Half-year Report

RNS Number : 5349C

Schroder Eur Real Est Inv Trust PLC

18 June 2019

 

18 June 2019

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

("SEREIT"/ the "Company" / "Group")

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2019

SUCCESSFUL ASSET MANAGEMENT AND INVESTMENT IN LOGISTICS ASSETS POSITIONS COMPANY TO DELIVER FURTHER PORTFOLIO VALUATION AND INCOME UPLIFT 

Schroder European Real Estate Investment Trust plc, the company investing in European growth cities and regions, today announces its half year results for the six months ended 31 March 2019.

Key Highlights

-     Agreed conditional heads of terms (post period end) for a new long-term lease and capex programme at the Boulogne-Billancourt office investment in Paris, providing future potential capital value and income upside    

-     Increased portfolio weighting towards higher growth sectors, recycling €17.3 million of capital into two logistics assets in France, reflecting an income yield of 5.9%

-     Maintained delivery of attractive dividend yield of 5.5% against Net Asset Value ('NAV')

Financial highlights

‒   Net Asset Value ('NAV') of €182.8 million or 136.7 cps (30 September: €182.1 million or 136.2 cps), an increase over the period of 0.4%

‒   NAV total return of 1.7% (31 March 2018: 6.1%)

‒   Underlying EPRA earnings of €5.4 million (31 March 2018: €6.5 million)

‒   Profit for the six months of €3.2 million (31 March 2018: €10.8 million, which included a number of one-off gains)

‒   Total dividends declared relating to the six months of 3.7 cps, in-line with target of 5.5% annualised yield against the euro IPO issue price

‒   Dividend cover of 108% (31 March 2018: 100%)

‒   Loan to value ('LTV') of 28% (30 September 2018: 26%) at a weighted average total interest rate of 1.4%

Operational highlights

‒   100% of the portfolio's 13 institutional grade properties located in the fastest growing cities and regions of Continental Europe

‒   Improved portfolio diversification, increasing exposure to higher growth logistics warehouse sector from 13% to 19% (31 March 2018: 0%)

‒   Maintained high portfolio occupancy of almost 100%, with a 6.5 years average lease term to expiry

‒   Ongoing execution of asset management initiatives across the portfolio:

o  Agreed conditional heads of terms (post period end) for a new long-term lease and capex programme with current tenant Alten, for 6,800 sqm, at the Boulogne-Billancourt office investment in Paris

o  Completion of €0.8 million refurbishment program at the Metromar Shopping Centre in Seville to improve centre vibrancy and visitor appeal

o  Completed two new leases with tenants in the education and IT sectors for over c. 40% of space in Hamburg, at rents above business strategy. Detailed discussions ongoing for a further two floors, representing an additional c. 25% of space

‒   Current portfolio valued at €240 million^* reflecting an uplift of approximately 7.8% on purchase price, with transaction costs now fully recovered through valuation uplifts since acquisition

‒   Underlying property portfolio total return of 3.5% over six months (excluding the impact from transaction costs)

* Includes the Group's share of the Seville property proportionally valued at €26.4 million.

Commenting, Sir Julian Berney, Chairman of the Board, said:

"This has been an active six month period for the Company which has seen us make important progress, improving the long-term income profile of the Company and increasing our exposure to higher growth regions and sectors. The Company has an exciting asset management opportunity to invest into its Paris Boulogne-Billancourt office investment, potentially delivering growth in rental income and capital value and improving the quality and defensive characteristics of the portfolio. This is a good example of how our investment strategy of targeting assets with strong property fundamentals in European Winning Cities provides opportunities for growth."    

Jeff O'Dwyer, Fund Manager for Schroder Real Estate Investment Management Limited, added:

"The recent French logistics acquisition is further evidence of our focus on  assembling  a diversified portfolio in winning cities and regions across continental Europe. The Company now has c. 20% of its assets in industrial warehousing, up from 0% twelve months ago. The majority of European real estate markets are performing well, particularly in Berlin, Frankfurt, Hamburg, Stuttgart and Paris, those cities where the Company has the majority of its exposure. We continue to focus on delivering our asset management programme and the optimal financing structure for this, in order to strengthen the income and portfolio profile, and support our ambition to  grow the size of the Company."

The Half Year Report is also being published in hard copy format and an electronic copy of that document 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/5349C_1-2019-6-17.pdf

The Company has submitted a pdf of the hard copy format of the Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

A further announcement will be made shortly to confirm the full timetable of the second interim dividend. 

For further information:

Schroder Real Estate Investment Management Duncan Owen / Jeff O'Dwyer	020 7658 6000
Ria Vavakis Schroder Investment Management Limited	01481 745212
FTI Consulting Dido Laurimore / Richard Gotla / Methuselah Tanyanyiwa	020 3727 1000

A presentation for analysts and investors will be held at 08.45 BST today at Schroders plc, 1 London Wall Place, London, EC2Y 5AU.  If you would like to attend, please contact James Lowe at Schroders on [e-mail] or [phone].

A webcast presentation will take place at 1100 BST / 1200 SA, registration for which can be accessed via:

https://www.brighttalk.com/webcast/1184/360254?utm_source=Schroder+Investments+Limited&utm_medium=brighttalk&utm_campaign=360254&utm_source=ExactTarget&utm_medium=Email&utm_campaign=SEREIT+Notice+of+Results-[phone]_114347

Chairman's Statement

Overview

SEREIT had an active six month period to 31 March 2019, with a continued focus on reinvesting sale proceeds, alongside a programme of value-enhancing asset management activity. As a result, the Group is in a strengthened position, with a further diversified portfolio, increased allocation to higher growth sectors and improved potential for longer-term income and capital growth. 

The acquisition of the Rennes logistics property (comprising two neighbouring warehouses) in March completed the reinvestment of the proceeds from the profitable sale of the Casino supermarkets last year. The overall reinvestment of these proceeds  has been at higher income yields and has increased exposure to the higher growth logistics and industrial sector. This forms part of the strategy to have a diversified income-generating portfolio focused on the Winning Cities and regions of Continental Europe, balanced across different growth sectors.

The main asset management activity has been agreeing heads of terms (post-period end) with the tenant at the Boulogne-Billancourt office investment in Paris for a new long-term lease commitment. As part of the agreement, SEREIT will plan to undertake a significant capital expenditure programme to refurbish the building and the heads of terms are subject to a number of conditions, including planning and financing. If concluded, it has the potential to deliver both NAV return upside and improve the longer-term income and portfolio profile. Progressing this project is a key focus for the remainder of the year, alongside other asset management initiatives such as securing further lease agreements for the remaining vacant space at the Group's Hamburg office and Metromar shopping centre in Seville.

Results

The Company's NAV at 31 March 2019, excluding non-controlling interests, was €182.8 million or 136.7 euro cents per share ("cps"), representing an increase of €0.7 million (0.5 cps / 0.4%) over the six month period. This movement includes property transactions costs of €1 million (0.7 cps) associated with the Rennes acquisition. Including dividends, the NAV total return over the period excluding these one-off items was 2.2% and was 1.7% including the one-off items.

The profit for the six month period ending 31 March 2019 was €3.2 million and EPRA earnings were €5.4 million.  

The Board also notes that it is working with its advisers to assess the potential impact of proposed changes to various European tax laws. Further detail is provided in note 7 of the condensed consolidated interim financial statements.

Strategy

The Group has a focused investment strategy, investing in good quality real estate located in Winning Cities and regions across Continental Europe. Winning Cities and regions are those that are expected to generate higher and more sustainable levels of economic growth, underpinned by themes such as urbanisation, demographics, technology and infrastructure improvements. The portfolio of 13 assets is fully situated in locations with GDP growth forecasts in the top two quartiles of all European regions (Source: Oxford Economics).

The portfolio is diversified by location, sector, tenants and lease expiry. This enables the Group to tactically orientate the portfolio over time in order to benefit from structural economic and sociodemographic trends, also influenced by the varying cycles across different cities and sectors. A recent example of this is the strategic reduction in the Group's retail exposure and increase in the allocation to the higher growth logistics sector, which is now 19% of the portfolio, up from nil 12 months ago. Having this flexibility and diversification also assists in improving the defensive characteristics of the asset base and the income profile over the long run.

The assets are managed by the Investment Manager's local real estate teams, which total 180 professionals based on the ground across eight key markets in Europe. This local presence provides a competitive advantage in being able to identify sub-markets and assets benefiting from local market trends and building relationships with tenants to execute asset management initiatives. In addition, Schroders' in-house economic and real estate research platform assists the Group with identifying and capitalising on broader macro and micro trends.

The Group is now fully invested, with the strategy for the remainder of the year being focused on supporting NAV and income returns through current and planned active asset management. Delivering this strategy will underpin our ambition to grow the Group in a disciplined way that will improve long-term shareholder returns. The delivery of these asset management initiatives is also important to provide downside protection in a scenario where income and values come under pressure as a result of a deterioration in the economic or real estate market backdrop.

Balance sheet and debt

During the period the Group completed a new €8.6 million debt facility secured against the Rennes industrial acquisition. This loan takes the Group's total third party debt as at 31 March 2019 to €73.0million[*], representing a Loan to Value ('LTV') of approximately 28% against the overall gross asset value of the Group.

The Group has a strategy of maintaining a robust balance sheet and overall leverage is capped at 35% at the time of borrowing the debt. The Group has six debt facilities in place, with an average weighted total interest rate of 1.40% per annum. All interest rates are either fixed or capped to mitigate the risk of rising interest rates.

There is various asset management activity, such as the lease regear and refurbishment at the Boulogne-Billancourt office in Paris, that will require capital investment and has the potential to provide attractive property returns. The Group has some additional debt capacity and regularly reviews other means of growing its available capital, such as raising equity or asset sales, in order to seek to optimise the overall capital structure for the Group's strategy.

Dividend

The Group has declared a second interim dividend in respect of the year ending 30 September 2019 of 1.85 euro cents per share payable on 22 July 2019 to shareholders on the register at 5 July 2019. The first and second interim dividends in respect of the year ending 30 September 2019 amount to 3.70 euro cents per share.

The dividends for the six month period are 108% covered from net income from the portfolio. This includes a positive net impact of €1.26 million from the receipt of the final payment for the Hamburg lease surrender, which contributes towards covering the void at that property whilst we complete the re-leasing. Excluding the Hamburg surrender premium receipt, the dividend cover is 78%.

The latest declared dividend represents an annualised rate of 5.5% based on the euro equivalent of the issue price at admission, again achieving the target dividend stated at IPO. Based on the Euro:GBP exchange rate as at 31 March 2019, this equates to an annualised rate of 6.5% on the GBP issue price at IPO of 100 pence per share.

Asset management activity such as the lease regear at the Boulogne-Billancourt office investment will improve the longer-term income profile of the Group, but will reduce dividend cover in the short term. In implementing the dividend strategy, the Board will consider the shorter term cash generation of the Company, alongside the longer term sustainable rental income from the portfolio.

Outlook

The global economic and political backdrop remains fragile. The Winning Cities we are invested in across Europe are better placed than many in respect of these risks, as they have higher levels of economic activity and are positioned to benefit from structural mega-themes such as urbanisation and infrastructure improvements. There are a number of opportunities to generate attractive returns from asset management and outperformance of certain markets, but also pockets of caution where income and value may come under pressure.    

The Group has a high-quality, diverse portfolio. Execution of the asset management initiatives across the portfolio will both strengthen the defensive characteristics of the Group and improve the long-term capital and income returns for shareholders.

Sir Julian Berney Bt.
Chairman
18 June 2019

Investment Manager's Review

Results

The Group's NAV as at 31 March 2019 stood at €182.8 million (£157.3m), or 136.7 euro cents (118.0 pence) per share, achieving a NAV total return of 1.7% over the six months to 31 March 2019.

The table below provides an analysis of the movement in NAV during the reporting period as well as a corresponding reconciliation in the movement in the NAV cents per share:

NAV movement	€million1	Cps2	% change per cps3
Brought forward as at 1 October 2018	182.1	136.2	-
Transaction costs of investments made during the period	(1.0)	(0.7)	(0.5)
Capital expenditure	(1.5)	(1.1)	(0.8)
Unrealised gain in valuation of the real estate portfolio	0.7	0.5	0.4
EPRA earnings4	5.4	4.0	2.9
Non-cash/capital items	(0.4)	(0.3)	(0.2)
Dividends paid	(2.5)	(1.9)	(1.4)
Carried forward as at 31 March 2019	182.8	136.7	0.4

¹ Management reviews the performance of the Group principally on a proportionally consolidated basis. As a result, figures quoted   in this table include the Group's share of the Seville joint venture on a line-by-line basis.

² Based on 133,734,686 shares.

³ Percentage change based on the starting NAV as at 1 October 2018.

⁴ EPRA earnings as reconciled in note 8 of the condensed consolidated financial statements

Market overview

Economic growth forecasts have been revised down over the last 3-6 months and Schroders forecasts now that Eurozone economic growth will slow from 1.8% in 2018 to 1.25-1.5% p.a. through 2019-2020. While short-term growth was impacted by political turmoil and uncertainty over the new Italian government, Brexit and the protests in France, the main weak spot is manufacturing, reflecting slower growth in China and the US. Particularly Germany, with its big exposure to manufacturing, has seen forecasts revised down sharply. By contrast, consumer spending remains stable, supported by very healthy labour markets, higher pay awards, low inflation of around 1.5% p.a. and some softening in austerity measures combined with higher public sector spending. The benign outlook for inflation means that the European Central Bank is likely to wait until 2020 before raising the refinancing interest rate. The main upside risk is that consumer spending is stronger than forecast.  The main downside risks are continued lack of clarity on Brexit, an escalation of the US-China trade dispute and the threat of US-imposed tariffs on EU exports.

Offices

Most major European cities experienced a rise in office rents over the year to 31 March 2019. This widespread upswing reflects the sustained increase in employment, particularly in technology and professional services over the last five years and low volumes of completions. As a result, vacancy rates in Amsterdam, Brussels, the major German cities, Paris and Stockholm are at their lowest level in fifteen years and there is a particular shortage of new and modern office space suitable for new workplace configurations. At the same time, there remains a low level of new development. Consequently, while rental growth will probably start to slow, we expect the increase in office rents to continue through 2019-2020.

Logistics/industrial

The industrial and logistics sector is also seeing strong demand and rising rents, driven by the cyclical improvement in the economy and by the structural growth in online retailing. However, the increase in rents is less ubiquitous than in the office market and big cities (e.g. Berlin, Madrid, Munich, Paris) are generally seeing faster rental growth than ports or other distribution hubs. The difference is largely due to the greater availability of land for new building in the main logistics hubs of Benelux and the Ruhr, but development in big cities is also being held back by low unemployment and a shortage of warehouse staff. This is encouraging greater automation and, combined with the transition to electric vehicles, means that warehouses increasingly need to have a good power supply.

Retail

Despite the growth in consumer spending, demand for retail space in continental Europe remains in structural decline. The key challenge is the switch to online retail. The market is also being disrupted by discount retailers who are taking market share from mid-market retailers and are unwilling to pay the same level of rent.  The average vacancy rate in shopping centres has risen to 8% and shopping centre rents fell in most countries in 2018 (source: PMA).  We believe that the most defensive retail types will be shops in big city centres and tourist destinations, convenience stores, mid-sized supermarkets and out-of-town retail warehouses selling bulky goods. We expect that department stores, shopping centres with a heavy reliance on clothing and footwear, shops in smaller cities and hypermarkets will suffer a sustained fall in rents

Strategy

The strategy over the period has focused on the following key objectives:

-     Maintaining the annualised target dividend yield of 5.5%;

-     Further strengthening of the portfolio's diversification qualities from a city, sector and income perspective;

-     Achieving full investment through targeting Winning Cities and regions that experience higher levels of GDP, employment and population growth than national averages;

-     Execute asset management initiatives to improve both the long-term income profile and individual asset value; and

-     Manage portfolio risk in order to enhance the portfolio's defensive qualities

Progress has been made in executing the strategy and activity over the period which has delivered the following:

-     Acquisition of an industrial property in Rennes, France (comprising two neighbouring warehouses) increasing the Company's industrial warehousing weighting to 19% and improving the portfolio diversification from a sector, tenancy, age profile and unexpired lease term perspective;

-     Agreeing conditional heads of terms (post-period end) with Alten regarding their longer term occupation in the Company's largest asset in Boulogne Billancourt, Paris and refurbishment of this asset;

-     Securing new lease agreements with two tenants over c.40% of the Hamburg space, achieved at rents above business plan and in detailed discussions for a further two floors;

-     100% of the portfolio now located in higher growth cities and regions;

-     Concluded three new leases and re-gears, generating a 9% increase in annualised income relative to previous rent at a weighted lease term of 3 years

-     Completion of a €0.8 million asset management initiative centred on improving the vibrancy, lighting, wayfaring and signage for the Metromar Shopping Centre, Seville;

-     Maintained the high occupancy level of 96%, with an average portfolio unexpired lease term of 6.5 years and 5.1 years to break; and

-     A prudent Loan to Value of 28%

Our focus continues to be on driving income and total returns for the existing portfolio, managing risks and continuing to seek new investments to accelerate income growth. The specific next steps therefore include:

1.     Conclusion of key asset management initiatives;

a)   Advancing the formal lease pre-commitment for the office investment in Boulogne Billancourt, Paris and progression of the redevelopment licences, construction contract and programme;

b)   Leasing the remaining c. 60% of vacant space in Hamburg;

c)    The opening of leisure specialist Urban Planet in Metromar, Seville which is expected in Q3 2019, which will add a further point of difference to the scheme, enhancing its appeal in a competitive local market; and

2. Continue to actively engage with existing shareholders and potential new investors; and

3. Consider opportunities to grow the Group, taking a disciplined approach in a way that will improve long-term shareholder returns.

Acquisition update

The Group has continued to focus on acquiring properties that increase its allocation to the high growth industrial and logistics sector and further diversify the portfolio.

In March 2019, the Group completed the acquisition of two neighbouring industrial warehouses near Rennes, in Brittany, France, for €17.3 million, reflecting a net initial yield of 5.9%. 

Providing 23,852 sq.m of institutional quality space across two adjacent buildings, the property is let on a 12 year lease to C-Log, the logistics subsidiary of Groupe Beaumanoir, the international fashion retailer, which has invested significant capex in equipping the building with automated technology.

The property is located at the junction of two major arterial routes and benefits from excellent sea, high speed rail and air connectivity. In line with Schroders' Winning Cities strategy, Brittany is one of France's fastest growing regions in terms of GDP and population growth.

Asset management update

Key asset management over the period has centred on Metromar (Seville) and Boulogne-Billancourt (Paris).

Metromar, Seville (retail shopping centre)	Boulogne-Billancourt, Paris (office)
Asset overview	Asset overview
23,500 sq.m urban shopping centre with a tenancy mix centred on grocery, fashion and leisure that services a local, growing catchment	6,800 sq.m office building located in an established market in Paris' Western Crescent
Asset strategy	Asset strategy
Light refurbishment and strengthening of entertainment point of difference to improve occupancy and local retail dominance	Repositioning opportunity regarding an office investment let off modest rents and located in a supply constrained location with competing demands for uses
Key activity	Key activity
Dual strategy involving an €800,000 investment to improve vibrancy, lighting, signage and wayfinding (completed April 2019) whilst adding an additional leisure anchor, trampoline specialist Urban Planet (due to open in August 2019). Defensive measures to increase property's appeal to visitors and tenants and protect against new competition. Reviewed the centre's BREEAM in-use certification. The centre achieved a rating of four stars (very good) for building performance and five stars (excellent) for management.	Advancement of feasibility analysis regarding redevelopment options. In conjunction we have agreed conditional heads of terms (post-period end) with the sitting tenant regarding their pre-commitment to a new longer term lease, in return for us refurbishing the building to grade A specification

Other key asset management included signing two new leases in the Group's Hamburg investment:

1. First floor totalling c. 927 sq.m leased to IT services specialist, Sentinel Systemlösungen GmbH for a 7 year term with an option for another 3 year term.

2. Fifth floor totalling c. 646 sq.m leased to education and training specialist Grone Wirtschaftsakademie GmbH for a 5 year term with an option for another 5 year term.

The combined annual rental terms have been concluded above target.

We are also in detailed discussions for leasing a further two floors.

Real Estate Portfolio

Following the latest Rennes acquisition, the Group now owns a portfolio of thirteen institutional grade properties valued at €240 million[†] as at 31 March 2019. The properties are 96% let and located across those Winning Cities and regions in France, Germany, Spain and the Netherlands. All investments are 100% owned except for the Metromar shopping centre, Seville, where the Group holds a 50% interest.

The top 10 properties comprise 92% of the portfolio value:

Rank	Property	Country	Sector	Value
				€m	% of total
1	Paris (B-B)[‡]	France	Office	41.6	17%
2	Paris (SC)[§]	France	Office	35.6	15%
3	Berlin	Germany	Retail	26.9	11%
4	Seville	Spain	Retail	26.4	11%
5	Apeldoorn	Netherlands	Mixed	20.0	8%
6	Rennes	France	Industrial	17.6	7%
7	Stuttgart	Germany	Office	16.4	7%
8	Hamburg	Germany	Office	15.3	7%
9	Frankfurt	Germany	Retail	11.5	5%
10	Venray	Netherlands	Industrial	9.6	4%
	Top 10 properties			220.9	92%
11-13	Remaining three properties	Netherlands/France	Industrial	19.0	8%
	Total			239.9	100%

The table below sets out the top ten tenants which are from a diverse range of industry segments and represent 67% of the portfolio:

Rank	Tenant	Property	Contracted rent		Wault break (yrs)	Wault expiry (yrs)
			€m	% of total
1	KPN	Apeldoorn	2.4	14%	7.8	7.8
2	Alten	Paris (B-B)	2.4	14%	2.0	2.0
3	Hornbach	Berlin	1.6	9%	6.8	6.8
4	C-Log	Rennes	1.1	7%	11.9	11.9
5	Filassistance	Paris (SC)	0.9	5%	2.8	7.8
6	Cereal Partners France	Rumilly	0.7	4%	6.1	7.1
7	DKL	Venray	0.7	4%	9.5	9.5
8	Land BW	Stuttgart	0.7	4%	6.9	7.3
9	Thesee	Paris (SC)	0.6	3%	0.4	0.4
10	Inventum Industrial	Houten	0.6	3%	7.2	7.2
Total top ten tenants			11.7	67%	6.0	6.5
	Remaining tenants		5.5	33%	3.2	6.5
Total			17.2	100%	5.1	6.5

The portfolio generates €17.2 million p.a. in contracted income. The average unexpired lease term is 5.1 years to first break and 6.5 years to expiry.

The lease expiry profile to earliest break is shown on page 17 of the condensed consolidated interim financial statements.  The near-term lease expiries provide asset management opportunities to renegotiate leases, extend weighted average unexpired lease terms, improve income security and generate rental growth. In turn, this activity benefits NAV total return.

Portfolio performance

The current portfolio value of €240 million[**] reflects an increase of 7.8% (€17.4 million) compared to the combined purchase price. Transaction costs have been fully recovered through valuation uplifts since acquisition.

Overall, external valuations remained fairly flat over the six months to the end of March 2019. A notable exception was the Hamburg property where the reduction in valuation was more than compensated for by the payment of the second tranche of the lease surrender premium by former tenant, City BKK.

Over the last six months, the underlying property portfolio generated a total property return of 3.5% (non-annualised/3.1% when including the impact from transaction costs for the newly-acquired property in Rennes). Hereof, portfolio income return amounted to 3.8% and portfolio capital return to -0.3% (net of capex).

Sustainable investment

Our approach to responsible investment has been continually upgraded over the last few years and we are increasingly seeking to assess and improve the positive impact of our investments. This involves incorporation of environmental, social and governance issues as well as, importantly, the impact of our investments on the built environment and climate change risks and opportunities. The Investment Manager is aware of the importance of the impact its activities have on local environments and the performance of this area is being continually measured. It was a founding member of the UK Green Building Council in 2007 and in 2017 became a member of the Better Buildings Partnership and a Fund Manager Member of GRESB.

Over the period, the Company had the Metromar shopping centre, Seville, reviewed from a BREEAM in-use perspective. The centre achieved a rating of four stars (very good) for building performance and five stars (excellent) for management. Both these ratings are expected to improve the portfolio's GRESB classification.

Finance

As at 31 March 2019, the Group's total external debt was €73.0 million[††], across six loan facilities. This represents a conservative loan to value of 28% against the Group's gross asset value.

During the first six months of the financial year the Group completed one new debt facility with the newly acquired industrial property in Rennes (comprising two neighbouring warehouses) being part financed with a €8.6 million loan.

The current blended all-in interest rate is 1.4%, significantly below the portfolio yield of 6.2% p.a, providing a favourable yield gap. The average unexpired loan term is 5.5 years.

Lender	Property	Maturity date	Outstanding principal1	Interest rate
Deutsche Pfandbriefbank	Berlin/Frankfurt	30/06/2026	€16,500,000	1.31%
	Stuttgart/Hamburg	30/06/2023	€14,000,000	0.85%
BRED Banque Populaire	Paris (SC)	15/12/2024	€13,000,000	3M Euribor + 1.30%
Münchener Hypothekenbank 1	Seville (50%)	22/05/2024	€11,678,750	1.76%
HSBC	Netherlands industrial	27/09/2023	€9,250,000	3M Euribor + 2.15%
Saar LB	Rennes	28/03/2024	€8,600,000	3M Euribor + 1.40%
Total			€73,028,750

¹ All statistics in the Investment Manager's report reflect a 50% ownership share of Seville. As a result, debt allocations for those  investments in the table above are similarly proportioned.

The German and Spanish loans are fixed rate for the duration of the loan term.

The French and Netherlands loans are based on a margin above 3 month Euribor. The Group has acquired interest rate caps to limit future potential interest costs if Euribor were to increase. The strike rate on the Paris loan interest rate cap is 1.25% p.a., on the Rennes loan cap is 1% p.a. and for the Netherlands loan is 1% p.a..

Outlook

GDP growth has slowed in Europe over the last six months, impacted by economic and political uncertainty. The majority of the major real estate markets continue to perform well. Occupational demand in leading European cities such as Paris, Berlin, Hamburg, Frankfurt and Amsterdam remains strong. In conjunction with this, the supply side remains balanced with disciplined bank lending reducing speculative development. These are all characteristics for positive rental growth and investment demand.  

Our immediate priority is centred on successfully executing our asset management programme. Successful conclusion of these asset management initiatives will improve the portfolio's income profile. This should enhance value and better support our continued ambition for the disciplined growth of the Company.

Schroder Real Estate Investment Management Limited
18 June 2019

Directors' Report

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following risk categories: investment policy and strategic; economic and property market; investment management; custody; gearing and leverage; accounting, legal and regulatory; valuation; and service provider. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 27 to 30 of the Company's published Annual Report and Consolidated Financial Statements for the year ended 30 September 2018. The Company is aware of potential changes to tax legislation, one retrospective, which, if implemented, may impact the Company. The Company is monitoring these matters closely. Otherwise, these risks and uncertainties have not materially changed during the six months ended 31 March 2019 and are not expected to change during the remaining six months of the financial year.

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 covenants and interest cover ratios. 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 condensed consolidated interim financial statements. The Directors have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future.

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with
the viability statement as set out on page 30 of the published Annual Report and Consolidated Financial Statements for the year ended 30 September 2018, the Directors consider it appropriate to adopt the going concern basis in preparing
the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2019. Related party transactions are disclosed in note 13 of the condensed consolidated interim financial statements.

Statement of Directors' responsibilities

The Directors confirm that to the best of their knowledge:

-     The half year report and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union; and

-     The Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Sir Julian Berney Bt.
Chairman

18 June 2019

Condensed Consolidated Interim Statement of Comprehensive Income

For the period ended 31 March 2019

	Note	Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)	Year to 30 Sep 2018 €'000 (audited)
Rental and service charge income	2	8,945	10,347	19,900
Other income	3	1,500	2,400	2,400
Property operating expenses		(2,423)	(3,899)	(6,458)
Net rental and related income		8,022	8,848	15,842
Loss on disposal		-	-	(29)
Net (loss)/gain from fair value adjustment on investment property	4	(1,566)	6,359	4,939
Realised gain on foreign exchange		4	1	1
Net change in fair value of financial instruments at fair value through profit or loss	5	(200)	(39)	(155)
Dividends received from joint venture	6	-	-	150
Expenses
Investment management fee	13	(947)	(849)	(1,958)
Valuers' and other professional fees		(494)	(309)	(687)
Administrator's and accounting fees		(165)	(147)	(330)
Auditors' remuneration		(191)	(134)	(269)
Directors' fees	13	(72)	(62)	(115)
Other expenses		(129)	(119)	(206)
Total expenses		(1,998)	(1,620)	(3,565)
Operating profit		4,262	13,549	17,183
Finance income		226	378	456
Finance costs		(402)	(502)	(962)
Net finance costs		(176)	(124)	(506)
Share of (loss)/profit of joint venture	6	(71)	292	407
Profit before taxation		4,015	13,717	17,084
Taxation	7	(818)	(815)	(1,517)
Profit after taxation		3,197	12,902	15,567
Attributable to:
Owners of the parent		3,197	10,798	13,175
Non-controlling interests		-	2,104	2,392
		3,197	12,902	15,567
Basic and diluted earnings per share attributable to owners of the parent	8	2.4c	8.1c	9.9c
Profit for the period/year		3,197	12,902	15,567
Other comprehensive income: Other comprehensive loss items that may be reclassified to profit or loss:
Currency translation differences		(6)	-	(4)
Total other comprehensive loss		(6)	-	(4)
Total comprehensive income for the period/year		3,191	12,902	15,563
Attributable to:
Owners of the parent		3,191	10,798	13,171
Non-controlling interests		-	2,104	2,392
		3,191	12,902	15,563

All items in the above statement are derived from continuing operations. The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.

Condensed Consolidated Interim Statement of Financial Position
As at 31 March 2019

Assets Non-current assets	Notes	31 Mar 2019 €'000 (unaudited)	30 Sep 2018 €'000 (audited)	31 Mar 2018 €'000 (unaudited)
Investment property	4	213,174	195,644	166,173
Investment in joint venture	6	6,626	6,697	6,582
Loans to joint venture		10,035	10,035	10,035
Non-current assets		229,835	212,376	182,790
Trade and other receivables		5,773	12,537	850
Interest rate derivative contracts	5	121	188	232
Cash and cash equivalents		15,166	15,738	21,268
Current assets		21,060	28,463	22,350
Assets of disposal group held for sale		-	-	70,389
Total assets		250,895	240,839	275,529
Equity
Share capital Share premium Retained earnings Other reserves		15,540 30,959 5,120 131,167	15,015 29,912 4,397 132,745	15,215 30,310 9,442 132,151
Equity attributable to owners of the parent		182,786	182,069	187,118
Non-controlling interest		-	-	9,795
Total equity		182,786	182,069	196,913
Liabilities Non-current liabilities
Interest-bearing loans and borrowings	9	60,506	52,150	43,079
Deferred tax liability	7	1,061	912	883
Non-current liabilities		61,567	53,062	43,962
Current liabilities
Trade and other payables Current tax liabilities	7	5,619 923	5,081 627	3,980 114
Current liabilities		6,542	5,708	4,094
Liabilities of disposal group held for sale		-	-	30,560
Total liabilities		68,109	58,770	78,616
Total equity and liabilities		250,895	240,839	275,529
Net Asset Value per ordinary share	11	136.7c	136.2c	139.9c

The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.

Condensed Consolidated Interim Statement of Changes in Equity
For the period ended 31 March 2019

	Note	Share capital €'000	Share premium €'000	Retained earnings €'000	Other reserves €'000	Owners of the parent €'000	Non-controlling interests €'000	Total equity €'000
Balance as at 1 October 2018		15,015	29,912	4,397	132,745	182,069	-	182,069
Profit for the period		-	-	3,197	-	3,197	-	3,197
Other comprehensive loss for the year		-	-	-	(6)	(6)	-	(6)
Dividends paid	12	-	-	(2,474)	-	(2,474)	-	(2,474)
Unrealised foreign exchange		525	1,047	-	(1,572)	-	-	-
Balance as at 31 March 2019 (unaudited)		15,540	30,959	5,120	131,167	182,786	-	182,786

	Note	Share capital €'000	Share premium €'000	Retained earnings €'000	Other reserves €'000	Owners of the parent €'000	Non-controlling interests €'000	Total equity €'000
Balance as at 1 October 2017		15,167	30,215	650	132,294	178,326	7,691	186,017
Profit for the year		-	-	13,175	-	13,175	2,392	15,567
Other comprehensive loss for the year		-	-	-	(4)	(4)	-	(4)
Dividends paid	12	-	-	(9,428)	-	(9,428)	-	(9,428)
Share premium distribution		-	-	-	-	-	(1,510)	(1,510)
Divestment of non-controlling interests		-	-	-	-	-	(8,573)	(8,573)
Unrealised foreign exchange		(152)	(303)	-	455	-	-	-
Balance as at 30 September 2018 (audited)		15,015	29,912	4,397	132,745	182,069	-	182,069

	Note	Share capital €'000	Share premium €'000	Retained earnings €'000	Other reserves €'000	Owners of the parent €'000	Non-controlling interests €'000	Total equity €'000
Balance as at 1 October 2017		15,167	30,215	650	132,294	178,326	7,691	186,017
Profit for the period		-	-	10,798	-	10,798	2,104	12,902
Dividends paid	12	-	-	(2,006)	-	(2,006)	-	(2,006)
Unrealised foreign exchange		48	95	-	(143)	-	-	-
Balance as at 31 March 2018 (unaudited)		15,215	30,310	9,442	132,151	187,118	9,795	196,913

The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.

Condensed Consolidated Interim Statement of Cash Flows
For the period ended 31 March 2019

	Note	Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)	Year to 30 Sep 2018 €'000 (audited)
Operating activities
Profit before tax for the period/year		4,015	13,717	17,084
Adjustments for:
Loss on disposal		-	-	29
Net loss/(gain) from fair value adjustment on investment property	4	1,566	(6,359)	(4,939)
Share of loss/(profit) of joint venture	6	71	(292)	(407)
Realised foreign exchange gains		(4)	(1)	(1)
Finance income		(226)	(378)	(456)
Finance costs		402	502	962
Net change in fair value of financial instruments at fair value through profit or loss	5	200	39	155
Dividends received from joint venture	6	-	-	(150)
Operating cash generated before changes in working capital		6,024	7,228	12,277
Decrease/(Increase) in trade and other receivables		6,761	(113)	(3,122)
Increase in trade and other payables		259	816	2,300
Cash generated from operations		13,044	7,931	11,455
Finance costs paid		(569)	(664)	(1,255)
Finance income received		226	381	456
Tax paid	7	(373)	(224)	(384)
Net cash generated from operating activities		12,328	7,424	10,272
Investing activities
Acquisition of investment property		(18,013)	(21,070)	(51,992)
Additions to investment property		(878)	(123)	-
Proceeds from disposal of investment property		-	-	19,740
Receipt of loan repayment		-	-	7,215
Dividends received from joint venture	6	-	-	150
Net cash used in investing activities		(18,891)	(21,193)	(24,887)
Financing activities
Proceeds from borrowings	9	8,600	13,000	13,000
Interest rate cap purchased	5	(133)	(227)	(227)
Dividends paid	12	(2,474)	(2,006)	(9,428)
Share premium distribution		-	-	(1,510)
Net cash generated from financing activities		5,993	10,767	1,835
Net decrease in cash and cash equivalents for the period/year		(570)	(3,002)	(12,780)
Opening cash and cash equivalents		15,738	28,521	28,521
Effects of exchange rate change on cash		(2)	1	(3)
Transfer to disposal group held for sale		-	(4,252)	-
Closing cash and cash equivalents		15,166	21,268	15,738

The accompanying notes 1 to 16 form an integral part of the condensed consolidated financial statements

Notes to the Condensed Consolidated Interim Financial Statements

1.    Significant accounting policies

The Company is a closed-ended investment company incorporated in England and Wales. The condensed consolidated interim financial statements of the Company for the period ended 31 March 2019 comprise those of the Company and its subsidiaries (together referred to as the 'Group'). 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 1 London Wall Place, London EC2Y 5AU.

These condensed consolidated interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2018 were approved by the Board of Directors on 30 November 2018 and were delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed consolidated interim financial statements have been reviewed and not audited.

Statement of compliance

The condensed consolidated interim financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority and IAS 34 Interim Financial Reporting as adopted by the European Union ("EU"). They do not include all of the information required for the full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 30 September 2018. The condensed consolidated interim financial statements have been prepared on the basis of the accounting policies set out in the Group's consolidated financial statements for the year ended 30 September 2018. The consolidated financial statements for the year ended 30 September 2018 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. The Group's annual financial statements refer to new Standards and Interpretations none of which had a material impact on the financial statements.

Basis of preparation

The condensed consolidated interim 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 flow of the entities included in the condensed consolidated interim financial statements and are consistent with those of the year end financial report.

During the period the Group adopted the following standards:

IFRS 9 - Financial instruments

The new standard results in changes in the classification of all financial assets excluding derivatives. This reclassification does not have an impact on the financial statements.

The new standard introduces an expected credit loss model, requiring expected credit losses to be recognised on all financial assets held at amortised cost.

This new IFRS 9 impairment model requires impairment allowances for all exposures from the time a loan is originated, based on the deterioration of credit risk since initial recognition. If the credit risk has not increased significantly (Stage 1), IFRS 9 requires allowances based on twelve month expected losses. If the credit risk has increased significantly (Stage 2) and if the loan is 'credit impaired' (Stage 3), the standard requires allowances based on lifetime expected losses. The assessment of whether a loan has experienced a significant increase in credit risk varies by product and risk segment. It requires use of quantitative criteria and experienced credit risk judgement.

The expected credit risk model has been applied to the joint venture loan and trade receivables. IFRS 9 does not apply to any other assets held by the Group.

There is no material quantitative impact for the period ended 31 March 2019 upon application of this new accounting policy for assessing asset impairment. The Group will continue to assess the financial assets periodically using the credit loss model and recognise an expected credit loss if required.

IFRS 15 - Revenue from contracts with customers

The new standard sets out a five-step model for the recognition of revenue and establishes principles for reporting useful information to users of financial statements about the nature, timing and uncertainty of revenues and cash flows arising from an entity's contracts with customers. The new standard does not apply to rental income which is in the scope of IAS 17, but does apply to service charge income, management and performance fees and trading property disposals. Adoption of IFRS 15 has not had a quantitative impact upon the Group's financial statements. It has resulted in some minor qualitative disclosure in relation to some revenue items, as detailed in Note 2 to the condensed consolidated interim financial statements, the service charge income has been separated from rental income.

IFRS 16 - Leases

The new standard requires recognition on the balance sheet for the head rent payable by a lessee over the lease term. For lessees, it will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases will be removed. The accounting for lessors will not significantly change. These changes are not expected to have any impact on the consolidated financial statements of the Group as it does not hold any leasehold properties.

IFRS 16 was effective from 1 January 2019 but has not been early adopted by the Group.

Going concern

The Directors have examined significant areas of possible financial risk including cash and cash requirements and compliance with 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 condensed consolidated interim 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, as adopted by the EU, 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 the condensed consolidated interim financial statements relate to the carrying value of investment properties (as disclosed in note 4, including those within joint ventures) which are stated at fair value. Fair value is inherently subjective because the valuer makes assumptions which may not prove to be accurate. The Group uses external professional valuers to determine the relevant amounts.

A key area of judgement is accounting for transactions. These include judgements on whether the criteria for assets and liabilities held for sale have been met for transactions not yet completed; and accounting for transaction costs and contingent consideration. Management use the most appropriate accounting treatment for each transaction and seek independent advice where necessary.

Another key area of judgement is tax provisioning and disclosure. Management use external tax advisers to monitor changes to tax laws in countries the Group has operations. New tax laws that have been substantively enacted are recognised in the Group's financial statements. Where changes to tax laws give rise to a contingent liability the Group discloses these appropriately within the notes to the financial statements.

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.

Financial risk factors

The Directors are not aware of significant changes to the financial risk profile of the Group since the end of the last annual financial reporting period for the year ended 30 September 2018.

The main risks arising from the Group's financial instruments and investment properties are: market price risk, currency risk, credit risk, liquidity risk and interest rate risk. The Board regularly reviews and agrees policies for managing each of these risks.

2.    Rental and service charge income

					Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)		Year to 30 Sep 2018 €'000 (audited)
Rental income					6,976	6,688		13,708
Service charge income					1,969	3,659		6,192
Total					8,945	10,347		19,900

3.    Other income

Other income relates to a lease surrender premium agreement pursuant to the Company's Hamburg office asset in Germany. €1.5m was received in the six months ended 31 March 2019 and €2.4m was received during the year ended 30 September 2018.

4.    Investment property

	Freehold €'000
Fair value at 30 September 2017 (audited)	202,563
Property acquisitions	21,127
Additions	124
Net valuation gain on investment property	6,359
Sub-total	230,173
Transfer to disposal group held for sale	(64,000)
Fair value as at 31 March 2018 (unaudited)	166,173
Property acquisitions	27,042
Acquisition costs	3,849
Net valuation loss on investment property	(1,420)
Fair value as at 30 September 2018 (audited)	195,644
Property acquisitions	18,211
Additions	885
Net valuation loss on investment property	(1,566)
Fair value as at 31 March 2019 (unaudited)	213,174

The fair value of investment properties, as determined by the valuer, totals €213,530,000 (30 September 2018: €195,950,000) with the valuation amount relating to a 100% ownership share for all the assets in the portfolio.

None of this amount is attributable to trade or other receivables in connection with lease incentives. The fair value of investment properties per the condensed consolidated interim financial statements of €213,174,000 includes a tenant incentive adjustment of €356,000 (30 September 2018: €306,000).

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 - Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015).

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 period. 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:

Quantitative information about fair value measurement using unobservable inputs (Level 3) as at 31 March 2019 (unaudited)

		Industrial	Retail (including retail warehouse)	Office	Total
Fair value (€'000)		€46,280	€91,150	€128,900	€266,3303
Area ('000 sq.m)		68,806	44,365	60,429	173,600
Net passing rent € per sq.m per annum	Range Weighted average 2	39.78-99.84 48.29	94.73-140.72 114.02	47.46-350.03 209.39	39.78-350.03 148.76
Gross ERV € per sq.m per annum	Range Weighted average 2	38.00-89.40 48.44	101.58-187.50 158.43	79.76-419.91 239.77	38.00-419.91 178.69
Net initial yield1	Range Weighted average 2	5.64-7.43 6.38	4.79-5.38 4.99	1.79-11.40 6.70	1.79-11.40 6.06
Equivalent yield	Range Weighted average 2	5.50-7.00 6.25	5.10-5.98 5.76	4.23-10.44 6.17	4.23-10.44 6.04

Notes:

¹ Yields based on rents receivable after deduction of head rents and non-recoverables.

² Weighted by market value.

³ This table includes the joint venture investment property valued at €52.8 million which is disclosed within the summarised  information within note 6 as part of total assets.

Quantitative information about fair value measurement using unobservable inputs (Level 3) as at 30 September 2018 (audited).

		Industrial	Retail (incl. retail warehouse)	Office	Total
Fair value (€'000)		28,600	89,650	129,700	247,9503
Area ('000 sq.m)		43,666	44,336	60,423	148,425
Net passing rent € per sq.m per annum	Range Weighted average 2	39.84-97.94 51.48	94.73-140.01 115.88	63.24-349.98 210.84	39.84-349.98 158.12
Gross ERV € per sq.m per annum	Range Weighted average 2	38.00-89.43 51.61	101.58-189.45 159.74	76.76-419.91 239.88	38.00-419.91 189.19
Net initial yield1	Range Weighted average 2	6.04-7.33 6.75	4.90-5.52 5.10	2.46-11.00 6.69	2.46-11.00 6.12
Equivalent yield	Range Weighted average 2	6.01-7.00 6.62	5.10-5.95 5.78	4.43-10.10 6.15	4.43-10.10 6.07

Notes:

¹Yields based on rents receivable after deduction of head rents and non-recoverables.

²Weighted by market value.

³This table includes the joint venture investment property valued at €52.0 million which is disclosed within the summarised information within note 6 as part of total assets.          

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 is shown below:

Estimated movement in fair value of investment properties at 31 March 2019 (unaudited)	Industrial €'000	Retail  €'000	Office  €'000	Total  €'000
Increase in ERV by 5%	1,350	3,550	2,000	6,900
Decrease in ERV by 5%	-1,350	-3,550	-2,000	-6,900
Increase in net initial yield by 0.25%	-1,850	-4,000	-6,400	-12,250
Decrease in net initial yield by 0.25%	2,050	4,400	7,100	13,550

Estimated movement in fair value of investment properties at 30 September 2018 (audited)	Industrial €'000	Retail €'000	Office €'000	Total €'000
Increase in ERV by 5%	800	3,500	5,700	10,000
Decrease in ERV by 5%	-900	-3,500	-5,550	-9,950
Increase in net initial yield by 0.25%	-1,150	-4,000	-6,000	-11,150
Decrease in net initial yield by 0.25%	1,100	4,350	6,700	12,150

5.    Derivative financial instruments

The Group has an interest rate cap in place which was purchased for €227,000 from BRED Banque Populaire on 15 December 2017 in connection to a €13.0m loan facility drawn from the same bank with a maturity date of 15 December 2024. The interest rate cap is 1.25% with a floating rate option being Euribor 3 months. In line with IFRS 9, this derivative is reported in the condensed consolidated interim financial statements at its fair value. As at 30 September 2018 the fair value of the interest rate cap was €188,000. The notional value of the instrument is €13.0 million. As at 31 March 2019 the fair value of the interest rate cap was €58,000, giving a valuation decrease as shown within the Statement of Comprehensive Income of €130,000.

During the period the group entered into an interest rate cap purchased for €87,000 from HSBC Bank Plc on 31 October 2018 in connection to a €9.25 million loan facility drawn from the same bank with a maturity date of 27 September 2023. The cap interest rate is 1.0% with a floating rate option being Euribor 3 months. In line with IFRS 9, this derivative is reported in the condensed consolidated interim financial statements at its fair value. As at 31 March 2019 the fair value of the interest rate cap was €17,000, giving a valuation decrease as shown in the Statement of Comprehensive Income of €70,000.

During the period the Group entered into an interest rate cap purchased for €46,000 from Landesbank Saar on 27 March 2019 in connection with an €8.6 million loan facility drawn from the same bank with a maturity date of 27 March 2024. The interest rate cap is 1.0% with a floating rate option being Euribor 3 months. In line with IFRS 9, this derivative is reported in the condensed consolidated interim financial statements at its fair value. As at 31 March 2019 the fair value of the interest rate cap was €46,000. There was no movement in the fair value of the interest rate cap as at 31 March 2019.

Transaction costs incurred in obtaining the instruments are amortised over the extended period of the above-mentioned loans.

6.    Investment in joint ventures

The Group has a 50% interest in a joint venture called Urban SEREIT Holdings Spain S.L. The principal place of business of the joint venture is Calle Velazquez 3, 4th Madrid 28001 Spain.

	31 Mar 2019 €'000
Balance as at 1 October 2018 (audited)	6,697
Share of loss for the period	(71)
Balance as at 31 March 2019 (unaudited)	6,626

	31 Mar 2018 €'000
Balance as at 1 October 2017 (audited)	6,290
Share of profit for the year	442
Dividends	(150)
Balance as at 31 March 2018 (unaudited)	6,582

	30 Sep 2018 €'000
Balance as at 1 October 2017 (audited)	6,290
Share of profit for the year	557
Dividends	(150)
Balance as at 30 September 2018 (audited)	6,697

Summarised joint venture financial information:	31 Mar 2019 €'000	31 Mar 2018 €'000	30 Sep 2018 €'000
Total assets	58,861	59,586	58,444
Total liabilities	(45,609)	(46,422)	(45,050)
Net assets	13,252	13,164	13,394
Net asset value attributable to the Group	6,626	6,582	6,697

	Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)	Year to 30 Sep 2018 €'000 (audited)
Revenues	2,826	2,838	5,464
Total comprehensive (loss)/profit	(142)	884	1,114
Total comprehensive (loss)/profit attributable to the Group	(71)	442	557

7.    Taxation

	Six months to 31 Mar 2019	Six months to 31 Mar 2018	Year to 30 Sep 2018
	€'000 (unaudited)	€'000 (unaudited)	€'000 (audited)
Current tax charge	669	405	1,078
Deferred tax charge	149	410	439
Tax expense in period/year	818	815	1,517

		Current tax liability	Deferred tax liability
		€'000	€'000
As at 1 October 2018 (audited)		627	912
Tax charge for the period		669	149
Tax paid during the period		(373)	-
Balance as at 31 March 2019 (unaudited)		923	1,061

		Current tax liability	Deferred tax liability
		€'000	€'000
As at 1 October 2017 (audited)		(67)	473
Tax charge for the period		405	410
Tax paid during the period		(224)	-
Balance as at 31 March 2018 (unaudited)		114	883

		Current tax liability	Deferred tax liability
		€'000	€'000
As at 1 October 2017 (audited)		(67)	473
Tax charge for the period		1,078	439
Tax paid during the period		(384)	-
Balance as at 30 September 2018 (audited)		627	912

Under the current Double Taxation Treaty between France and Luxembourg, dividends paid by OPPCI SEREIT France to SEREIT Holdings are subject to withholding tax at a rate of 5% and are exempt from further taxation in Luxembourg. However, this Treaty has been in the process of renegotiation. Proposed changes to the Treaty mean, amongst other things, that dividends paid by OPPCI SEREIT France to SEREIT Holdings could be subject to 30% withholding tax and may incur further tax charges in Luxembourg.

The new Double Taxation Treaty will come in to force on 1 January 2020, subject to the completion of the ratification process by both governments. As at 31 March 2019 the Treaty had not been fully ratified. It is expected that the company will recognise an additional deferred tax liability of €1.4m upon completion of the ratification process, reflecting the potential tax liability relating to unrealised gains arising within OPPCI SEREIT France.

In April 2019 the European Commission ("EC")  issued a ruling that a UK group financing exemption within the UK Controlled Foreign Company rules was partially in breach of the European Union State aid rules. The Group has made claims to apply this exemption in respect of SEREIT (Jersey) Limited which provides financing to other group companies, and this ruling may result in additional tax liabilities becoming payable. The UK government has not yet indicated whether it intends to appeal against the ruling, and nor has it published the mechanism for calculating the tax due. Accordingly the sum potentially payable cannot be accurately measured at this time.

8.    Basic and diluted earnings per share

The basic and diluted earnings per share for the Group is based on the net profit for the period, excluding non-controlling interests and currency translation differences, of €3,197,000 (six months to 31 March 2018: €10,798,000, for year ended 30 September 2018: €13,175,000) and the weighted average number of ordinary shares in issue during the period of 133,734,686 (six months to 31 March 2018: 133,734,686, year to 30 September 2018: 133,734,686).

EPRA[‡‡] earnings reconciliation

	Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)	Year to 30 Sep 2018 €'000 (audited)
Total IFRS comprehensive income	3,191	12,902	15,563
Adjustments to calculate EPRA Earnings:
Net loss/(gain) from fair value adjustment on investment property	1,566	(6,359)	(4,939)
Currency translation differences (unrealised)	6	-	4
Loss on disposal of investment properties, development properties held for investment and other interests	-	-	29
Withholding tax on profits on disposal	-	-	279
Share of joint venture loss/(gain) on investment property	264	(156)	(8)
Non-controlling interest's net revenue	-	(378)	(692)
Deferred tax	149	410	439
Net change in fair value of financial instruments	200	39	155
EPRA Earnings	5,376	6,458	10,830
Weighted average number of ordinary shares	133,734,686	133,734,686	133,734,686
IFRS Earnings per share (cents per share)	2.4	8.1	9.9
EPRA Earnings per share (cents per share)	4.0	4.8	8.1

Headline[§§] earnings reconciliation

	Six months to 31 Mar 2019 €'000 (unaudited)	Six months to 31 Mar 2018 €'000 (unaudited)	Year to 30 Sep 2018 €'000 (audited)
Total IFRS comprehensive income	3,191	12,902	15,563
Adjustments to calculate headline earnings exclude:
Net valuation (loss)/profit on investment property	1,566	(6,359)	(4,939)
Profits on disposal of investment properties, development properties held for investment and other interests	-	-	29
Withholding tax on profits on disposal	-	-	279
Share of joint venture (loss)/gain on investment property	264	(156)	(8)
Non-controlling interest's net revenue	-	(378)	(692)
Deferred tax	149	410	439
Net change in fair value of financial instruments	200	39	155
Headline earnings	5,370	6,458	10,826
Weighted average number of ordinary shares	133,734,686	133,734,686	133,734,686
Headline Earnings per share (cents per share)	4.0	4.8	8.1

9.    Interest-bearing loans and borrowings

	Six months to 31 Mar 2019  €'000
As at 1 October 2018 (audited)	52,150
Drawdown of borrowings	8,600
Capitalisation of finance costs	(299)
Amortisation of finance costs	55
As at 31 March 2019 (unaudited)	60,506

	Year ended 30 Sep 2018  €'000
As at 1 October 2017 (audited)	58,772
Receipt of borrowings	22,250
Disposal - loans	(29,064)
Disposal - finance costs	472
Capitalisation of finance costs	(416)
Amortisation of finance costs	136
As at 30 September 2018 (audited)	52,150

	Six months to 31 Mar 2018  €'000
As at 1 October 2017 (audited)	58,772
Drawdown of borrowings	13,000
Capitalisation of finance costs	(204)
Amortisation of finance costs	72
	71,640
Transfer to disposal group held for sale	(28,561)
As at 31 March 2018 (unaudited)	43,079

Bank loan - Landesbank Saar

The Group entered into a loan facility of €8.6 million with Landesbank Saar on 27 March 2019.

The loan matures on 27 March 2024 and carries an interest rate of 1.40% plus EURIBOR 3 months per annum payable quarterly. An additional 25bps is applied to the margin if the LTV is between 56% and 60% or 50bps if the LTV is above 60%. The facility was subject to a €56,000 arrangement fee which is amortised over the period of the loan. The debt has an LTV covenant of 64% and the HIC and PIC should each be above 220% each.

A pledge of all shares in the borrowing Group company is in place.

10.  Issued capital and reserves

As at 31 March 2019, the Company has 133,734,686 ordinary shares in issue with a par value of 10.00 pence (no shares are held in Treasury). The total number of voting rights in the Company is 133,734,686.

11.  NAV per ordinary share

The NAV per ordinary share is based on the net assets excluding non-controlling interests at 31 March 2019 of €182,786,000 (30 September 2018: €182,069,000; 31 March 2018: €187,118,000) and 133,734,686 ordinary shares in issue at 31 March 2019 (30 September 2018: 133,734,686; 31 March 2018: 133,734,686).

12.  Dividends paid

Six months ended 31 March 2019 (unaudited)	Number of ordinary shares	Rate (cents)	€'000
Interim dividend paid 25 January 2019	133,734,686	1.85	2,474

Six months ended 31 March 2018 (unaudited)	Number of ordinary shares			Rate (cents)		€'000
Interim dividend paid 19 January 2018		133,734,686	1.50		2,006

Year ended 30 September 2018 (audited)	Number of ordinary shares	Rate (cents)	€'000
Interim dividend paid on 19 January 2018	133,734,686	1.50	2,006
Interim dividend paid on 13 April 2018	133,734,686	1.85	2,474
Interim dividend paid on 20 July 2018	133,734,686	1.85	2,474
Interim dividend paid on 14 September 2018	133,734,686	1.85	2,474
Total interim dividends paid			9,428

13.  Related party transactions

Schroder Real Estate Investment Management Limited is the Group's Investment Manager.            

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 period was €947,000 (six months ended 31 March 2018: €849,000, year ended 30 September 2018: €1,958,000). At 31 March 2019, €140,000 was outstanding (six months ended 31 March 2018: €881,000, year ended 30 September 2018: €318,000).

Directors are the only officers of the Company and there are no other key personnel. The Directors' remuneration for services to the Group for the six months ended 31 March 2019 was €72,000 (six months ended 31 March 2018: €62,000, year ended 30 September 2018: €105,325) equivalent to £61,962. Each of the three directors owns 10,000 shares in the Company.

14.  Contingent liability

There are no contingent liabilities other than those disclosed in note 7.

15.  Capital commitments

At 31 March 2019 the Group had capital commitments of €821,000 (30 September 2018: €293,590,
31 March 2018: €400,000).

16.  Post balance sheet events

There were no post balance sheet events.

 

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[*] Includes the Group's 50% share of external debt in the joint venture of €11.4m and excludes unamortised

  finance costs of €1.1m

[†] Includes the Group's 50% share in the Seville property proportionally valued at €26.4m

[‡] B-B refers to Boulogne-Billancourt

[§] SC refers to Saint-Cloud

[**] Includes the Group's 50% share in the Seville property proportionally valued at €26.4m

[††] Includes the Group's 50% share of external debt in the joint venture of €11.4m and excludes unamortised

  finance costs of €1.1m

[‡‡] European Public Real Estate Association ('EPRA') earnings per share reflects the underlying performance of the company calculated in accordance with the EPRA guidelines.

[§§] Headline earnings per share reflects the underlying performance of the company calculated in accordance with the Johannesburg Stock   Exchange listing requirements.

 

END

 

 

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