Management Limited
13 December 2016
Principal risks and uncertainties
The Board is responsible for the Company's system of risk management and internal control and for
reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the
Company's business as an investment trust and has established associated policies and processes
designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and
Valuation Committee on an ongoing basis. This system assists the Board in determining the nature
and extent of the risks it is willing to take in achieving its strategic objectives. Both the principal risks
and the monitoring system are also subject to robust review at least annually. The last review took
place in November 2016.
Although the Board believes that it has a robust framework of internal control in place this can provide
only reasonable, and not absolute, assurance against material financial misstatement or loss and is
designed to manage, not eliminate, risk.
A summary of the principal risks and uncertainties faced by the Company which have remained
unchanged throughout the period from listing to 30 September 2016, and actions taken by the Board
and, where appropriate, its Committees, to manage and mitigate these risks and uncertainties, is set
out below.
Risk Mitigation and management
Strategic risk
The Company's investment objectives may Appropriateness of the Company's investment
become out of line with the requirements of remit periodically reviewed and success of the
investors. Company in meeting its stated objectives
monitored.
Investment management risk Marketing and distribution activity is actively
reviewed.
The Investment Manager's investment strategy, if
inappropriate, may result in the Company Review of the Investment Manager's compliance
underperforming the market and/or peer group with the agreed investment restrictions,
companies, leading to the Company and its investment performance and risk against
objectives becoming unattractive to investors. investment objectives and strategy; relative
performance; the portfolio's risk profile; and
appropriate strategies employed to mitigate any
negative impact of substantial changes in
markets, including any potential disruption to
capital markets.
Custody risk Annual review of the ongoing suitability of the
Investment Manager.
Safe custody of the Company's assets may be
compromised through control failures, including Depositary verifies ownership and legal
cyber hacking. entitlement, and reports on safe custody of the
Company's assets, including cash.
Quarterly report from the Depositary on its
activities.
Gearing and leverage risk
The Company utilises credit facilities. These Gearing is monitored and strict restrictions on
arrangements increase the funds available for borrowings imposed.
investment through borrowing. While this has the
potential to enhance investment returns in rising
markets, in falling markets the impact could be
detrimental to performance.
Accounting, legal and regulatory risk
In order to continue to qualify as an investment Confirmation of compliance with relevant laws
trust, the Company must comply with the and regulations by key service providers.
requirements of Section 1158 of the Corporation Shareholder documents and announcements,
Tax Act 2010. including the Company's published Annual
Report, are subject to stringent review
Breaches of the UK Listing Rules, the Companies processes.
Act or other regulations with which the Company
is required to comply, could lead to a number of Procedures have been established to safeguard
detrimental outcomes. against unauthorised disclosure of inside
information.
Service provider risk
The Company has no employees and has Service providers appointed subject to due
delegated certain functions to a number of diligence processes and with clearly documented
service providers. Failure of controls and poor contractual arrangements detailing service
performance of any service provider could lead to expectations.
disruption, reputational damage or loss.
Regular reporting by key service providers and
monitoring of the quality of services provided.
Review of annual audited internal controls reports
from key service providers, including confirmation
of business continuity arrangements.
Going concern
The Directors have examined significant areas of possible financial risk and have reviewed cash flow
forecasts and compliance with the debt covenants, in particular the loan to value covenant and
interest cover ratio. They have not identified any material uncertainties which would cast significant
doubt on the Group's ability to continue as a going concern for a period of not less than twelve
months from the date of the approval of the financial statements. The Directors have satisfied
themselves that the Group has adequate resources to continue in operational existence for the
foreseeable future.
After due consideration, the Board believes it is appropriate to adopt the going concern basis in
preparing the financial statements.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report, the Strategic Report, the Report of the
Directors, the Corporate Governance Statement, the Remuneration Report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under
that law the Directors have prepared the financial statements in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the
Directors must not approve the financial statements unless they are satisfied that they give a true and
fair view of the state of affairs of the Company and of the return or loss of the Company for that
period. In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable Accounting Standards have been followed, subject to any material
departures disclosed and explained in the financial statements; and
- prepare the financial statements on a going concern basis unless it is inappropriate to
presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and
explain the Company's transactions and disclose with reasonable accuracy at any time the financial
position of the Company and enable them to ensure that the financial statements and the
Remuneration Report comply with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Investment Manager is responsible for the maintenance and integrity of the Company's webpage.
Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on page 26 of the 2016 Annual Report,
confirm that to the best of their knowledge:
- the financial statements, which have been prepared in accordance with IFRS, give a true and
fair view of the assets, liabilities, financial position and net return of the Group and the
undertakings included in the consolidation taken as a whole;
- the Strategic Report contained in the Report and Accounts includes a fair review of the
development and performance of the business and the position of the Group and the
undertakings included in the consolidation taken as a whole, together with a description of the
principal risks and uncertainties that it faces; and
- the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company's position and
performance, business model and strategy.
Consolidated Statement of Comprehensive Income
Group Group Company Company
30/09/2016 30/09/2015 30/09/2016 30/09/2015
EUR000
EUR000 EUR000 EUR000 (unaudited)
(unaudited)
Rental income 4,891 - - -
Property operating expenses (969) - - -
Net rental and related income 3,922 - - -
Net loss from fair value (4,537) - - -
adjustment on investment
property
Realised loss on foreign (101) - (101) -
exchange
Net change in fair value of (60) - - -
financial instruments at fair value
through profit or loss
Expenses
Investment management fee (1,402) - (1,402) -
Valuers' and other professional
fees (425) - (127) -
Administrators and accounting fee (185) - (114) -
Auditors' remuneration (161) - (139) -
Directors' fees (129) - (129) -
Other expenses (122) - (88) -
Total expenses (2,424) - (1,999) -
Operating loss before net
finance costs (3,200) - (2,100) -
Finance income 5 - 5 -
Finance costs (157) - - -
Net finance costs/(income) (152) - 5 -
Loss before income tax (3,352) - (2,095) -
Income tax expense (47) - - -
Loss for the year (3,399) (2,095) -
Other comprehensive loss
items that may be subsequently
reclassified to profit or loss
Currency translation differences (226) - (226) -
Total other comprehensive loss (226) - (226) -
Total comprehensive loss for
the year attributable to the (3,625) - (2,321) -
equity holders
Total comprehensive loss
attributable to:
Owners of the parent (2,742) - (2,321) -
Non-controlling interests (883) - - -
(3,625) - (2,321) -
Basic and diluted loss per
share attributable to the equity (2.9c) - - -
holders during the year
(expressed in EUR per share)
All items in the above statement are derived from continuing operations. The accompanying notes 1
to 24 of the 2016 Annual Report form an integral part of the financial statements.
Consolidated Statement of Financial Position
Group Group Company Company
30/09/2016 30/09/2015 30/09/2016 30/09/2015
Assets EUR000 EUR000 EUR'000 EUR'000
Non current assets (unaudited) (unaudited)
Investment property 165,365 - - -
Investment in subsidiaries - - 118,583 -
Non-current assets 165,365 - 118,583 -
Current assets
Trade and other receivables 2,377 - 34,179 -
Interest rate derivative contracts 200 - - -
Cash and cash equivalents 58,476 - 6,068 -
Current assets 61,053 - 40,247 -
Total assets 226,418 - 158,830 -
Equity
Share capital 13,994 - 13,994 -
Share premium 14,882 - 14,882 -
Retained earnings (3,486) - (3,291) -
Other reserves 132,370 - 132,595 -
Issued capital and reserves attributable to
owners 157,760 - 158,180 -
Non-controlling interest 6,804 - - -
Equity 164,564 - 158,180 -
Liabilities
Non current liabilities
Interest-bearing loans and borrowings 58,724 - - -
Deferred tax 30 - - -
Non-current liabilities 58,754 - - -
Current liabilities
Trade and other payables 3,084 - 650 -
Current income tax liabilities 16 - - -
Current liabilities 3,100 - 650 -
Total liabilities 61,854 - 650 -
Total equity and liabilities 226,418 - 158,830 -
Net Asset Value per Ordinary Share 135.7c - 130.5c -
Consolidated Statement of Changes in Equity
Non- Total
Group Share Share Retained Other Sub- controlling Equity
capital premium earnings reserves total interests
EUR000 EUR000 EUR000 EUR000 EUR000 EUR'000 EUR'000
Balance as at 9 January 2015 - - - - - - -
Total comprehensive profit for - - - - - - -
the year
Balance as at 30 September - - - - - - -
2015
Loss for the year - - (2,516) - (2,516) (883) (3,399)
Other comprehensive loss for - - - (226) (226) - (226)
the year
Dividends paid - - (970) - (970) - (970)
New equity issuance 16,576 149,873 (4,977) 161,472 - 161,472
Share premium reduction - (122,157) - 122,157 - - -
Unrealised foreign exchange (2,582) (12,834) - 15,416 - - -
Investment from non-controlling - - - - - 7,687 7,687
interest
Balance as at 30 September 13,994 14,882 (3,486) 132,370 157,760 6,804 164,564
2016
Non- Total
Company Share Share Retained Other Sub- controlling
capital premium earnings reserves total interests
EUR000 EUR000 EUR000 EUR000 EUR000 EUR'000 EUR'000
Balance as at 9 January 2015 - - - - - - -
Total comprehensive profit for - - - - - - -
the year
Balance as at 30 September - - - - - - -
2015
Total comprehensive loss for - - (2,321) - (2,321) - (2,321)
the year
Dividends paid - - (970) - (970) - (970)
New equity issuance 16,576 149,873 - (4,978) 161,471 - 161,471
Share premium reduction - (122,157) - 122,157 - - -
Unrealised foreign exchange (2,582) (12,834) - 15,416 - - -
Balance as at 30 September 13,994 14,882 (3,291) 132,595 158,180 - 158,180
2016
The accompanying notes 1 to 24 of the 2016 Annual Report form an integral part of the financial statements.
Consolidated Statement of Cash Flows
Group Group Company Company
30/09/2016 30/09/2015 30/09/2016 30/09/2015
EUR000 EUR000 EUR'000 EUR'000
(unaudited) (unaudited)
Operating activities
Loss before tax for the year (3,352) - (2,095) -
Adjustments for:
Net valuation loss on fair value 4,537 - - -
adjustment in investment property
Realised foreign exchange losses 101 - 101 -
Finance income (5) - (5) -
Finance expense 157 - - -
Movement in fair value of 60 - - -
derivative interest rate
contracts
Operating cash generated/(used) 1,498 - (1,999) -
before changes in working capital
Increase in trade and other (2,376) - (422) -
receivables
Increase in trade and other 2,728 - 644 -
payables
Cash generated from/(used in) 1,850 - (1,777) -
operations
Interest rate cap purchased (260) - - -
Finance costs paid (903) - - -
Interest received 5 - 5 -
Net Cash generated/used in 692 - (1,772) -
operating activities
Investing Activities
Acquisition of investment property (169,647) - - -
Investment in shares of subsidiary - - (118,583) -
companies
Loans to subsidiary companies - - (33,757) -
Net cash used in investing (169,647) - (152,340) -
activities
Financing Activities
New bank loan advance 56,500 - - -
New loan advance - non- 10,753 - - -
controlling interest
Loan repayment - non-controlling (7,689) - - -
interest
New equity - non controlling 7,687 - - -
interest
Share issue net proceeds 161,477 - 161,477 -
Dividends paid (970) - (970) -
Net cash generated from 227,758 - 160,507 -
financing activities
Net increase in cash and cash 58,803 - 6,395 -
equivalents for the year
Opening cash and cash - - - -
equivalents
Foreign exchange losses (327) - (327) -
Closing cash and cash 58,476 - 6,068 -
equivalents
The accompanying notes 1 to 24 of the 2016 Annual Report form an integral part of the financial statements.
Notes to the Financial Statements
1. Significant accounting policies
Schroder European Real Estate Investment Trust plc ("the Company") is a closed-ended investment
company incorporated in England and Wales. The condensed consolidated financial statements of
the Company for the year ended 30 September 2016 comprise those of the Company and its
subsidiaries (together referred to as the "Group"). The Group holds a portfolio of investment
properties in Europe. The shares of the Company are listed on the London Stock Exchange Primary Listing and the
Johannesburg Stock Exchange Secondary Listing. The registered office of the Company is 31 Gresham Street, London, EC2V 7QA.
Statement of compliance
The consolidated financial statements of the group have been prepared in accordance with the
Disclosure, Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority
and International Financial Reporting Standards ("IFRS") as issued by, the International Accounting
Standards Board (the "IASB") and interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC").
The financial statements give a true and fair view and are in compliance with applicable legal and
regulatory requirements and the Listing Rules of the UK Listing Authority.
Basis of preparation
The financial statements are presented in euros, rounded to the nearest thousand. They are prepared
on a going concern basis, applying the historical cost convention except for the measurement of
investment property and derivative financial instruments that have been measured at fair value.
The accounting policies have been consistently applied to the results, assets, liabilities and cash flows
of the entities included in the consolidated financial statements and are consistent with those of the
Half Year financial report.
Going concern
The Directors have examined significant areas of possible financial risk including cash and cash
requirements and the debt covenants. The Directors have not identified any material uncertainties
which would cast significant doubt on the Group's ability to continue as a going concern for a period of
not less than twelve months from the date of the approval of the financial statements. The Directors
have satisfied themselves that the Group has adequate resources to continue in operational existence
for the foreseeable future.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires management to make
judgements, estimates and assumptions that affect the application of policies and the reported
amounts of assets and liabilities, income and expenses. These estimates and associated
assumptions are based on historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of making judgements about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates. The estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The most significant estimates made in preparing these financial statements relate to the carrying
value of investment properties, including those within joint ventures, which are stated at fair value.
The Group uses external professional valuers to determine the relevant amounts. Judgements made
by management in the application of IFRS that have a significant effect on the financial statements
and estimates with a significant risk of material adjustment in the next year are disclosed in note 19
of the 2016 Annual Report.
Basis of consolidation
Subsidiaries
The consolidated financial statements comprise the financial statements of the Company and all of its
subsidiaries drawn up to 30 September each year. Subsidiaries are those entities, including special
purpose entities, controlled by the Company. Control exists when the Company has the power,
directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits
from its activities. In assessing control, potential voting rights that presently are exercisable are taken
into account. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. Where properties
are acquired by the Group through corporate acquisitions but the acquisition does not meet the
definition of a business combination, the acquisition has been treated as an asset acquisition.
Transactions eliminated on consolidation
Intra-group balances and any gains and losses arising from intra-group transactions are eliminated in
preparing the consolidated financial statements. Gains arising from transactions with joint ventures
are eliminated to the extent of the Group's interest in the entity. Losses are eliminated in the same
way as gains but only to the extent that there is no evidence of impairment.
Investment property
Investment property is land and buildings held to earn rental income together with the potential for
capital growth.
Acquisitions and disposals are recognised on unconditional exchange of contracts. Acquisitions are
initially recognised at cost, being the fair value of the consideration given, including transaction costs
associated with the investment property.
After initial recognition, investment properties are measured at fair value, with unrealised gains and
losses recognised in profit and loss. Realised gains and losses on the disposal of properties are
recognised in profit and loss in relation to carrying value. Fair value is based on the market valuations
of the properties as provided by a firm of independent chartered surveyors, at the reporting date.
Market valuations are carried out on a quarterly basis.
As disclosed in note 21 of the 2016 Annual Report, the Group leases out all owned properties on operating leases. A property
held under an operating lease is classified and accounted for as an investment property where the
Group holds it to earn rentals, capital appreciation, or both. Any such property leased under an
operating lease is classified as an investment property and carried at fair value.
Prepayments
Prepayments are carried at cost less any accumulated impairment losses.
Borrowing costs
Borrowing costs are charge in full to the Statement of Comprehensive Income as incurred.
Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by another
party, the lessor, are classified as operating leases. Payments, including pre-payments, made under
operating leases (net of any incentives received from the lessor) are charged to the income statement
on a straight-line basis over the period of the lease. Properties leased out under operating leases are
included in investment properties.
Properties leased out under operating leases are included in investment property in the consolidated
statement of financial position (Note 10 of the 2016 Annual Report).
Financial assets and liabilities
Non-derivative financial instruments
Assets
Non-derivative financial instruments comprise trade and other receivables and cash and cash
equivalents. These are recognised initially at fair value plus any directly attributable transaction costs.
Subsequent to initial recognition they are measured at amortised cost using the effective interest rate
method less any impairment losses.
Trade and other receivables
Financial assets recognised in the consolidated statement of financial position as trade and other
receivables are classified as loans and receivables. They are recognised initially at fair value and
subsequently measured at amortised cost less provision for impairment.
Cash and cash equivalents
Cash at bank and short-term deposits that are held to maturity are carried at cost. Cash and cash
equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to insignificant risk of changes in value.
For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash in hand and
short-term deposits at banks with a term of no more than three months.
Liabilities
Non-derivative financial instruments comprise loans and borrowings and trade and other payables.
Loans and borrowings
Borrowings are recognised initially at fair value of the consideration received, less attributable
transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at
amortised cost with any difference between cost and redemption value being recognised in the profit
and loss over the period of the borrowings on an effective interest basis.
Trade and other payables
Financial liabilities included in trade and other payables are recognised initially at fair value and
subsequently at amortised cost. The fair value of a non-interest bearing liability is its discounted
repayment amount. If the due date of the liability is less than one year, discounting is omitted.
Derivative financial instruments ("derivatives")
Derivative financial assets and liabilities comprise of an interest rate cap for hedging purposes
(economic hedge). The Group does not apply hedge accounting in accordance with IAS 39.
Recognition of the derivative financial instruments takes place when the economic hedging contracts
are entered into. They are measured initially and subsequently at fair value; transaction costs are
included directly in finance costs. Gains or losses on derivatives are recognised in the profit or loss in
net change in fair value of financial instruments at fair value through profit or loss.
Share capital
Ordinary shares including treasury shares are classified as equity when there is no obligation to
transfer cash or other assets.
Dividends
Dividends are recognised as a liability in the period in which they are approved.
Impairment
Financial assets
A financial asset, other than those at fair value through profit and loss, is assessed at each reporting
date to determine whether there is any objective evidence that it is impaired. A financial asset is
considered to be impaired if objective evidence indicates that one or more events have had a
negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the
difference between its carrying amount and the present value of the estimated future cash flows
discounted at the original effective interest rate.
Significant financial assets are tested for impairment on an individual basis. The remaining financial
assets are assessed collectively in groups that share similar credit risk characteristics. All impairment
losses are recognised in the profit and loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the
impairment loss was recognised. For financial assets measured at amortised cost, the reversal is
recognised in the profit and loss.
Non-financial assets
The carrying amounts of the Group's non-financial assets, other than investment property but
including joint ventures, are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the asset's recoverable amount is
estimated.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its
fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely independent of the cash inflows of
other assets or groups of assets (the "cash-generating unit").
An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit
exceeds its estimated recoverable amount. Impairment losses are recognised in the profit and loss.
Revenue
Rental income
Rental income from operating leases is recognised on a straight-line basis over the lease term. When
the Group provides incentives to its tenants, the cost of incentives is recognised over the lease term,
on a straight-line basis, as a reduction of rental income.
Service charges
Revenue from service charges is measured at the fair value of the consideration received or
receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts
collected on behalf of third parties.
The group recognises revenue when the amount of revenue can be reliably measured, it is probable
that future economic benefits will flow to the entity and specific criteria have been met for each of the
group's activities as described below. The group bases its estimates on historical results, taking into
consideration the type of customer, the type of transaction and the specifics of each arrangement.
Service charges are recognised in the accounting period in which the services are rendered.
Finance income and expenses
Finance income comprises interest income on funds invested that are recognised in the profit and
loss. Interest income is recognised on an accruals basis.
Finance expenses comprise interest expense on borrowings that are recognised in profit and loss.
Attributable transaction costs incurred in establishing the Group's credit facilities are deducted from
the fair value of borrowings on initial recognition and are amortised over the lifetime of the facilities
through profit and loss. Finance expenses are accounted for on an effective interest basis.
Expenses
All expenses are accounted for on an accruals basis. They are recognised in profit or loss in the year
in which they are incurred, on an accruals basis.
Taxation
The Company and its subsidiaries are subject to UK income tax on any income arising on investment
properties, after deduction of debt financing costs and other allowable expenses.
Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the
expected tax payable on the taxable income for the year, using tax rates enacted or substantially
enacted at the reporting date, and any adjustment to tax payable in respect of previous periods.
Foreign currency translation
Items included in the financial statements of each of the Group's entities are measured using the
currency of the primary economic environment in which the entity operates (the "functional currency").
The functional currency of all the entities in the Group is the euro, as this is the currency in which the
majority of investment takes place and in which the majority of income and expenses are incurred.
The financial statements are also presented in euros.
Foreign currency transactions are translated into the functional currency using the exchange rate
prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at the year-end exchange rates of monetary
assets and liabilities denominated in foreign currencies are recognised in profit or loss in the
Statement of Comprehensive Income.
Income and expenses are translated into the presentation currency using average rate monthly rates.
Assets and liabilities held at the end of the reporting period are translated into the presentation
currency at the exchange rate prevailing at that date. Foreign exchange differences arising on
translation to the presentation currency are recognised in other comprehensive income in the
Statement of Comprehensive Income. Equity held at the end of the reporting period is translated into
the presentation currency at the exchange rate prevailing at that date. Foreign exchange differences
arising on translation to the presentation currency are recognised within Equity.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment of business, being
property investment and in one geographical area, Continental Europe. The chief operating decision
maker is considered to be the Board of Directors who are provided with consolidated IFRS
information on a quarterly basis.
2. New standards and interpretations
Standards, interpretations and amendments to published standards that are effective for the first time
in 2016
The following new standards, interpretations or amendments, which are relevant to the Company's
operations, became effective during the year:
- Annual improvements to IFRSs 2010-2012 Cycle (effective for accounting periods beginning
on or after 1 July 2014)
- Annual improvements to IFRSs 2011-2013 Cycle (effective for accounting periods beginning
on or after 1 July 2014)
New standards and interpretations not yet adopted
A number of new standards and amendments to standards and interpretations are effective for annual
periods beginning on or after 1 January 2017, and have not been applied in preparing these
consolidated financial statements. None of these are expected to have a significant effect on the
consolidated financial statements of the Group, except the following set out below:
IAS 12, 'Income taxes' was amended to clarify the accounting for deferred tax where an asset is
measured at fair value and that fair value is below the asset's tax base. This amendment is effective
for annual periods beginning on or after 1 January 2017. The Group does not expect the amendment
to have a material impact on its financial statements since fair value exceeds the cost for almost all of
its investment properties. The group is monitoring fair value movements below cost to assess the
impact of the amendment in future periods.
IFRS 9, 'Financial instruments', addresses the classification, measurement and recognition of
financial assets and financial liabilities. The standard is effective for accounting periods beginning on
or after 1 January 2018. Early adoption is permitted. The group expects IFRS 9 to have an immaterial
impact on the accounting for available-for-sale financial assets and derivatives.
IFRS 15, 'Revenue from contracts with customers' deals with revenue recognition and establishes
principles for reporting useful information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.
The standard is effective for annual periods beginning on or after 1 January 2019 and earlier
application is permitted. The Group expects IFRS 16 to have an immaterial impact on its current
accounting practices.
IFRS 16, 'Leases' was issued in January 2016. For lessees, it will result in almost all leases being
recognised on the statement of financial position, as the distinction between operating and finance
leases will be removed. Under the new standard, an asset (the right to use the leased item) and a
financial liability to pay rentals are recognised. The only exceptions are short-term and low-value
leases. The accounting for lessors will not significantly change. The standard is effective for annual
periods beginning on or after 1 January 2019 and earlier application is permitted. The Group expects
IFRS 16 to have an immaterial impact on its current accounting practices.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to
have a material impact on the Group.
3. Material agreements
Schroder Real Estate Investment Management Limited is the Investment Manager to the Company.
The Investment Manager is entitled to a fee together with reasonable expenses incurred in the
performance of its duties. The fee is payable monthly in arrears and shall be an amount equal to one
twelfth of the aggregate of 1.1% of the EPRA NAV of the Company. The Investment Management
Agreement can be terminated by either party on not less than twelve months written notice, such
notice not to expire earlier than the third anniversary of Admission, or on immediate notice in the
event of certain breaches of its terms or the insolvency of either party. The total charge to profit and
loss during the year was EUR1,402,000 (2015: EURNil). At the year end EUR438,000 (2015: EURNil) was
outstanding. Details of directors' fees are disclosed in Note 6 of the 2016 Annual Report, and details of
loans from Mercialys, a related party, are disclosed in Note 16 of the 2016 Annual Report.
4. Other expenses
Group Group Company Company
30/09/2016 30/09/2015 30/09/2016 30/09/2015
EUR000 EUR000 EUR000 EUR000
Directors' and officers'
insurance premium 9 - 9 -
Regulatory costs 25 - 12 -
Marketing 8 - 8 -
Professional fees 11 - 11 -
Other expenses 69 - 48 -
122 - 88 -
Directors' fees
Directors are the only officers of the Company and there are no other key personnel. The Directors'
annual remuneration for services to the Group was EUR129,000 (2015: EURNil), equivalent to GBP97,457 as
set out in the Remuneration Report on pages 37 to 38 of the 2016 Annual Report.
5. Earnings per share
Basic earnings per share
The basic loss per share for the Group is calculated by dividing the net loss attributable to
shareholders by the weighted average number of ordinary shares in issue during the year.
2016 2015
Net loss attributable to shareholders (EUR3,399,000) -
Weighted average number of ordinary shares is issue 118,319,687 -
Basic earnings per share (cents per share) (2.9) -
Diluted earnings per share
The Group has no dilutive potential ordinary shares, hence the diluted loss per share is the same as
the basic loss per share.
Headline earnings per share
The headline earnings for the Group is 0.9 euro cents per share as detailed on page 74 of the 2016 Annual Report.
6. Dividends paid
In respect of Ordinary Rate 30/09/2016
Shares (cents) EUR000
First interim dividend for the year ended 30 September 2016,
dividend paid 7 September 2016 121,234,686 0.8 970
A second interim dividend for the year ended 30 September 2016 of 0.9 euro cents per share was
declared on 13 December 2016 and will be paid on 27 January 2017 to shareholders on the register
on 13 January 2017.
7. Investment property
Group
Leasehold Freehold Total
EUR000 EUR000 EUR000
Fair value as at 30 September 2015 - - -
Property acquisitions - 158,639 158,639
Acquisition costs - 11,263 11,263
Net valuation loss on investment property - (4,537) (4,537)
Fair value as at 30 September 2016 - 165,365 165,365
Fair value of investment properties as determined by the valuer totals EUR165,500,000 (2015: EURNil). The fair
value of investment properties disclosed above includes a tenant incentive adjustment of EUR135,000 (2015: EURNil).
The net valuation loss on investment property of EUR4,537,000 consists of net property revaluation
losses of EUR4,402,000 and the above mentioned tenant incentive adjustment of EUR135,000.
The fair value of investment property has been determined by Knight Frank LLP, a firm of
independent chartered surveyors, who are registered independent appraisers. The valuation has
been undertaken in accordance with the RICS Valuation - Professional Standards January 2014
Global and UK Edition, issued by the Royal Institution of Chartered Surveyors (the "Red Book")
including the International Valuation Standards.
The properties have been valued on the basis of "Fair Value" in accordance with the RICS Valuation -
Professional Standards VPS4(1.5) Fair Value and VPGA1 Valuations for Inclusion in Financial
Statements which adopt the definition of Fair Value used by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation methodology and the Valuer's
professional judgement. The Valuer's opinion of Fair Value was primarily derived using recent
comparable market transactions on arm's length terms, where available, and appropriate valuation
techniques (The Investment Method).
The properties have been valued individually and not as part of a portfolio.
All investment properties are categorised as Level 3 fair values as they use significant unobservable
inputs. There have not been any transfers between Levels during the year. Investment properties
have been classed according to their real estate sector. Information on these significant unobservable
inputs per class of investment property is disclosed below:
Some of the investment properties are leased to tenants under long-term operating leases with
rentals payable monthly.
Quantitative information about fair value measurement using unobservable inputs (Level 3) as at
30 September 2016
Retail (incl Office Total
retail
warehouse)
Fair value 94,000 71,500 165,500
(EUR000)
Area 50.273 19.686 69.959
('000 sqm)
Net passing Range 94.73 - 145.32 27.78 - 27.78 -
rent EUR per sqm Weighted average(2) 108.67 340.64 340.64
per annum 234.96 163.25
Gross ERV per Range 96.45 - 157.80 126.12 - 96.45 -
sqm per annum Weighted average(2) 112.77 409.91 409.91
291.70 190.07
Net initial yield (1) Range 4.62 - 5.81 1.00 - 6.06 1.00 - 6.06
Weighted average(2) 5.28 4.55 4.96
Equivalent yield Range 4.60 - 6.02 4.60 - 5.26 4.60 - 6.02
Weighted average(2) 5.31 4.74 5.06
Notes:
(1) Yields based on rents receivable after deduction of head rents, and non-recoverables
(2) Weighted by Market Value
Sensitivity of measurement to variations in the significant unobservable inputs
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of
the fair value hierarchy of the Group's property portfolio, together with the impact of significant
movements in these inputs on the fair value measurement, are shown below:
Unobservable input Impact on fair value Impact on fair value
measurement of significant measurement of significant
increase in input decrease in input
Passing rent Increase Decrease
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Equivalent yield Decrease Increase
There are interrelationships between the yields and rental values as they are partially determined by
market rate conditions. The sensitivity of the valuation to changes in the most significant inputs per
class of investment property are shown below:
Estimated movement in fair value of Retail Office Total
investment properties at 30 September 2016 EUR'000 EUR'000 EUR'000
Increase in ERV by 5% 2,800 3,500 6,300
Decrease in ERV by 5% 2,850 3,500 6,350
Increase in net initial yield by 0.25% 4,300 2,500 6,800
Decrease in net initial yield by 0.25% 4,700 6,950 11,650
8. Cash and cash equivalents
Group Group Company Company
30/09/2016 30/09/2015 30/09/2016 30/09/2015
EUR000 EUR000 EUR000 EUR000
Cash at bank and in hand 58,476 - 6,068 -
9. Issued capital and reserves
Share capital
As at 30 September 2016, the share capital of the Company was represented by 121,234,686
Ordinary Shares with a par value of 10.00 pence.
Issued share capital
On 9 December 2015 the Company issued 107,500,000 new ordinary shares under the placing and
offer for subscription programme at a price of GBP1.00 per share. A further 450,000 new ordinary shares
were issued under the placing programme at a price of GBP1.00 per share on 14 December 2015.
On 12 February 2016, a further 13,284,686 shares were issued under the placing programme at a
price of GBP1.04 per share.
Issue costs in relation to the placings were EUR4,762,000.
On 23 March 2016 a reduction of share premium of GBP96,750,000 (EUR122,157,000) was approved.
As at 30 September 2016, the Company had 121,234,686 ordinary shares in issue (no shares were
held in Treasury). The total number of voting rights of the Company at 30 September 2016 was 121,234,686.
Following the year end, an additional 12,500,000 ordinary shares were issued pursuant to the placing
programme at an issue price of GBP1.20 per share, bringing the total number of shares in issue as at the
date of this report to 133,734,686.
10. Net Asset Value per Ordinary Share
The NAV per Ordinary Share of 135.7 cents is based on the net assets of EUR164,564,000 and
121,234,686 Ordinary Shares in issue at 30 September 2016.
11. Foreign exchange
During the year the Group incurred the following foreign currency losses:
A realised currency loss of EUR314,000 arose when GBP51.0 million of share issue proceeds received on 9
December 2015 was converted into euros on 14 December 2015. A realised currency gain of
EUR210,000 arose on a cash transaction. Other currency gains of EUR4,000 arose on sundry corporate
expense transactions.
A net unrealised currency loss of EUR226,000 arose when GBP0.8m and R0.8m of cash and other monetary
items held by the Group at the period were retranslated into euros at the period end for reporting
purposes.
Both of these realised and unrealised amounts appear within the Statement of Comprehensive Income.
On 9 December 2015 the company issued GBP54.7 million of sterling denominated share capital to its
South African investors. This share capital was valued at EUR75.3 million on the date of issue. The
proceeds of this share issue were settled by investor funds of R1.18bn valued at EUR73.7 million on the
date of issue. The reason for the difference is that the amount paid by investors was required to be
determined one week in advance of the issue date by a forward exchange rate provided to South
African investors and could not be hedged by the Company at IPO. The currency loss arising from
this was EUR1.6 million. This amount appears within the Statement of Changes in Equity as part of total
issue costs of EUR5.0 million. Following IPO the Company is able to hedge currency when issuing new
equity and therefore this is not expected to reoccur.
At each period end the Group retranslates its sterling denominated share capital, share premium and
other reserves into euros using the period end exchange rate. At 30 September 2016 the unrealised
currency loss arising on this retranslation was EUR25.7m. This amount appears within the Statement of
Changes in Equity.
12. EPRA and Headline Performance Measures (unaudited)
As recommended by EPRA (European Public Real Estate Association), EPRA performance measures are
disclosed in the section below.
EPRA performance measures: Summary Table
31/03/ 2016 30/09/2015
Total Total
EUR000 EUR000
EPRA earnings 1,013 -
EPRA earnings per share 0.9 -
EPRA NAV 157,560
EPRA NAV per share 130.0 -
EPRA NNNAV 157,560 -
EPRA NNNAV per share 130.0 -
EPRA Net Initial Yield 5.1% -
EPRA topped-up Net Initial Yield 5.1% -
EPRA Vacancy Rate 0% -
a.EPRA earnings and EPS
Total comprehensive income excluding realised and unrealised gains/losses on investment property, share
of profit on joint venture investments and changes in fair value of financial instruments, divided by the
weighted average number of shares.
31/03/2016 30/09/2015
EUR000 EUR000
IFRS loss after tax (3,625) -
Adjustments to calculate EPRA Earnings:
Net valuation loss on investment property 4,537 -
Exchange differences on monetary items (unrealised) 226 -
Adjustment for Minority Interests net revenue (185) -
Finance costs: interest rate cap 60 -
EPRA earnings 1,013 -
Weighted average number of ordinary shares 118,319,687 -
IFRS earnings per share (cents per share) (2.9) -
EPRA earnings per share (cents per share) 0.9 -
b.EPRA NAV per share
The Net Asset Value adjusted to exclude assets or liabilities not expected to crystallise in a long-term
investment property model, divided by the number of shares in issue.
30/09/2016 30/09/2015
EUR000 EUR000
IFRS NAV per financial statements 164,564 -
Adjustment for Minority Interests (6,804)
Adjustment for fair value of financial instruments (200)
EPRA NAV 157,560 -
Shares in issue at end of year 121,234,686 -
IFRS NAV per share 135.7 -
EPRA NAV per share 130.0 -
c.EPRA NNNAV per share
The EPRA NAV adjusted to include the fair value of debt, divided by the number of shares in issue.
30/09/2016 30/09/2015
EUR000 EUR000
EPRA NAV 157,560 -
Adjustments to calculate EPRA NNNAV:
Fair value of debt - -
EPRA NNNAV 157,560 -
EPRA NNNAV per share 130.0 -
d.EPRA Net Initial Yield
Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable
property operating expenses, divided by the grossed up market value of the complete property portfolio.
The EPRA "topped up" NIY is the EPRA NIY adjusted for unexpired lease incentives.
30/09/2016 30/09/2015
EUR000 EUR000
Investment property – wholly owned 148,160 -
Investment property – share of joint ventures and funds - -
Complete property portfolio 148,160 -
Allowance for estimated purchasers' costs 9,954 -
Gross up completed property portfolio valuation 159,423 -
Annualised cash passing rental income 8,088 -
Property outgoings - -
Annualised net rents 8,088 -
Notional rent expiration of rent free periods - -
Topped-up net annualised rent 8,088 -
EPRA NIY 5.1% -
EPRA "topped-up" NIY 5.1% -
e.Headline Rarnings Reconciliation
30/09/2016 30/9/2015
EUR000 EUR000
Loss after tax (3,625) -
Adjustments to calculate Headline Earnings exclude:
Net valuation loss on investment property 4,537 -
Adjustment for Minority Interests net revenue (185) -
Finance costs: interest rate cap 60
Headline earnings 787 -
Weighted average number of ordinary shares 118,319,687 -
Headline earnings per share (cents per share) (0.7) -
Headline earnings per share reflect the underlying performance of the company calculated in accordance with
the Johannesburg Stock Exchange Listings requirements.
13. Status of announcement
2015 Financial Information
The figures and financial information for 2015 are extracted from the published Annual Report and
Accounts for the year ended 30 September 2015 and do not constitute the statutory accounts for that year.
The 2015 Annual Report and Accounts have been delivered to the Registrar of Companies.
2016 Financial Information
The figures and financial information for 2016 are extracted from the Annual Report and Accounts for the
year ended 30 September 2016 and do not constitute the statutory accounts for the year. The 2016
Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does
not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The
2016 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks
on the Company's webpage (or any other website) is incorporated into, or forms part of, this announcement.
Note to editors:
Schroder European Real Estate Investment Trust is a closed ended real estate investment company
which invests in European growth cities. The Company has a premium listing on the Main Market of
the London Stock Exchange (ticker: SERE) and a secondary listing on the Main Board of the
Johannesburg Stock Exchange (ticker: SCD).
The Company is externally managed by Schroder Real Estate Investment Management Limited (the
'Investment Manager') which has managed real estate funds since 1971 and currently has GBP11.8
billion* (EUR13.7 billion/ US$15.4 billion) of gross real estate assets under management as at 30 September 2016.
The Company's primary investment focus is on the core cities and regions in France and Germany,
considered to be well established, mature and liquid and where the Investment Manager believes
there are positive growth prospects and real estate markets that provide an opportunity to generate
attractive returns. The Company has the ability to invest in any country in Continental Europe,
although preference will be given to mature and liquid markets.
For further information about Schroders' real estate business visit www.schroders.com/realestate
*Real Estate AUM includes holdings of Schroder Real Estate Capital Partners and Schroders Multi- asset Funds.
JSE Sponsor:
PSG Capital
Date: 14/12/2016 09:20:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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