In an interview with Business Day TV‚ Tony Smedley‚ Head of Continental European Investment at Schroder Real Estate Investment Management‚ speaks about the fund’s plan to raise new capital to help fund an investment pipeline of around EUR150m.
BUSINESS DAY TV: South African investors it seems just can’t say no to a property company book build and recently listed Schroder European Real Estate Investment Trust intends to raise more equity capital to help it secure a roughly EUR150m pipeline of investment properties. The company has cash available of about EUR45m. And joining me now on the line to discuss the share placement is CEO Tony Smedley.
Tony...how much are you actually looking to raise and why didn’t you say so in your Sens statement?
Tony Smedley: We have capacity in the company to raise EUR120m and we have a large pipeline as you indicated of EUR150m. We’re seeing increasing investment opportunities so we certainly do not have the capacity currently in the company to satisfy those opportunities that we’ve identified.
BDTV: Fair enough and yet reading through the Sens statement you talk about the average cost of your debt‚ or the interest costs which is 1.19% as far as the debt drawdown that you had in place in August. Why are you raising equity rather than debt when debt is so cheap?
TS: We will certainly add further debt as we invest. We’re currently at a loan to value (LTV) of about 24%. We always said that we would not exceed 35% LTV in order not to stress the balance sheet of the company. We want this to be a stable long-term allocation to real estate in Europe and we would like the equity to do the hard work rather than the debt. So we’re investing in areas where we believe we will grow more quickly than some parts of Europe and hence our focus on big cities. If we continue to do that we will invest the capital that we raise and then add further debt in due course because clearly at these sorts of rates that it is accretive.
BDTV: Yes‚ I suppose I understand that. But if the cap in your load to value is 35% why wouldn’t you look to maybe do a bit of it now‚ particularly given where share prices in SA at least are trading?
TS: We will certainly add additional debt as we invest the equity that we raise but it’s generally much better to invest the equity first than to put the debt later. The reason for that is you can therefore decide the best assets for the debt structure‚ you’d have a more efficient debt strategy we can then choose and select the opportunities that gives us the lowest cost of debt. It’s better to do that once we’ve acquired assets rather than trying to do that before having raised the equity.
BDTV: Okay. You say that the current pipeline of acquisitions have a net initial yield in excess of the initial yield on your current portfolio‚ and that is around the 5.6% level. How much higher than the initial yield in your existing portfolio is it?
TS: Clearly the pipeline will change over time‚ but the current collection of assets that we’re looking at has an income yield of about 6.5%.
BDTV: So that’s a fair degree higher.
TS: Yes it is and we’re finding some interesting opportunities so hence the reason for coming to the market to raise more capital from investors now because there are some attractive opportunities that we’ve identified‚ many of them have not been openly marketed and we believe that if we could deploy equity now into these assets‚ it will certainly improve overall returns of the company.
BDTV: Where are these properties‚ are they spread around Europe because you’ve already spread yourself about a bit‚ or are they located in any particular geographies?
TS: We’ve always said we would invest in 12 – 14 growth cities or regions across continental Europe. We began the investment strategy focusing essentially on the liquid established and mature markets of France and Germany. There are some assets in France and Germany on the pipeline but we are also looking to diversify geographically into other cities in order to benefit diversification.
BDTV: So which cities are they?
TS: We have additional assets in Paris‚ we’re looking at a couple of things in Brussels‚ Amsterdam and we also have something that we’re looking at in Madrid.
BDTV: Okay...I know that the yields seem great and especially the differential I suppose between cost of debt and maybe the equity that you’re raising‚ but these are initial yields. What are the forward yields like‚ especially if you consider that there is almost no inflation in Europe and presumably you can’t push through cost escalations like South Africans are used to‚ where inflation is 5% or 6%. So down the line what kinds of yields are you actually going to get?
TS: It’s a good question and one of the reasons why we like the main cities and growth regions is that the rental levels currently being paid in those areas are relatively low by historical standards. But we believe we are buying in an interesting point in the cycles where we can get growth through rental renegotiations as and when leases expire. The escalations will still occur annually‚ but they will be at lower rates for the reasons you’ve described. But in some parts of these cities we’re seeing rentals grow between 10% and 20%. That’s in certain sub-markets of Berlin for example‚ we see that sort of growth whereas average German rental growth is more in the region 2% to 3% so our job is to identify those parts of those cities that will outperform.
BDTV: Growth of 20% sounds unbelievable actually. Surely there are other people then looking at exactly the same properties‚ wanting to capitalise on that yield differential‚ and isn’t that pushing the price up?
TS: Unfortunately we’re not alone in these markets clearly‚ the huge benefit we have and I think I mentioned the point earlier‚ is that because we have a significant infrastructure and teams on the ground in these markets‚ we’re able to identify opportunities which are not being openly marketed and over half of the portfolio the company already owns has been acquired in that way and that’s meant that we’ve been able to buy assets...and avoid competitive bidding.
BDTV: Just lastly‚ what does your share register look like‚ what percentage of South African investors do you have versus international investors?
TS: It’s about‚ when we launched in December last year it was about a 50-50 split between UK and SA.
BDTV: And has it stayed that way?
TS: It’s remained broadly at that level‚ yes. We hope and expect that we will get a broad cross section of funds from existing investors and also potentially some new investors to come onto the register to improve liquidity.