Final Results

RNS Number : 7716R

Schroder Eur Real Est Inv Trust PLC

14 December 2016

 

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

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:

http://www.rns-pdf.londonstockexchange.com/rns/7716R_-2016-12-13.pdf

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

·     €166.5 million (£121.7 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 €157.8 million (£136.7 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 €148.2 million as at 30 September 2016, reflecting an uplift on purchase price of approximately 5%

·     100% let on strong covenants with 6.5 years average lease term

·     Portfolio to benefit from growth trends of urbanisation, demographics and infrastructure improvements

·     Post period end, a further €16.8 million (£15 million) raised through equity placing; and contracts exchanged on an office investment in Paris for €30.1 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 7-9% property total return once fully invested 

·     Existing portfolio and attractive investment pipeline on target to meet performance objectives

·     €60 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: [phone]

Ria Vavakis

Schroder Investment Management Limited                                        Tel: [phone]

Dido Laurimore/Ellie Sweeney/Richard Gotla                                    Tel: [phone]

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 £15 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 €148.2 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 €8.7 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 €178 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 €48.7 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 (£11.8 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 €157.8 million (£136.7 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: 

	€million*	% 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 €148.2 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 €30.1 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 €178 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
			€m	% total	€0-€20m	€20m-€40m	€40m-€60m	>€60m
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	€148.2 million
Paris, Le Directoire	France	Office	3.4	28.2		X
Portfolio incl. committed purchase			12.1	100.0	€ 178.3 million

The portfolio's country and sector allocations, pre and post the Le Directoire commitment, is specified below.

Country allocation (% contracted rent)	Portfolio at financial year end	Portfolio including committed purchase		Sector allocation (% contracted rent)	Portfolio at financial year end	Portfolio including committed 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 €12.1 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 risk(1)	Contracted rent (€'000 p.a.)	Contracted rent (%)(2)	Unexp. lease 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 €100,000 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 €148.2 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 €37.5 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 southern Berlin suburb of Mariendorf. It was acquired in March 2016 for €24.3 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 €28.9 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 €28.9 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 €11.1 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 €39.9 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 €39.9 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 €141.6 million and €151.5 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 €30.1 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 €48.7 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 Date	Outstanding Principal	Interest rate
Deutsche Pfandbrief Bank	Berlin/Frankfurt	30/06/2026	16,500,000	1.31%
	Stuttgart/Hamburg	30/06/2023	14,000,000	0.85%
Credit Agricole1	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 €0.2 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 become out of line with the requirements of investors.	Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives monitored. Marketing and distribution activity is actively reviewed.
Investment management risk The Investment Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of the Investment Manager's compliance with the agreed investment restrictions, investment performance and risk against 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. Annual review of the ongoing suitability of the Investment Manager.
Custody risk Safe custody of the Company's assets may be compromised through control failures, including cyber hacking.	Depositary verifies ownership and legal 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 arrangements increase the funds available for 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.	Gearing is monitored and strict restrictions on borrowings imposed.
Accounting, legal and regulatory risk In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, are subject to stringent review processes. Procedures have been established to safeguard against unauthorised disclosure of inside information.
Service provider risk The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers appointed subject to due diligence processes and with clearly documented contractual arrangements detailing service expectations. 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 €000
		€000	€000 (unaudited)	€000	(unaudited)
Rental income		4,891	-	-	-
Property operating expenses		(969)	-	-	-
Net rental and related income		3,922	-	-	-
Net loss from fair value adjustment on investment property		(4,537)	-	-	-
Realised loss on foreign exchange		(101)	-	(101)	-
Net change in fair value of financial instruments at fair value through profit or loss		(60)	-	-	-
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 Other comprehensive loss items that may be subsequently reclassified to profit or loss Currency translation differences		(3,399) (226)	-	(2,095) (226)	- -
Total other comprehensive loss		(226)	-	(226)	-
Total comprehensive loss for the year attributable to the equity holders		(3,625)	-	(2,321)	-
Total comprehensive loss attributable to: Owners of the parent                                        Non-controlling interests		(2,742) (883) (3,625)	- - -	(2,321) - (2,321)	- - -
Basic and diluted loss per share attributable to the equity holders during the year (expressed in € per share)		(2.9c)	-	-	-

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 Non current assets				€000	€000 (unaudited)	€'000	€'000 (unaudited)
Investment property				165,365	-	-	-
Investment in subsidiaries				-	-	118,583	-
Non-current assets				165,365	-	118,583	-
Current assets
Trade and other receivables Interest rate derivative contracts				2,377 200	- -	34,179 -	- -
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	-
				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

Group		Share capital	Share premium	Retained earnings	Other reserves	Sub-total	Non-controlling interests	Total Equity
		€000	€000	€000	€000	€000	€'000	€'000
Balance as at 9 January 2015		-	-	-	-	-	-	-
Total comprehensive profit for the period		-	-	-	-	-	-	-
Balance as at 30 September 2015		-	-	-	-	-	-	-
Loss for the year		-	-	(2,516)	-	(2,516)	(883)	(3,399)
Other comprehensive loss for the year		-	-	-	(226)	(226)	-	(226)
Dividends paid New equity issuance Share premium reduction Unrealised foreign exchange Investment from non-controlling interest		- 16,576 - (2,582) -	- 149,873 (122,157) (12,834) -	(970) - - -	- (4,977) 122,157 15,416 -	(970) 161,472 - - -	- - - - 7,687	(970) 161,472 - - 7,687
Balance as at 30 September 2016		13,994	14,882	(3,486)	132,370	157,760	6,804	164,564

Company			Share capital	Share premium	Retained earnings	Other reserves	Sub-total	Non-controlling interests	Total
			€000	€000	€000	€000	€000	€'000	€'000
Balance as at 9 January 2015			-	-	-	-	-	-	-
Total comprehensive profit for the period			-	-	-	-	-	-	-
Balance as at 30 September 2015			-	-	-	-	-	-	-
Total comprehensive loss for the year			-	-	(2,321)	-	(2,321)	-	(2,321)
Dividends paid New equity issuance Share premium reduction Unrealised foreign exchange			- 16,576 - (2,582)	- 149,873 (122,157) (12,834)	(970) - - -	- (4,978) 122,157 15,416	(970) 161,471 - -	- - - -	(970) 161,471 - -
Balance as at 30 September 2016			13,994	14,882	(3,291)	132,595	158,180	-	158,180

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
			€000	€000 (unaudited)	€'000	€'000 (unaudited)
Operating activities
Loss before tax for the year			(3,352)	-	(2,095)	-
Adjustments for:
Net valuation loss on fair value adjustment in investment property			4,537	-	-	-
Realised foreign exchange losses			101	-	101	-
Finance income Finance expense Movement in fair value of derivative        interest rate contracts			(5) 157 60	- - -	(5) - -	- - -
Operating cash generated/(used) before changes in working capital			1,498	-	(1,999)	-
Increase in trade and other receivables			(2,376)	-	(422)	-
Increase in trade and other payables			2,728	-	644	-
Cash generated from/(used in) operations			1,850	-	(1,777)	-
Interest rate cap purchased			(260)	-	-	-
Finance costs paid			(903)	-	-	-
Interest received			5	-	5	-
Net Cash generated/used in operating activities			692	-	(1,772)	-
Investing Activities
Acquisition of investment property			(169,647)	-	-	-
Investment in shares of subsidiary companies			-	-	(118,583)	-
Loans to subsidiary companies			-	-	(33,757)	-
Net cash used in investing activities			(169,647)	-	(152,340)	-
Financing Activities
New bank loan advance New loan advance - non-controlling interest Loan repayment - non-controlling interest			56,500 10,753 (7,689)	- - -	- - -	- - -
New equity - non controlling interest			7,687	-	-	-
Share issue net proceeds			161,477	-	161,477	-
Dividends paid			(970)	-	(970)	-
Net cash generated from financing activities			227,758	-	160,507	-
Net increase in cash and cash equivalents for the year			58,803	-	6,395	-
Opening cash and cash equivalents			-	-	-	-
Foreign exchange losses			(327)	-	(327)	-
Closing cash and cash equivalents			58,476	-	6,068	-

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 and the Johannesburg Stock Exchange.  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 €1,402,000 (2015: €Nil). At the year end €438,000 (2015: €Nil) 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
		€000	€000	€000	€000
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 €129,000 (2015: €Nil), equivalent to £97,457 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		(€3,399,000)	-
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)	€000
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
	€000	€000	€000
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 €165,500,000 (2015: €Nil).  The fair value of investment properties disclosed above includes a tenant incentive adjustment of €135,000 (2015: €Nil).

The net valuation loss on investment property of €4,537,000 consists of net property revaluation losses of €4,402,000 and the above mentioned tenant incentive adjustment of €135,000.

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 retail warehouse)	Office	Total
Fair value (€000)		94,000	71,500	165,500
Area ('000 sq m)		50.273	19.686	69.959
Net passing rent € per sqm per annum	Range Weighted average (2)	94.73 - 145.32 108.67	27.78 - 340.64 234.96	27.78 - 340.64 163.25
Gross ERV per sqm per annum	Range Weighted average (2)	96.45 - 157.80 112.77	126.12 - 409.91 291.70	96.45 - 409.91 190.07
Net initial yield (1)	Range Weighted average (2)	4.62 - 5.81 5.28	1.00 - 6.06 4.55	1.00 - 6.06 4.96
Equivalent yield	Range Weighted average (2)	4.60 - 6.02 5.31	4.60 - 5.26 4.74	4.60 - 6.02 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 measurement of significant increase in input	Impact on fair value measurement of significant 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 investment properties at 30 September 2016	Retail €'000	Office €'000	Total €'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 30/09/2016 €000	Group 30/09/2015 €000	Company 30/09/2016 €000	Company 30/09/2015 €000
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 £1.00 per share. A further 450,000 new ordinary shares were issued under the placing programme at a price of £1.00 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 £1.04 per share.

Issue costs in relation to the placings were €4,762,000.

On 23 March 2016 a reduction of share premium of £96,750,000 (€122,157,000) 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 £1.20 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 €164,564,000 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 €314,000 arose when £51.0 million of share issue proceeds received on 9 December 2015 was converted into euros on 14 December 2015.  A realised currency gain of €210,000 arose on a cash transaction.  Other currency gains of €4,000 arose on sundry corporate expense transactions.

A net unrealised currency loss of €226,000 arose when £0.8m 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 £54.7 million of sterling denominated share capital to its South African investors.  This share capital was valued at €75.3 million on the date of issue. The proceeds of this share issue were settled by investor funds of R1.18bn valued at €73.7 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 €1.6 million. This amount appears within the Statement of Changes in Equity as part of total issue costs of €5.0 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 €25.7m. 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 €000	Total €000
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%	-

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
		€000	€000
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	-

a.  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
		€000	€000
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	-

b.  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
		€000	€000
EPRA NAV		157,560	-
Adjustments to calculate EPRA NNNAV:
Fair value of debt		-	-
EPRA NNNAV		157,560	-
EPRA NNNAV per share		130.0	-

c.  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
		€000	€000
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%	-

d.  Headline Earnings Reconciliation

		30/09/2016	30/9/2015
		€000	€000
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 Listing 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 plc 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 £11.8 billion* (€13.7 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.

 

END

 

 

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