Schroder Eur.r Regulatory News (SERE)

9 December 2019

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

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

FULL YEAR RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2019

SECTOR DIVERSIFICATION AND WINNING CITIES STRATEGY UNDERPINS POTENTIAL TO DELIVER FURTHER INCOME AND CAPITAL GROWTH

Schroder European Real Estate Investment Trust plc, the company investing in European growth cities and regions, today announces its audited full year results for the year ended 30 September 2019.

Operational highlights

- Agreed a conditional new long-term lease and capex programme at the Group's largest asset, Boulogne-Billancourt office in Paris, providing future potential capital value and income upside

- Portfolio allocation to higher growth logistics sector increased to 20% (30 Sept 2018: 13%) with the acquisition of a French logistics asset for €18.2 million

- Underlying property portfolio total return of 7.7% (excluding the impact of transaction costs) (30 September 2018: 10.8%)

- 100% of the portfolio's 13 institutional grade properties located in cities and regions of Continental Europe that are in the top two quartiles of forecast economic growth 

- Portfolio valued at €242.7 million (on a proportionally consolidated basis), reflecting an uplift of approximately 9.0% on purchase price

- Conclusion of 18 new leases and re-gears with a total annual rental income of €1.6 million, generating a c.2% increase in annualised income on a like-for-like basis and secured at a weighted lease term of c.9 years. The overall unexpired lease term across the portfolio is 5.0 years to first break and 6.4 years to expiry

- Achieved a Global Real Estate Sustainability Benchmark ('GRESB') Green Star for 2019

Financial highlights

- Net Asset Value ("NAV") of €182.1 million or 136.2 cps (30 September 2018: €182.1 million / 136.2 cps)

- Total dividends declared of 7.4 cps, in line with target of 5.5% annualised yield against the Euro IPO issue price

- EPRA earnings of €10.5 million (30 September 2018: €10.8 million), resulting in dividend cover of 107% (30 September 2018: 109%)

- Profit for the year of €7.4 million (30 September 2018: €13.2 million), predominantly reflecting lower valuation gains on investment properties

- NAV total return of 4.1% (30 September 2018: 7.5%), reflecting the impact of acquisition costs and one-off tax restructuring costs

- Loan to value ('LTV') of 29% (30 September 2018: 26%) at a weighted average total interest rate of 1.4%. Additional loans completed post period take the LTV to 31%.

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

"2019 has been an important year in positioning SEREIT to deliver long-term income and capital growth. Our increasingly diversified portfolio by sector, geography and tenant has underpinned a period of stable financial and operational performance, supporting the delivery of the attractive and well covered dividend, whilst also improving the Company's defensive characteristics. At the same time, initiatives such as the Paris Boulogne-Billancourt refurbishment and lease regear demonstrate the potential to generate strong shareholder returns from our strategy of focusing on Winning European Cities, where all 13 of the Group's assets are situated." 

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

"Property markets in our target cities are performing well. Whilst there are pockets of weakness, such as in the retail shopping centre sector, our limited exposure to underperforming parts of the market and balanced portfolio helps mitigate us against these. Alongside progressing the Paris redevelopment and other initiatives to further improve our income profile, the ambition for 2020 is that we will grow the portfolio via new acquisitions in our target Winning cities, benefitting from both the macro trends supporting attractive real estate returns, as well as the Company's extensive local market expertise."

 The Company's Annual Report and Accounts for the year ended 30 September 2019 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/1155W_1-2019-12-6.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.morningstar.co.uk/uk/NSM.

Dividend details will be released in a separate announcement.

For further information:

A presentation for analysts and investors will be held at 09.00 GMT today at Schroders plc, 1 London Wall Place, London, EC2Y 5AU. If you would like to attend, please contact James Lowe at Schroders on james.lowe@schroders.com or +44 (0)20 7658 2083.

A webcast presentation will take place at 1100 GMT / 1300 SA, registration for which can be accessed via:

https://www.brighttalk.com/webcast/1184/376008?utm_source=Schroder+Investments+Limited&utm_medium=brighttalk&utm_campaign=376008

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Chairman's Statement

Asset management positioning the Company for growth

Overview

2019 has been an important year in positioning SEREIT to deliver long-term income and capital growth. New investments were made in the logistics/industrial sector, returning the Company to full investment. This took the portfolio weighting in this higher growth sector to 20%, compared to nil 18 months ago. There has also been success in progressing value-enhancing asset management initiatives, the most notable of which is at the Company's Paris office investment Boulogne-Billancourt. A conditional agreement for a long-term lease has been signed with the existing tenant Alten, in return for a comprehensive refurbishment of the building which is expected to start in mid-2020. This has the potential to deliver both NAV return upside and improve the longer-term income and portfolio profile.

Real estate markets in our target cities generally remain stable, which has supported an overall portfolio valuation uplift. However, certain sectors such as retail shopping centres are under pressure. The Company has seen this at its shopping centre in Seville, where rents and value have declined. The Investment Manager is continuing to implement asset management initiatives across the portfolio to mitigate such market risks.

Strategy

The Company's strategy is built around three core pillars, being: a focus on assets with strong fundamentals in Winning Cities and regions across continental Europe; diversification across sectors and tenants; and execution of value-enhancing investment and asset management via on the ground European teams.

All 13 of SEREIT's assets are situated in Winning Cities and regions, being those that are expected to generate higher and more sustainable levels of economic growth than their national averages (Source: Oxford Economics). These locations are characterised by themes such as technological and infrastructure improvements and urbanisation. Schroders uses its in-house economic and real estate research platform to assist with identifying such locations and also advises on how to capitalise on broader macro and micro trends such as e-commerce.

The increased diversification provided by the portfolio improves the defensive characteristics of the Company. The strategy also provides opportunities to tactically allocate between different sectors and investments to maximise returns. The portfolio is increasingly diversified by location and sector, and has around 100 tenants with a broad spread of lease expiries and exposure to different industries. The increase in the Company's weighting to the logistics/industrial sector and decrease in allocation to the retail sector is an example of a tactical strategic move implemented over the past 18 months. This orientates the Company to sectors which are forecast to deliver higher rental growth going forward.

Execution of the strategy is implemented by the real estate teams that Schroders has located on the ground across eight key European markets, including Paris and Frankfurt. This local presence is important in identifying sub-markets and assets benefiting from local market trends. It is also key to being able to build relationships with tenants to execute asset management initiatives. This was demonstrated by the work done with Alten to secure a conditional new long-term lease at the Paris Boulogne-Billancourt office investment.

Financial Results

Despite the challenging global political backdrop, the Company delivered stable financial results during the period. The NAV was unchanged at €182.1 million (€1.362 per share), despite the one-off costs of the tax restructuring of €2 million. The conclusion of 18 new leases and regear events generated a c.2% increase in annualised income underpinning dividend cover.

Balance sheet and debt

One new loan was completed during the year, an €8.6 million debt facility secured against the Rennes industrial acquisition. As at 30 September 2019 total third party debt was €73 million, representing a net loan to value ('LTV') of 29% against the overall gross asset value of the Group.

As announced post year end, the loan on the Saint-Cloud office building in Paris was increased by €4 million to €17 million and a new 3.5 year loan of €3.7 million was also taken against the Rumilly logistics asset in France. This takes total third party debt to €81 million, representing a net Loan to Value ('LTV') of approximately 31% against the overall gross asset value of the Company. The average weighted total interest rate of the loans is 1.4% per annum and all interest rates are either fixed or have caps to mitigate the impact of rising interest rates. The weighted average duration of the loans is 4.9 years.

The additional loans were drawn mainly to fund capital expenditure across the portfolio, including preliminary works at the Paris Boulogne-Billancourt office investment. The comprehensive refurbishment of this asset, that is being undertaken as part of the agreement for the new lease with Alten, is likely to be mainly funded with a new debt facility secured against that asset. This would take overall gearing to c.35% LTV. In parallel, the Company continues to keep under review other means of growing its available capital, such as raising equity or asset sales, in order to optimise the overall capital structure.

Dividend

The Company has declared a fourth interim dividend in respect of the year ended 30 September 2019 of 1.85 euro cents per share payable on 27 January 2020 to shareholders on the register on 10 January 2020. The total dividends in respect of the year amount to 7.4 euro cents per share.

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 and GBP share price as at 30 September 2019, this equates to an annualised dividend yield of 5.9%.

The dividends in respect of the year are approximately 107% covered from net income from the portfolio. Dividend cover over the next two years is expected to be reduced whilst the refurbishment of the Paris Boulogne-Billancourt office investment is completed. However, this project will be accretive to NAV and will improve the longer term income profile and dividend cover of the Company, with a new 10 year lease to a strong tenant being agreed in return for the refurbishment. In implementing the dividend strategy going forward, the Board will consider the shorter term cash generation of the Company, alongside the longer term sustainable rental income from the portfolio.

Outlook

Initiatives such as the Paris Boulogne-Billancourt refurbishment and lease regear demonstrate the potential to generate strong shareholder returns from our strategy of focusing on Winning European Cities and active asset management by local teams. Having a diverse portfolio of properties and tenants presents other asset management opportunities to improve value and income. Equally, it also provides defensive attributes if certain sectors or markets come under pressure, for example the exposure to the retail sector in the Seville shopping centre. Alongside the quality of the portfolio, execution of asset management initiatives such as improving the occupancy of the Hamburg and Seville assets will also reduce portfolio risk.

This will position the Company well to deliver on our long-term growth ambitions.

Sir Julian Berney Bt.Chairman6 December 2019

Investment Manager's Review

Focus on Winning Cities

Focus on growing net income and improving the portfolio's defensive characteristics.

Results

The Group's NAV at 30 September 2019, excluding non-controlling interests, was €182.1 million or 136.2 euro cents per share ('cps'), representing no change over the year. Including dividends, the NAV total return over the period was 4.1%.

The NAV movement includes one-off costs relating to tax restructuring of €2 million (1.5 cps). The restructuring was undertaken in response to changes to various European tax laws. The restructuring seeks to ensure the Company continues to have the most appropriate tax structure for its investment activities, post the changes to the tax laws. The potential tax changes were flagged in the 2019 Half Year Report and further details are provided in note 10 of the financial statements.

Deducting the interim dividend in respect of the quarter ending 30 June 2019, which was declared on 10 September 2019, and was paid on 21 October 2019 from income, the Company's NAV would have reduced to €179.6m or 134.3 euro cents per share. This dividend was fully covered from income.

EPRA earnings were €10.5 million (2018: €10.8 million) and IFRS profit was €7.4 million (2018: €13.2 million).

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:

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 on page 73 of the 2019 Report and Accounts.

Strategy

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

·; Achieving full investment, targeting Winning Cities and regions and high growth sectors;

·; Executing asset management initiatives to enhance both the long-term rental profile and individual asset value;

·; Improving the Company's net income profile to support the target dividend yield of 5.5%; and

·; Managing portfolio risk in order to enhance the portfolio's defensive qualities.

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

·; Acquisition of two industrial warehouses in Rennes, France, thereby increasing the Group's industrial warehousing weighting to 20% and improving the portfolio diversification from a sector and tenant perspective;

·; Return to full investment with 100% of the portfolio located in higher-growth cities;

·; Agreeing a conditional heads of terms with Alten for a long-term lease in the Company's largest asset at Boulogne- Billancourt, Paris;

·; Securing new lease agreements with three tenants for c.50% of the Hamburg space which were achieved at rents 13% above the business plan;

·; Concluded 18 new lease and re-gear events (including Hamburg) across the portfolio, generating a c.2% increase in annualised income on a like-for-like basis and secured at a weighted lease term of c.9 years;

·; Completion of a €0.8 million capital expenditure programme to improve the quality of Metromar Shopping Centre, Seville. Together with the opening of leisure specialist, Urban Planet, it will enhance the centre's defensive capabilities in an increasingly competitive local market and a challenging retail sector;

·; Maintained a high occupancy level of 94%, with an average portfolio unexpired lease term of 6.4 years and 5.0 years to break; and

·; A prudent loan to value ('LTV') of 29%.

Our focus continues to be on executing asset management to drive income and total returns for the existing portfolio, managing risks and positioning the Company for growth. The specific next steps therefore include:

1. Conclusion of key asset management initiatives;

a. Advancing the planning permit, detail design, construction tender and financing for the office investment in Boulogne-Billancourt, Paris;

b. Leasing the remaining vacant space in Hamburg; and

c. Continuing to actively manage the Company's sole shopping centre with a view to leasing vacant space and stabilising income.

2. Continue to actively engage with investors and consider new investment opportunities that can support the disciplined growth of the Company in a way that will improve shareholder returns.

Market overview

Economic outlook

The eurozone is currently a two-speed economy. The slowdown in world trade and investment has hit manufacturers and output has fallen by 1% since late 2018. Conversely, the services sector continues to grow, supported by solid labour markets, rising consumption and government spending. The risk is that the downturn in manufacturing deepens, possibly because of a disruptive Brexit or a further escalation of the trade dispute and then spreads to the services sector. The ECB has begun to loosen policy, but its room to manoeuvre is limited, given that the main financing rate is already at zero. However, low borrowing costs for governments provide some room for government stimulus. Schroders forecasts that eurozone GDP will grow by 1% p.a. through 2019/20. Sweden, France and Spain will probably see faster growth, while Germany, which has a relatively large manufacturing sector, is likely to lag behind.

Offices

The fall in office vacancy has slowed sharply this year, as demand has eased in step with the economy and as development has increased. Also, in many markets vacancy of quality space in key inner city markets has virtually run out. At 6.4% the average office vacancy in major European cities in mid-2019 was only slightly lower than at the end of 2018 (6.7%). While this could mark a turning point, we think that office rents are unlikely to fall in most cities given that developers and lenders are generally cautious and new building is low by historical standards. We expect office rental growth to slow, but remain positive through 2020/21, assuming the eurozone avoids a recession. Berlin, Madrid and Munich will likely see the biggest rise in average grade office rents over the next two years of 3-4% p.a., but most other cities will see rental growth of 1.5-2.5% p.a.

Logistics/industrial

Despite a fall in lettings to manufacturers this year, overall demand for warehouses in Continental Europe remains strong. Online retailers (e.g. Amazon, Zalando) have continued to expand and traditional retailers (e.g. Decathlon, IKEA) are also taking more space to support their online sales. In general, the growth in demand has been matched by supply and while there is a shortage of land for big warehouses around Hamburg, Munich and Rotterdam, occupiers have typically been willing to pre-let developments in smaller cities, provided they have an adequate labour force and good road connections. In the first half of 2019 two-thirds of logistics take-up in Germany was outside the big seven cities. As a result, rental growth in the logistics market has been limited to around 2% p.a., although some smaller warehouses, which are used for last mile deliveries in cities and where supply is more constrained, have seen stronger rental growth.

Retail

Demand for retail space in Continental Europe is weak as retailers adapt to growing online competition and fewer shoppers in their stores. While total retail sales in France and Germany could grow by 2-3% in 2019, store sales are likely to shrink. Several retailers have failed and even successful retailers like Inditex have closed more stores than they have opened over the last 12 months and use the weakness of the sector to renegotiate lease terms. In general shopping centres have been most affected, as hypermarkets have cut their non-food sales areas and clothing retailers have contracted, but the number of empty shops in city centres is also rising. We expect that prime shopping centre rents will fall in most European cities over the next three years and that prime shop rents will stagnate. The most defensive retail types are likely to be convenience food stores and out-of-town retail warehouses with affordable rents.

Real estate portfolio

The Company owns a portfolio of 13 institutional grade properties valued at €242.73 million as at 30 September 2019 (30 September 2018: €222.0 million). The properties are 94% let and located across 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 Company holds a 50% interest.

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

The table below sets out the top ten tenants which are from a diverse range of different industry segments and represent 68% of the portfolio:

1 B-B refers to Boulogne-Billancourt.

2 SC refers to Saint-Cloud.

3 Includes the Group's 50% share in the Seville property proportionally valued at €23.5 million.

The portfolio generates €17.1 million p.a. in contracted income and has an estimated market rental value of €17.9 million. The average unexpired lease term is 5.0 years to first break and 6.4 years to expiry.

The lease expiry profile to earliest break is shown below. 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 €242.7 million2 reflects an increase of 9.0% (€20.1 million) compared to the combined purchase price. Transaction costs have been fully recovered through valuation uplifts since acquisition.

Over the last 12 months, the underlying property portfolio generated a total property return of 7.7% (7.3% when including the impact from transaction costs for the newly-acquired property in Rennes). Hereof, the portfolio income return amounted to 7.2% and the portfolio capital return to 0.5% (net of capex).

The largest contributors to portfolio performance during the last 12 months were the Paris Saint-Cloud, Stuttgart, Apeldoorn, Hamburg, Venray and Houten properties - all delivering above 10% total property returns. The Seville property was the main detractor from performance delivering -7.8% total return over the last 12 months.

2 Includes the Group's 50% share in the Seville property proportionally valued at €23.5 million.

Transactions and asset management

Acquisition

Rennes, C-log

Asset strategy

Acquired in March for €17.3 million for income and growth benefits, being let off a long-term 12 year lease and located in one of France's fastest growing regions from a GDP perspective.

Asset overview

Providing 23,852 sqm of institutional quality warehouse space across two adjacent buildings. The property is let to C-Log, the logistics subsidiary of Groupe Beaumanoir, the international fashion retailer, which has invested significantly in equipping the building with automated technology. The asset was acquired off a net initial yield of 5.9% and a capital value per sqm of €725.

During the hold period (six months to 30 September 2019), the property delivered a 5.0% total return.

Key activity and performance

The acquisition helped increase the Company's warehouse sector weighting to 20%, improved the portfolio unexpired lease term and overall building quality.

Asset management

Paris, Boulogne-Billancourt

Asset strategy

Repositioning opportunity regarding an office investment let off modest rents and located in a supply-constrained location with competing demands for uses.

Asset overview

6,800 sq.m office building located in an established market in Paris's Western Crescent providing occupiers the ability to live, work and socialise.

During the financial year to 30 September 2019, the property delivered a 4.2% total return. Further upside may be achieved following conclusion of the key asset management activity below.

Key activity and performance

Signing (post period end) of a conditional long-term lease agreement with the Alten Group to occupy the entire premises, subject to refurbishing the building to grade A standard. Advancement of planning permission, detail design and cost feasibility analysis. In conjunction with the above we have progressed finance discussions with a number of lenders concerning the funding of refurbishment works. It will also materially enhance the company's asset quality, income profile, Winning Cities exposure and tenant covenant strength. Completion of the project has the potential to be accretive to the Company's NAV growth.

Asset management

Paris, Saint-Cloud

Asset strategy

Acquired for its attractive initial yield, diverse tenancy profile, modest rents and long-term potential to benefit from transport infrastructure improvements (Grand Paris Express - Line 15 expansion).

Asset overview

15,800 sqm of office and storage accommodation located in 'Les Bureaux de la Colline', a well maintained 65,000 sqm office complex in Saint Cloud, an upscale suburban city bordering Paris. The office space offers flexible accommodation with views over Paris, Parc de Saint-Cloud and La Défense. Diverse tenancy profile with a high incidence of tenant retention given modest/affordable rents of c. €230/sqm.

During the financial year to 30 September 2019, the property delivered a 15.3% total return. The lease regears concluded during the year added significant value.

Key activity and performance

In September 2019 the Investment Manager concluded two new leases. Level five to Ascott Informatique on a standard 3/6/9 year lease with breaks and levels 6, 7 and 8 to Outscale on a new 6/9 year lease. Both leases reflect a 9% increase on previous rent.

Asset management

Seville, Metromar

Asset strategy

Spanish recovery play via the acquisition of a dominant urban shopping centre located in a fast growing suburb of Seville, Spain's fourth largest city. The strategy over the year was to undertake a light refurbishment and strengthen the entertainment point of difference in order to defend against competition.

Metromar is the portfolio's sole shopping centre and is one of only three assets in the retail sector. This sector has been most negatively impacted by structural changes. Whilst the two other retail properties have few or single occupiers that are large and stable, as a shopping centre Metromar has multiple tenants and has been negatively impacted with increased vacancy. We therefore remain constantly vigilant in our management of the asset and are actively reviewing new occupiers and marketing of the centre.

Asset overview

23,500 sqm urban shopping centre with a tenancy mix centred on grocery, fashion and leisure that services a local, growing catchment. The centre benefits from easy car access and is well serviced by public transport with frontage to the only train line that services this part of Seville to the city centre, making the area a key residential growth corridor.

During the financial year to 30 September 2019 the property delivered a -7.8% total return. This was a result of weakening valuation yields to reflect increased competition, structural shifts in retail and increased vacancy.

Key activity and performance

·; Completed an €800,000 capital expenditure programme to improve the quality of the centre. Also added an additional leisure anchor, trampoline specialist Urban Planet (opened August 2019).

·; Initiated a programme to achieve a BREEAM in‑use certification of four stars (very good) for building performance and five stars (excellent) for management.

·; Enhanced marketing to highlight the centre's points of difference around convenience, accessibility, entertainment and parking abundance relative to competition.

These measures seek to mitigate the risks of a weakening retail sector and increasing local competition which have led to an increase in vacancy in the centre. The measures increase the property's appeal to visitors and tenants.

Responsible and positive impact 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 the 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 Global Real Estate Sustainability Benchmark ('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 30 September 2019, the Group's total external debt was €73.0 million, across six loan facilities. This represents a conservative Loan to Value of 29% against the Group's gross asset value.

The current blended all-in interest rate is 1.4%, significantly below the portfolio yield of 5.8% p.a, providing a favourable yield gap. The average unexpired loan term is 5.0 years.

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 three 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 French cap is 1.25% p.a. and 1% p.a. for The Netherlands loan.

As announced post year end, the Group completed a €4 million increase to its existing debt facility secured against the Saint-Cloud asset, with Banque Populaire, taking the total loan to €17 million. The Group also completed a new 3.5 year loan of €3.7 million secured against the Rumilly logistics asset in France. This takes total third party debt to €80.7 million, representing a net Loan to Value ('LTV') of approximately 31% against the overall gross asset value of the Group. The average weighted total interest rate of all the loans in the portfolio, including these two new loan amounts, is 1.4% p.a. and all interest rates are either fixed or have caps to mitigate the impact of rising interest rates. The weighted average duration of the all the loans in the portfolio is 4.9 years.

Outlook

The Company's portfolio is 100% allocated to 'Winning Cities', those cities that will grow faster than their domestic economies from a GDP, employment and population perspective. This has been the central theme to constructing the portfolio and is expected to position the Company well for the future. This will be particularly important if risks around the economic and political backdrop increase.

We continue to focus on asset management as a means to grow shareholder returns. The Paris refurbishment initiative is a good case in point. Successful completion will not only strengthen portfolio real estate fundamentals but also provide opportunity to deliver profits. Other asset management initiatives, such as leasing vacant accommodation in Hamburg and Seville will also be important in supporting the income profile of the Company.

The Company is well placed to deliver on its strategy.

Schroder Real Estate Investment Management Limited

6 December 2019

Strategic Review

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 the Company's 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 2019.

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.

The Board has considered the potential risks arising from the UK's departure from the European Union. Due to the Group's activities predominantly being based in Europe, the Board does not consider the UK's departure will have any adverse impact, but continues to keep the matter under review. Given the Company's UK listing, the board is also mindful that changes to public policy in the UK could impact the Company in the future.

A summary of the principal risks and uncertainties faced by the Company which have remained unchanged throughout the year ended 30 September 2019, and actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's principal risks and uncertainties, are set out in the table below.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit and Valuation Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit and Valuation Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report.

A full analysis of the financial risks facing the Company and its subsidiaries is set out in note 23 on pages 68 to 71 of the 2019 Report and Accounts.

Viability statement

The Board is required to give a statement on the Company's viability which considers the Company's current position and principal risks and uncertainties together with an assessment of future prospects.

The Board conducted this review over a five year time horizon commencing from the date of this report which is selected to match the period over which the Board monitors and reviews its financial performance and forecasting. The Investment Manager prepares five year total return forecasts for the Continental European commercial real estate market. The Investment Manager uses these forecasts as part of analysing acquisition opportunities as well as for its annual asset level business planning process. The Board receives an overview of the asset level business plans which the Investment Manager uses to assess the performance of the underlying portfolio and therefore make investment decisions such as disposals and investing capital expenditure. The Company's principal borrowings are for a weighted duration of 5.0 years and the average unexpired lease term, assuming all tenants vacate at the earliest opportunity, is 5.0 years.

The Board's assessment of viability considers the principal risks and uncertainties faced by the Company, as detailed in the Strategic Review on pages 27 and 28 of the 2019 Report and Accounts, which could negatively impact its ability to deliver the investment objective, strategy, liquidity and solvency. This includes consideration of scenario stress testing and a cash flow model prepared by the Investment Manager that analyses the sustainability of the Company's cash flows, dividend cover, compliance with bank covenants, general liquidity requirements and potential legal and regulatory change for a five year period. These metrics are subject to a sensitivity analysis which involves flexing a number of the main assumptions including macro-economic scenarios, delivery of specific asset management initiatives, rental growth and void/re-letting assumptions. The Board also reviews assumptions regarding capital recycling and the Company's ability to refinance or extend financing facilities. Steps which are taken to mitigate these risks as set out in the Strategic Review on pages 27 and 28 of the 2019 Report and Accounts are also taken into account.

Based on the assessment, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

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 LTV covenant, interest cover ratio and rental income projections. They have not identified any material uncertainties which would cast significant doubt on the Company's ability to continue as a going concern for a period of not less than 12 months from the date of the approval of the financial statements. The Directors have satisfied themselves that the Company 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 regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) 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 Group and Company and of the profit or loss of the Group and 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 IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

·; Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS regulation.

The Investment Manager is responsible for the maintenance and integrity of the Company's webpages. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors confirmations

The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed on pages 30 and 31 of the 2019 Report and Accounts, confirm that to the best of their knowledge:

·; the Group and Company financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group and profit of the Company; and;

·; the Directors' Report includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties that it faces; and

In the case of each Director in office at the date the Directors' Report is approved:

·; so far as the Director is aware, there is no relevant audit information of which the Group and Company's auditors are unaware; and

·; they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group and Company's auditors are aware of that information.

Consolidated and Company Statements of Comprehensive Income

For the year ended 30 September 2019

All items in the above statement are derived from continuing operations.

Consolidated and Company Statements of Financial Position

As at 30 September 2019

Consolidated and Company Statements of Changes in Equity

For the year ended 30 September 2019

1 These reserves form the distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments. See note 1 for further detail.

Consolidated and Company Statements of Cash Flows

For the year ended 30 September 2019

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 consolidated financial statements of the Company for the year ended 30 September 2019 comprise those of the Company and its subsidiaries (together referred to as the 'Group'). The Group holds a portfolio of investment properties in Continental Europe. The shares of the Company are listed on the London Stock Exchange (primary listing) and the Johannesburg Stock Exchange (secondary listing). The registered office of the Company is 1 London Wall Place, London, England EC2Y 5AU.

Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU') and interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC'), and therefore comply with Article 4 of the EU IAS regulation, and in accordance with the Companies Act 2006.

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.

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, 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 these financial statements relate to the carrying value of investment properties, as disclosed in note 13, including those within joint ventures, which are stated at fair value. The fair value of investment property 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 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 taxation where recognition and measurement of liabilities relating to tax positions are uncertain.

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 is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. 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 is treated as an asset acquisition.

Non-controlling interests

Non-controlling interests are recognised on the basis of their share in the recognised amounts of a subsidiary's identifiable net assets. On the balance sheet non-controlling interests are presented separately from the equity of the owners of the Parent. Profit or loss and total comprehensive income for the period attributable to non-controlling interests are presented separately in the statement of comprehensive income.

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. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and balance sheet respectively.

Joint arrangements

Under IFRS 11, Joint Arrangements, the Group's investments in joint arrangements are classified as joint ventures. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost, in the consolidated statement of financial position.

Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses of the investee in profit or loss.

When the Group's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Investment property

Investment property comprises 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 or loss. Realised gains and losses on the disposal of properties are recognised in profit and loss in relation to carrying value at the beginning of the accounting period. 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 25, the Group leases out all owned properties on operating leases which are 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.

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. Rental income, including prepayments, received under operating leases (net of any incentives granted by the lessor) are recognised in the statement of comprehensive income on a straight-line basis over the period of the lease. Properties leased out under operating leases are included as investment properties in the consolidated statement of financial position (note 13).

Financial assets and liabilities

Non-derivative financial assets and liabilities

Non-derivative financial assets and liabilities comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. These are initially recognised at fair value and subsequently measured at amortised cost and discounted as appropriate. On initial recognition the Group calculates the expected credit loss for non-derivative assets and liabilities based on lifetime expected credit losses under the IFRS 9 simplified approach.

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.

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.

Borrowing costs such as arrangement fees are capitalised and amortised over the loan term.

Derivative financial assets and liabilities

Derivative financial assets and liabilities comprise interest rate caps for hedging purposes (economic hedge). These are initially recognised at cost and subsequently revalued at fair value, with the revaluation gains or losses immediately recorded in the statement of comprehensive income.

Share capital

Ordinary shares, including treasury shares, are classified as equity when there is no obligation to transfer cash or other assets.

Share premium

Share premium represents the excess of proceeds received over the nominal value of new shares issued.

Other reserves

Other reserves mainly consists of a share premium reduction reserve arising from the conversion of share premium into a distributable reserve and unrealised currency exchange gains and losses arising on the revaluation of sterling-denominated share capital and share premium at the reporting date.

Dividends

Final dividends to the Company's shareholders are recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders. Interim dividends are recognised when paid.

Impairment

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.

Surrender premium income

Surrender premium income is recognised as revenue upon receipt.

Service charges

These include income in relation to service charges, directly recoverable expenditure and management fees. Revenue from providing services is recognised in the accounting period in which the services are rendered. Revenue from services is recognised based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided and recognised over time.

Finance income and costs

Finance income comprises interest income on funds invested that are recognised in the statement of comprehensive income. Finance income is recognised on an accruals basis.

Finance costs comprise interest expenses on borrowings that are recognised in the statement of comprehensive income. 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 the statement of comprehensive income in the year in which they are incurred on an accruals basis.

Taxation

The Company and its subsidiaries are subject to 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.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is determined using tax rates (and laws) that have been enacted, or substantially enacted, by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

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.

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 are recognised in profit or loss in the statement of comprehensive income.

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.

2. New standards and interpretations

New standards and interpretations adopted by the Group

New standards, amendments or interpretations, effective for the first time for financial years beginning on or after 1 January 2018, have not had a material impact on the Group or Company.

The Group has applied the following standards and amendments for the first time for its annual reporting period commencing 1 October 2018:

IFRS 9 - Financial instruments

IAS 39 is replaced with IFRS 9, resulting in changes in the recognition, measurement and classification of all financial assets excluding derivatives. An expected credit loss model is introduced by IFRS 9, requiring expected credit losses to be recognised on all financial assets held at amortised cost.

IFRS 9 adoption has not had an impact on the financial statements.

Classification and measurement

The Group reviewed its financial assets and assessed that the expected credit risk model should apply to the loan to the joint venture, cash and cash equivalents, and trade receivables. IFRS 9 does not apply to any other assets held by the Group.

The 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.

Derivatives and hedging activity

Hedge accounting is not applied to the interest rate caps held as financial assets and are periodically revalued at fair value through profit or loss. IFRS 9 does not change how interest rate caps held by the Group are measured and therefore has no material impact on the financial statements.

Impairment of financial assets

The Group's trade receivables are largely comprised of tenant receivables. For reasons set out in the Group's Credit Risk management in note 23, the credit risk was deemed to be immaterial.

As disclosed in note 15, the Group has a loan receivable from the joint venture and on application of IFRS 9's credit risk model does not result in recognition of a material loss allowance.

There is no material quantitative impact for the period ended 30 September 2019 upon application of this new accounting policy for assessing asset impairment. The Group will continue to assess 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 makes up 79% of the Group's income and 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 3, the service charge income has been separated from rental income.

The Company does receive management fee income in the form of recharges to subsidiaries. However there is no performance element to the management fee calculation, hence there is no change to the accounting for this income stream.

New standards and interpretations not yet adopted by the Group

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 and it is not a lessee of any other assets that would be in scope for IFRS 16.

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

IFRS 3 - Business combinations

Amendments to IFRS 3 Business Combinations (subject to EU endorsement) and effective for financial years commencing on or after 1 January

2020 provides a revised framework for evaluating a business and introduces an optional 'concentration test'. The amendment will impact the

assessment and judgements used in determining whether future property transactions represent an asset acquisition or business combination.

As a result of the amendment it is expected that future transactions are more likely to be treated as an asset acquisition.

3. Rental and service charge income

4. Other income

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

5. Property operating expenses

All the above amounts relate to service charge expenses which are all recoverable except for €831,000 (2018: €266,000).

6. Material agreements

Schroder Real Estate Investment Management Limited ('SREIM') 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 Group. 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 €1,904,000 (2018: €1,958,000). At the year end €140,000 (2018: €318,000) was outstanding.

SREIM provides accounting services to the Group with a minimum contracted annual charge of €79,000 (£70,000). The total charge to the Group was €99,000 (2018: €106,000). At the year end €8,000 (2018: €17,000) was outstanding.

SREIM provides administrative and company secretarial services to the Group with a contracted annual charge of €56,000 (£50,000). The total charge to the Group was €57,000 (2018: €57,000). At the year end €5,000 (2018: €9,000) was outstanding.

Details of Directors' fees are disclosed in note 9.

Details of loans to Urban SEREIT Holdings Spain S.L., a related party, are disclosed in note 15.

The Company received management fees of €1,429,000 (2018: €1,306,000) from subsidiary companies during the year. The amounts recharged to subsidiaries and outstanding are provided in the table below.

7. Auditors' remuneration

The Group's total audit fees for the year are €356,000 (2018: €269,000) which include the Group's audit and the individual SPV audits fees. The Company's total audit fees for the year were €318,000 (2018: €232,000) which only covers the Group audit fee.

The auditor did not perform any non-audit services for the Group during the year (2018: €6,000). The interim review fee was €50,000 (2018: €37,000) which is an assurance related non-audit service.

8. Dividends received

During the year the Group received dividends of €93,000 (2018: €150,000) from its joint venture operation Urban SEREIT Holdings Spain S.L. (see note 15).

During the year the Company received dividends from its subsidiary undertakings. €2,680,000 (2018: €7,600,000) was received from SEREIT (Jersey) Limited and €10,471,000 (2018: €1,500,000) was received from SEREIT Holdings Sàrl. €9,521,000 of the dividend from SEREIT Holdings Sàrl was received as a contribution of shares in OPPCI SEREIT France and €950,000 was received as a cash distribution.

9. Other expenses

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 €124,742 (2018: €105,325), as set out in the Remuneration Report on pages 39 to 41 of the 2019 Report and Accounts. The total charge for directors' fees was €142,000 (2018: €115,000), which included employer's National Insurance contributions.

10. Taxation

The effective tax rate is a weighted average of the tax rates in the countries the Group has operations.

A potential deferred tax asset of €290,000 (2018: €403,000) arose on tax losses which has not been provided for.

The current tax charge includes €1,997,000 of French taxes paid during the year in respect of a Group restructuring. The Group continues to proactively monitor the appropriateness of its structure and adapt where necessary.

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 incompatible with European Union State Aid rules, to the extent that profits derive from activities performed within the UK. The Group benefits from this exemption in respect of SEREIT (Jersey) Limited which provides financing to other group companies. The Group has undertaken a review with its advisors and does not consider that a provision is currently required as a consequence of the ruling.

11. Earnings per share

Basic earnings per share

The basic earnings per share for the Group is calculated by dividing the net profit after tax attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share

The Group has no dilutive potential ordinary shares and hence the diluted earnings per share is the same as the basic earnings per share in both 2018 and 2019.

Headline earnings per share

The headline earnings and diluted headline earnings for the Group is 7.9 euro cents per share (2018: 8.1 euro cents per share) as detailed on page 75 of the 2019 Report and Accounts.

12. Dividends paid

Interim dividends of €7,422,000 (2018: €9,428,000) were paid to shareholders during the year as follows:

The interim dividend for the quarter ended 30 June 2019 was paid on 21 October 2019. This was 1.85 euro cents per share and a total dividend payment of €2,474,000 was made and would have brought the total dividend paid for the year to €9,896,000 (2018: €9,428,000).

13. Investment property

There were no leasehold properties held during the year (2018: Nil). The value of the respective sectors held were as follows:

The fair value of investment properties as determined by the valuer totals €219,200,000 (2018: €195,950,000). The fair value of investment properties disclosed above includes a tenant incentive adjustment of €304,000 (2018: €306,000).

The net valuation gain on investment property of €3,530,000 (2018: €4,939,000) consists of net property revaluation gains of €3,528,000 (2018: €5,108,000) and a movement of the above mentioned tenant incentive adjustment of €2,000 (2018: €169,000).

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 an 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.

The fee payable to Knight Frank is less than 5% of its total revenue in any year.

All investment properties are categorised within level 3 of the fair value hierarchy, 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:

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

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 €47.0 million which is disclosed within the summarised information within note 15 as part of total assets.

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 €52.0 million which is disclosed within the summarised information within note 15 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:

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:

14. Investment in subsidiaries

During the year the Company invested €4,111,000 in SEREIT Holdings France SAS (SIIC), a new French company created to hold the Company's investment in Rennes. Additional investments of €1,154,000 in SEREIT Holdings Sàrl (2018: €7,415,000), €700 in SEREIT SCI SEREIT Directoire and €10 in SCI 221 Jean-Jaures were made during the year.

As part of the restructure exercise the Company acquired €74,666,000 of shares in OPPCI SEREIT France and reduced its investment in SEREIT (Jersey) Limited by €77,750,000.

The subsidiary companies listed below are those which were part of the Group as at 30 September 2019. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group and the proportion of ownership of interests held equals the voting rights held by the Group.

The Company set up a French permanent establishment in France during the year to hold its French investments.

On 31 July 2018 the Group disposed of its 70% holding of SCI Rennes Anglet. The net proceeds from sale were €19,974,000, including €29,000 of sale costs, resulting in a loss on disposal of €29,000. Cash held in SCI Rennes Anglet on disposal was €234,000 which was deducted from the above mentioned net sale proceeds to give proceeds on disposal of €19,740,000 as reported in the consolidated statement of cash flows. An inter-company loan of €7,215,000 was repaid to the Group on disposal.

Following this disposal the Group derecognised its previously disclosed non-controlling interest. The value of this as at 30 September 2017 was €7,691,000. Profits attributable to the non-controlling interest during the period up to disposal was €2,392,000 and a share premium distribution of €1,510,000 was received. The value of the non-controlling interest derecognised at the date of disposal was €8,573,000.

15. Investment in joint venture

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.

The carrying value equals the fair value.

In 2018 and 2019, within total liabilities of the joint venture, is a €23.4 million loan facility with Münchener Hypothekenbank eG. The facility matures on 22 May 2024 and carries a fixed interest rate of 1.76% per annum payable quarterly. The facility was subject to a 0.3% arrangement fee which is being amortised over the period of the loan. The debt has a LTV covenant of 60% and a minimum net rental income covenant. The lender has a charge over the property owned by the Group with a value of €47.0 million. A pledge of all shares in the borrowing Group company is in place.

A reduction in rental income has resulted in a requirement under the minimum net rental income covenant in the loan to retain all excess income generated by the Seville property in the property owning SPV. This position will continue until the rental income increases sufficiently to meet the level required under the loan.

In 2018 and 2019, within total liabilities of the joint venture, there is also a loan amount of €10.0 million owed to the Group. The loan is expected to mature at the same time as the above-mentioned bank loan and carries a fixed interest rate of 4.37% per annum payable quarterly.

Both of the above-mentioned loans were in place during the prior year ended 30 September 2018 under the same terms.

16. Trade and other receivables

Other debtors and prepayments includes tenant incentives of €304,000 (2018: €306,000). There were no provisions against the above amounts in 2019 (2018: Nil).

17. 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 consolidated financial statements at its fair value. The notional value of the instrument is €13.0 million. As at 30 September 2019 the fair value of the interest rate cap was €10,000 (2018: €188,000), giving a valuation decrease as shown within the statement of comprehensive income of €178,000.

During the year 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 consolidated financial statements at its fair value. As at 30 September 2019 the fair value of the interest rate cap was €3,000, giving a valuation decrease as shown in the statement of comprehensive income of €84,000.

During the year the Group entered into an interest rate cap purchased for €46,000 from Landesbank Saar on 27 March 2019 in connection to a €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 consolidated financial statements at its fair value. As at 30 September 2019 the fair value of the interest rate cap was €4,000, giving a valuation decrease as shown in the statement of comprehensive income of €42,000.

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

18. Cash and cash equivalents

19. Share capital

Share capital

As at 30 September 2019, the share capital of the Company was represented by 133,734,686 ordinary shares (2018: 133,734,686 ordinary shares) with a par value of 10.00 pence.

Issued share capital

As at 30 September 2019, the Company had 133,734,686 ordinary shares (2018: 133,734,686) in issue (no shares were held in treasury). The total number of voting rights of the Company at 30 September 2019 was 133,734,686 (2018: 133,734,686).

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.