Schroder Eur.r Regulatory News (SERE)

6 December 2022

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

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

FULL YEAR RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2022

PORTFOLIO VALUE INCREASE AND ROBUST EARNINGS, WITH INDEXATION TO DRIVE FUTURE GROWTH

STRONG BALANCE SHEET WITH SIGNIFICANT CASH RESERVES AND INVESTABLE FIREPOWER

Schroder European Real Estate Investment Trust plc, the company investing in European growth cities and regions, announces its full year results for the year ended 30 September 2022.

Quarterly dividends at pre-Covid level and payment of special dividends

- Special dividends totalling €12.8 million, reflecting 9.60 euro cents per share ("cps"), were paid as a result of the exceptional asset management profits achieved from the repositioning of Paris Boulogne-Billancourt (Paris B-B);

- Continuation of pre-Covid quarterly dividend of 1.85 cps, equating to 7.40 cps for the financial year, in line with target.

Financial highlights:

- Net Asset Value ("NAV") total return of 7.3% based on an IFRS profit of €13.9 million (30 September 2021: 3.2% /€6.2 million), driven primarily by valuation uplifts in the industrial and DIY portfolio, together with the German office portfolio;

- NAV of €188.2 million or 140.8 cps (30 September 2021: €199.5 million or 149.2 cps), reflecting the payment of the special dividends (excluding which the NAV would have been €201.0 million);

- Underlying EPRA earnings of €6.1 million (30 September 2021: €6.6 million), which will increase with the redeployment of Paris B-B sale proceeds and rental indexation;

- Strong balance sheet with considerable cash reserves and investable firepower of circa €50 million including additional debt;

- Maintained a prudent gearing approach with a loan to value ("LTV") of 29% and 20% net of cash (30 September 2021: 16% net of cash / 28% gross of cash), considerably below target of 35%. Average cost of drawn debt (interest-only) of 1.9%;

- Approximately 33% of the Company's debt expires in 2023; positive discussions with lenders regarding these loans are currently taking place with the Company expecting increased financing costs to be offset by rental indexation.

Operational highlights:

- Total direct portfolio valuation of €218.7 million, reflecting a like-for-like increase of 3%, or €7.6 million (€7.2 million net of capital expenditure and incentives);

- Two acquisitions completed totalling circa €10 million, further diversifying the portfolio by sub-sector and markets and contributing to replacing the lost income from Paris B-B (i.e. a car show room in Cannes, France and an industrial warehouse in Venray, the Netherlands);

- Concluded 14 new leases and regears across the portfolio totalling 19,065 sqm at a weighted unexpired lease term of 6.1 years;

- 100% rent collection, excluding the Seville JV interest which has been written to nil;

- 100% of the portfolio leases indexed to inflation, including 80% annually;

- Enhanced ESG performance across the portfolio including:

o  Improved 2021 Global Real Estate Sustainability Benchmark ("GRESB") score from three stars to four, ranking the portfolio second in the peer group;

o  Building Research Establishment Environmental Assessment Method ("BREEAM") certifications for the Company's Frankfurt, Berlin and Venray investments.

Sir Julian Berney Bt., Chairman, commented:

"The Board is pleased with the resilience of the portfolio, sector and winning city allocations as well as the Investment Manager's efforts in delivering on its asset management programme. The success of Paris Boulogne-Billancourt is testament to the strategy of acquiring high quality real estate in growth locations and using in-house local active management expertise to create value.

"We are well aware of the ongoing challenges facing global markets but real estate continues to remain attractive relative to other asset classes. By having real asset exposure that is diversified, indexed linked and located in strong, liquid cities like Berlin, Hamburg, Stuttgart and Paris, the Company is well positioned to deliver on its strategy longer term. In addition, the Company's balance sheet is robust and the existing cash position provides flexibility to strengthen the strategy, either from accessing new investments, share buybacks or further de-levering." 

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

"Despite current headwinds, we currently have approximately €50 million of firepower to deploy and expect to see an improving pipeline of opportunities over the next six to twelve months that will enable the Company to further diversify, grow income and strengthen its exposure to growth cities, regions and sectors."

The Annual Report and Accounts are 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/6682I_1-2022-12-5.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

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

A virtual presentation for analyst and investors will be held today at 9am GMT / 11am SAST. To register please visit: https://registration.duuzra.com/form/SEREAnnualResults2022

Overview

For the year ended 30 September 2022, Schroder European Real Estate Investment Trust Plc ('SEREIT', or 'the Company'), has delivered a robust set of results, driven by the portfolio's resilience, diversification characteristics and execution of active management initiatives by Schroders Capital Real Estate ('the Investment Manager'). Despite current headwinds, the portfolio in Continental Europe's winning cities was valued at €218.7 million. In addition, the Company has substantial cash reserves of approximately €29 million, providing significant flexibility and additional investment capacity. The net asset value ('NAV') at the end of the financial year was €188.2 million or 140.8 euro cents per share (124.0 pence per share).

During the period the portfolio was enhanced by the acquisitions of a car showroom in Cannes, France for €8.4 million and an industrial warehouse in Venray, the Netherlands for €1.7 million. The portfolio now comprises 14 investments across three Western European countries in leading cities including Paris, Berlin, Frankfurt, Hamburg and Stuttgart. In addition, the industrial exposure has increased to 26%, with a focus on supply constrained sub-markets in France and the Netherlands. Most of the retail exposure is in grocery and DIY, both segments have benefited from strong underlying fundamentals, underpinning robust performance.

The Board is pleased with the resilience of the portfolio, its sector and winning city allocations and the Investment Manager's ability to deliver on its asset management programme. The success of Paris Boulogne-Billancourt ('Paris BB') is testament to the strategy of acquiring good real estate in accessible locations and using in-house local active management expertise to create value. This skill will be increasingly valuable and pertinent to delivering the target returns which we are well positioned to deliver.

The quarterly dividend was maintained at the pre-pandemic level (of 1.85 euro cps) and as a result of the exceptional asset management profits from the Paris BB repositioning, special dividends totalling €12.8 million (9.6 euro cps) were paid during the period. This, together with the capital growth in the portfolio, resulted in a favourable NAV total return for the financial year of 7.3%.

We have today announced the continuation of the 1.85 euro cps quarterly dividend.

There remains around €1.2 million of profit to be released from the Paris BB sale and reflected in the NAV; expectations are that this will be released over 2022 and 2023.

The Company has remaining investment capacity of circa €50 million (including €25 million of debt) and this will be invested in a conservative manner to further diversify the portfolio, taking into account debt refinancings during 2023 and the expectation for better investment opportunities over the next six to 12 months.

Unlike in the UK, one benefit of European real estate exposure is that the leases tend to have a form of inflation-linked indexation. 80% of the Company's income is subject to annual indexation with the remaining 20% linked to a hurdle (typically 10%), offering an attractive hedge in the current environment as we expect underlying income to directly benefit from inflation.

The Company's continued focus on sustainability during the period has delivered an improved GRESB rating to 4 stars, ranking second in the peer group. We continue to review green certifications as there is a growing consensus that there is a meaningful rental and value premium for more sustainable buildings as occupiers re-evaluate their space requirements.

We are operating in a challenging environment. The speed and force of inflationary concerns, devastating war in Ukraine, general uncertainty and volatility has been a shock to markets. Values across the portfolio have held up well, although we saw some softening in the second half of the year; recent bond yield rises and recession concerns are likely to put further pressure on these. The Company expects the portfolio's diversification, income profile, indexation characteristics and high growth locations will help mitigate this pressure. Looking forward, the expectation is that rental affordability and the Manager's local multi-sector expertise will be increasingly important to retain occupiers, grow rental income and deliver shareholder value.

Strategy

The strategy over the period centred on active asset management and capital investment; in particular, the success of the Paris BB refurbishment and sale, the improvement of the income profile, the extension of the average lease term and the implementation of sustainability initiatives to improve the quality of the portfolio. A key benefit of the strategy is the concentration of assets in highly accessible locations, with competing demands for uses and leased off affordable rents. Given the current pressures facing occupiers, particularly around inflation, labour and operating costs, we expect affordability to be an increasingly key factor in tenants' occupational decisions. In addition, modest rents allow for the ability to feasibly reposition investments, improving sustainability and certification. This is the strategy successfully deployed in Paris BB, where we have delivered a Grade A, BREEAM-rated building of institutional quality. As a result, this has led to increasing the rent by circa 40%, regearing the lease on a long-term basis and enabling us to crystallise €28 million of pre-tax profit.

The Company concluded 14 leasing transactions during the period, at an average WAULT of 6.1 years, reducing the portfolio vacancy to 4%. The Investment Manager is working on several asset management initiatives including the leasing of vacant space in Saint-Cloud, Paris, tenancy remixing in Frankfurt and improvement of ESG credentials across the portfolio to further strengthen sustainability ratings and meet the demands of the modern occupier.

Following the sale of Paris BB, we are reviewing suitable investment opportunities to improve diversification and replace the lost income, moving the dividend cover back to 100%. Over the last 12-18 months, the Investment Manager has seen little value on a risk adjusted basis, making a clear decision to be patient. With markets now softening and debt becoming more expensive and less available for some, we expect to see more suitable investment opportunities. Having equity and operating in markets where we have local and proven expertise, puts us in a strong position to successfully borrow, underwrite investments, implement business plans and provide execution certainty to vendors.

Financial results

The NAV total return was 7.3% over the year based on an IFRS profit of €13.9 million. Returns were driven primarily by an increase in the valuation of our industrial and DIY investments, together with the German office portfolio. In addition, €1.9 million of the Paris BB development post-tax profit was released following the refurbishment handover during June 2022. There remains approximately €1.2 million of profit from Paris BB; this will flow through the NAV over the remainder of 2022 and 2023. Underlying EPRA earnings were €6.1 million, compared to €6.6 million in 2021. Earnings will further increase with the redeployment of the Paris BB sale proceeds, and the portfolio's indexation. The Company's NAV as at 30 September 2022 decreased by €11.3 million, to €188.2 million, or 140.8 euro cents per share, driven by the payment of €12.8 million in special dividends.

Balance sheet and debt

Third-party debt totalled €80.7 million, representing a loan to value ('LTV') net of cash of 20% against the overall gross asset value of the Company. This compares to a net LTV cap of 35%. The Company has seven loans secured against individual assets or groups of assets, with no cross-collateralisation between loans. The current average weighted total interest rate of the loans is 1.9% per annum. The weighted average duration of the loans is 1.9 years, with the earliest loan maturity in April 2023. All loans except Seville comply with their default covenants. The Seville loan remains in cash trap and is being managed under an LTV covenant waiverto facilitate a sale.

Approximately €27 million, or 33%, of the Company's debt is expiring during 2023. We are having positive discussions with lenders regarding regearing, particularly given the quality, low LTV and the Investment Managers reputation and expertise. Five-year swap rates have dramatically increased over the period, from zero in Q3 2021 to around 280 basis points at the time of writing. More detail of the individual loans is provided in the Investment Manager's Report. The Company has circa €30 million of cash, which provides significant flexibility to further bolster the balance sheet.

Dividends

Despite the deteriorating economic and geopolitical conditions, the Board has elected to continue with the 1.85 euro cps quarterly dividend. However, it will continue to review this position taking into account the level of tenant occupation, rent collection, refinancing and dividend cover. Dividend cover has improved over the last three quarters partly due to the additional investments in Cannes and Venray and is at around 70%. As announced previously, it is expected that dividends from net income will remain uncovered whilst the proceeds from the sale of Paris BB are reinvested. The Board expects to allocate some of the net sale proceeds towards covering the shortfall in income, pending the reinvestment of the remainder. Total quarterly dividends declared relating to the year are 7.4 euro cps, with a dividend cover for the year of 61%. Including the special dividends, total dividends paid increased 195% to €25.2 million (18.8 euro cps) versus the previous financial year.

Share price

The shares continue to trade at a discount, which as at 28 November 2022 reflected a circa 35% discount to the 30 September 2022 NAV. The Board and the Investment Manager remain frustrated in the share price performance, particularly given the differentiated strategy, strength of the underlying real estate, attractive dividend, local management expertise, strong balance sheet and cash reserves. Annualising the quarterly dividend of 1.85 euro cps (to 7.4 euro cents per annum) provides an attractive circa 8.0% dividend yield based on current share price. The Board will continue to review the discount, and at its discretion to execute a share buyback programme, as well as new acquisitions consistent with the current strategy.

Sustainability

The Board and Manager believe that focusing on sustainability, and Environmental, Social and Governance ('ESG') considerations, will deliver enhanced long-term returns for shareholders and have a positive impact on the environment and local communities in which the Company invests. We are pleased with the progress that has been made to improve the portfolio's sustainability credentials over the period. Asset management initiatives, which centred on capital investment, asset BREEAM certifications and tenant and community engagement, have resulted in an improvement in the portfolios GRESB rating to 4 stars. The Manager has identified further opportunities to improve sustainability and ESG, with aspirations to achieve a 5 star GRESB rating. In addition, we have commenced asset by asset reviews in relation to net zero carbon pathways which will allow us to make more informed decisions around operation, financial and hold sell analysis.

Outlook

We are well aware of the ongoing challenges facing global markets but real estate continues to remain attractive relative to other asset classes. By having real asset exposure that is diversified and indexed linked in strong, liquid cities like Berlin, Hamburg, Stuttgart and Paris, the Company is well positioned to deliver on its strategy longer term. In addition, it is managed by a highly competent Investment Manager with local multi-sector expertise, providing additional comfort to deal with risks. The Company's balance sheet is considered robust and the existing cash position provides flexibility to strengthen the strategy, either from accessing new investments, share buybacks or further de-levering. We expect returns to soften from that achieved in the last years and that over the short term, income will become an increasingly key part of shareholder returns. We are confident in the portfolio and management to steer through current challenges, seeking opportunities to enhance earnings in this ever-changing market.

Sir Julian Berney Bt.

Chairman

5 December 2022

Investment Manager's Report

Results

The net asset value ('NAV') as at 30 September 2022 stood at €188.2 million (£165.1 million), or 140.8 euro cents (123.5 pence per share), resulting in a NAV total return of 7.3% over 12 months to 30 September 2022.

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 euro cents per share.

1 Management reviews the performance of the Company principally on a proportionally consolidated basis. As a result, figures quoted in this table include the Company's share of 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 2021.

4 EPRA earnings as reconciled on page 77 of the 2022 Report and Accounts.

Strategy

The Company aims to provide shareholders with an attractive level of income with the potential for income and capital growth through investing in commercial real estate in Continental Europe. The strategy to deliver this includes:

· Maximising shareholder value through active asset management;

· Improving the defensive qualities of the portfolio in light of changing social, economic and geopolitical risks;

· Applying a research-led approach to determine attractive sectors and locations in which to invest in commercial real estate;

· Increasing exposure to higher growth Winning Cities and Regions;

· Actively managing the Company and its assets, drawing on the expertise of our sector specialists to maximise shareholder returns and evolve the Company's active asset management approach that is focused on operational excellence;

· Reinvesting Paris BB disposal proceeds to improve diversification and move dividend cover back to 100%;

· Applying our integrated sustainability and Environmental, Social and Governance ('ESG') approach at all stages of the investment process and asset life cycle; and

· Managing the Company prudently and efficiently by controlling costs and maintaining a strong balance sheet.

Progress was made in executing the strategy and activity over the period, which has delivered:

· Dividend payments to shareholders totalling 18.85 euro cps which includes 9.6 euro cps in special dividends associated with the exceptional profit from the Paris BB refurbishment, regear and sale;

· 100% of the portfolio continues to be located in higher-growth cities including Berlin, Hamburg, Stuttgart, Frankfurt and Paris;

· High levels of positive tenant engagement and implementation, resulting in 100% rent collection over the period, excluding Seville;

· Disciplined acquisition activity: a €8.4 million car showroom in Cannes, reflecting a net initial yield of 5.5%, reversionary yield of 6.4% and with longer term scope for alternate use, and a €1.7 million industrial warehouse in Venray, the Netherlands, reflecting a net initial yield of 5.3% and reversionary yield of 7.6%;

· Maintained a high occupancy level of 96%, with an average portfolio to lease term to break of 4.4 years;

· Concluded 14 new leases and regears events across the portfolio at a weighted unexpired lease term of 6.1 years;

· Improved the portfolio's environmental characteristics, which included BREEAM certifications for the Company's Frankfurt, Berlin and Venray investments;

· Enhanced ESG performance across the portfolio including an improvement in the 2021 Global Real Estate Sustainability Benchmark ('GRESB') score from three stars to four, ranking the portfolio second amongst its peer group;

· Continuation of individual asset net zero pathway analysis;

· Maintained a prudent gearing approach with a loan to value ('LTV') of 29% and 20% net of cash, comfortably below the target of 35%. Positive discussions with lenders regarding loans expiring during 2023.

Macro impacts

· We are operating against an unprecedented backdrop. The pricing of real estate and risk during the latter part of 2021 was biased towards the underwriting of ESG and Covid-19 impacts. Today, these risks remain but have been somewhat overshadowed by recessionary concerns, inflation, cost and availability of debt and the Ukrainian crisis.

· Consensus forecast is for eurozone GDP to fall over the next nine months with minimal growth over 2024/25. In addition, the latest consensus forecast (October 2022) now expects eurozone inflation (HICP) of 8.3% over 2022, 5.8% in 2023 and a return to a more manageable level of circa 2% for the medium term thereafter. A benefit of European leases is the inflationary hedge characteristics as a result of rental indexation being linked to annual movements in the consumer price index (CPI). The risk moves more to underlying occupiers capacity to pay and solvency. The diversified nature and strength of underlying tenants, coupled with the fact that our assets are typically leased off affordable and sustainable rents, gives us confidence in managing such risks.

· We continue to monitor the Ukraine crisis. We have no exposure to Eastern Europe or Russia. We continue to manage the portfolio in the best interests of all shareholders, ensuring that all international sanctions are adhered to. The Group's key suppliers do not have operations in Ukraine or Russia and we are not seeing any adverse impact from the war on our ability to manage the operations of the Group.

· Although Covid-19 risks are abating, they remain present and monitored. We continue to work with tenants to facilitate their growth out of Covid-19 whilst also protecting shareholders' long-term interests. Structural changes as a result of the pandemic continue to shape the industry. From an office perspective, occupiers are looking to improve the quality of their office space in order to attract staff and deliver on corporate objectives linked to wellbeing and sustainability. At the same time e-commerce is changing consumerism and having a direct impact on physical retail (negative) and logistics (positive). In addition, disruption to production and trade as a result of geopolitics, sustainability, weather, energy costs and labour shortages are necessitating a move from 'just in time' supply chain management to 'just in case', resulting in more demand for warehouse space domestically.

· Central banks have rapidly moved to curtail inflation via the increasing of interest rates. Five-year euro swap rates have been volatile, moving from negative territory 12 months ago to circa 280 basis points in recent times. In addition, lenders are reassessing margins, LTVs, covenants and the quality of the counterparty they wish to lend to. Being a modestly levered Group, managed by an investment management specialist with local multi-sector expertise puts the Company in a strong position to refinance.

Market overview

Economic outlook

The combination of high inflation, an energy crisis and rising interest rates is likely to tip the eurozone into recession. Real household incomes are falling as wages lag behind inflation at 10% and the rise in interest rates and uncertainty about energy supplies has dented business confidence. In addition, the rise in government spending to help consumers with their energy bills following already high spending during Covid raises concerns about debt/GDP ratios, given the increase in debt servicing costs. Schroders forecasts that eurozone GDP will fall by 1% over the next nine months, before recovering in the second half of 2023 as inflation slows to 5%. Despite the weakness of the economy, we expect that the ECB will raise the refinance rate to 3% by end-2023, as it wrestles inflation back towards its 2% target.

Interest rates and real estate yields

The sharp increase in interest rates has led to a rapid cooling in investment markets. In Germany the total cost of hedged bank debt on good quality assets has risen from 1.5% at the start of the year to 4% and other countries have seen a parallel increase in finance costs from a higher starting point. As a result, a lot of debt-backed buyers have been priced out of the market and many institutions have put purchases on hold, as the premium over bond yields has shrunk and while markets have entered a phase of price-finding. The total value of investment deals in the eurozone in the third quarter of 2022 was 30% lower than in the first quarter and all sectors saw an increase in prime yields of 0.3-0.6% between March and October. Given the uncertainty over interest rates (and with further hikes likely) it is difficult to know how much further real estate yields will rise before they find a new equilibrium. Assuming government bond yields settle at current levels (German 10-year bund yields are currently at 2.25%), the expectation is that prime real estate yields will increase by a further 0.5-0.75% between September and June 2023. That would restore the gap between real estate and bond yields to around its long-term average. While high inflation and index-linked leases will help to offset some of the negative impact of rising yields, it is nevertheless expected that prime capital values will fall by 15-20% between mid-2022 and end-2023. Secondary assets are likely to see a similar decline in capital values, given they are more vulnerable than prime assets to an increase in vacancy and fall in income and as investors become more risk averse and push out the spread between prime and secondary yields.

Offices

Despite the deteriorating outlook, office leasing activity has remained robust; Q3 volumes were only slightly down on the previous quarter. Take-up in major European markets was down 10%, but up 5% compared to the same quarter last year. And in a historic context, volumes this quarter fell 15% on the five-year average quarterly volume, but just 5% on the 10 year quarterly average (excluding 2020 and 2021).

Despite the drop in business sentiment and cost pressures from inflation, occupiers continue to commit to high quality space to execute their new workspace strategies, retain their staff and improve their corporate ESG-credentials. However, going forward, it seems inevitable that given the shift in the outlook, activity will be more muted. On the supply side, Q3 saw further completions of office space. However, office vacancy remained nearly unchanged on aggregate over the quarter. However, vacancy remains highly polarised, with modern space scarce and being absorbed quickly, while overall vacancy now increasingly consists of older, second-hand space that has been released back into the markets. While new completions are expected to only peak in 2023, the rise in constructions costs and the jump in finance cost have further reduced the pipeline for the years thereafter. This scarcity of modern space is likely to further support prime office rents, which saw further increases over the quarter in a number of markets, albeit somewhat more selective. At the same time, the pressure on secondary space continues to increase.

Retail

Retail sales are starting to reflect the squeeze on incomes. After a strong post-lockdown rebound in 2021, eurozone retail sales have fallen in volume terms since June 2022, although they have continued to grow in cash terms due to inflation. Food retail is likely to be the most stable sector, particularly convenience and discount stores, which are forecast to win further market share from hypermarkets. By contrast, shopping centres which have a high exposure to fashion, leisure and restaurants are likely to be hit hard by the drop in discretionary spending. In addition, high service charges are impacting profitability. As such, we expect that prime shopping centre rents will fall by 6-8% in most cities between end-2021 and end-2023. Shop rents are likely to fall in parallel, although in the longer-term we believe that shop rents in tourist destinations (e.g. Barcelona, Paris) should recover, as tourism returns to pre-Covid levels.

Logistics/industrial

Logistics warehouses in the eurozone have continued to see strong occupier demand in 2022. Although interest from online retailers has cooled, as the growth in e-commerce has slowed since the pandemic, demand from traditional retailers (e.g. Carrefour, Lidl, REWE) and manufacturers (e.g. Mercedes, Tesla) has increased. In part, this is due to companies ensuring their supply chains are more resilient by holding more stock and further adjusting to faster delivery modes. In parts it also reflects investment in modern stock to enhance the carbon footprint and increase automation. While these structural drivers will persist, the uncertain economic outlook means that demand is likely to weaken in the short-term. We expect prime logistics rental growth in the eurozone to slow from 4-5% p.a. to 2-3% p.a. in 2023. The record amount of new warehouse space under construction will also limit rental growth.

The table below sets out the portfolio's top ten tenants, which are from a diverse range of industry segments and represent 72% of the portfolio1:

1 Excludes Seville property for which NAV exposure is nil.

Lease Expiry Chart

The top ten tenants have paid 100% of their rent over the 12 month period. The portfolio generates €15.3 million p.a. in contracted income. The average unexpired lease term is 4.4 years to first break and 4.9 years to expiry.

The lease expiry profile to earliest break is shown above. 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 the income profile and NAV total return.

Transactions

A key target of the Company is to redeploy the remaining investment capacity, totalling circa €50 million (including debt) in line with the stated objective of targeting income-producing commercial real estate in Winning Cities and Regions in Continental Europe. This will not only improve diversification but also improve the dividend cover. We continue to screen a wide range of acquisition opportunities. We will continue to be patient in deploying capital and believe that recent market volatility will create more opportunities.

During the period, the Company completed two acquisitions in line with the targeted investment objective:

· Cannes, France: a freehold car showroom for €8.4 million, equating to €1,983 per sqm and a net initial yield of 5.5% with reversion to 6.4% and longer-term alternate use upside. The weighted unexpired lease term was approximately three years.

· Venray II, the Netherlands: a freehold industrial warehouse for €1.7 million, equating to €440 per sqm and a net initial yield of 5.3% with reversion to 7.6%. The weighted unexpired lease term was approximately eight years. The investment adjoins the existing Venray investment acquired in August 2018.

Both investments further diversify the portfolio by sub-sector and markets, and contribute to replacing the lost income from Paris BB.

We continue to manage the Seville investment and work with the lender regarding a view to a disposal.

Portfolio performance

During the period, the underlying property portfolio generated a total property return of 6.9%. The portfolio income return was 4.1% and the portfolio capital return was 2.8% net of capital expenditure.

The strongest contributors to portfolio performance over the last 12 months were the industrial assets Rennes (+19%), Rumilly (+16%), Nantes (+13%), the DIY store in Berlin (+13%), and the office assets Hamburg (+11%) and Stuttgart (+10%) .

· The industrial portfolio delivered an average 15% total return due to improved investment demand and yield rerating;

· The Berlin DIY property delivered a 13% total return due to the sector benefiting from the pandemic and improved investor demand;

· The Hamburg office property delivered a +11% total return driven by income growth and yield rerating;

· The Stuttgart office property delivered a +10% total return with the asset benefiting from rental growth as a result of tight supply; and

· Most of the strong positive performance impact from the Paris Boulogne-Billancourt lease regear and forward funded sale was taken into account in the previous year's financial returns.

The main detractor from portfolio performance was Seville with a -7% total property return. The negative return for the Seville property was a result of rent discounts, increased vacancy and weakening investor demand for shopping centres. However, from a fund performance perspective, Seville did not have any impact as the NAV exposure to this investment had already been fully written off since early 2021.

Over the last three years, the real estate portfolio delivered ungeared property returns of 9.7% p.a.

Finance

As at 30 September 2022, the Company's third party debt was €80.7 million, across seven loan facilities. This represents a loan to value ('LTV') net of cash of 20% against the Company's gross asset value (gross of cash LTV is 29%). Cash levels are high, as the Company has received almost 90% from the agreed sale price of Paris Boulogne-Billancourt. There is a net of cash LTV cap of 35% that restricts concluding new external loans if the Company's net LTV is above 35%. An increase in leverage above 35% as a result of valuation decline is excluded from this cap. The current blended all-in interest rate is 1.9% and the average remaining loan term is 1.9 years.

The individual loans are detailed in the table below. Each loan is held at the property-owning level instead of the group level and is secured by the individual properties noted in the table. There is no cross-collateralisation between loans. Each loan has specific LTV and income default covenants. We detail the headroom against those covenants in the latter two columns of the table below.

1 Includes the Company's 50% share of external debt in the Seville joint venture of €11.7 million and excludes unamortised finance costs.

2 Temporary waiver for breach of LTV covenant in Seville agreed with the lender.

3 The HSBC loan is secured against three Netherlands industrial assets: Venray, Houten, Utrecht.

4 Headroom against LTV default covenant is based on the lower JLL valuations and the banks' valuations

For the Seville shopping centre, a reduction in rental income has resulted in a requirement under the loan to retain all excess income generated by the Seville property in the property-owning special purpose vehicle. The Seville loan is being managed under an LTV covenant waiver to facilitate a sale. The loan is secured solely against the Seville investment, with no recourse back to the Company or any other entity within the Group.

The German and Spanish loans are fixed rate for the duration of the loan term. The French and Dutch loans are based on a margin above three-month Euribor. The Company has acquired interest rate caps to limit future potential interest costs if Euribor were to increase. The strike rates on the interest rate caps are between 0.25% p.a. and 1.25% p.a. There are three loans due to expire over 2023. We have commenced preliminary discussions with lenders and are confident in our ability to refinance at similar LTVs, albeit current swap rates would result in the overall cost of debt increasing. The Directors have examined significant areas of possible financial risk. This is discussed in more detail in note 1 of the consolidated financial statements.

Outlook

The economic outlook remains challenging with the eurozone facing a number of headwinds. The energy crisis, inflationary pressures, increasing interest costs and geopolitical risks are creating a drag on sentiment and recessionary concerns. We are alert to these risks and the combination of a clear strategy, a strong balance sheet, a diversified portfolio in Western Europe with a bias towards the strongest urban conurbations of Berlin, Frankfurt, Hamburg, Stuttgart and Paris provides confidence in navigating such risks.

Although values across the portfolio have been resilient to date, expectations are for values to come under pressure as yields adjust for risk. However, we do not expect Continental European property to face the same downward pressure as the UK.

Looking forward the expectation is that the favourable rental indexation clauses, rental affordability and management's active and local multi-sector expertise will help mitigate value declines and assist in tenant retention. Total returns over the medium term are going to be led by income and the portfolio's high occupancy, attractive net initial yield (circa 6%) and unexpired lease term (circa 5 years) will underpin the maximising of shareholder returns.

Management will continue to be patient in its approach to deployment but expects to return dividend cover back to 100% by the end of 2023. The Company currently has circa €50 million of firepower to deploy (including €25 million of additional debt) and the Manager expects to see an improving pipeline of opportunities over the next six to 12 months that will enable it to further diversify and strengthen its exposure to growth cities, regions and sectors. We will continue to remain patient and any deployment will be assessed in light of economic volatility, balance sheet protection and ensuring the Company remains in a robust position.

Jeff O'Dwyer

Fund Manager

Schroder Real Estate Investment Management Limited

5 December 2022

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, Valuation and Risk 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 2022.

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.

From an emerging risks and uncertainties perspective the Board recognises the changing global environment and the risks posed by inflation, geo-political uncertainty (in particular stemming from the war in Ukraine) and volatile markets. The Board receives regular updates on those risks from the Investment Manager. Overall, however, the diversification of the Company's portfolio is expected to help minimise the impact of these factors, which the Board will continue to keep under review.

The Board also continues to be mindful of the Ukraine war and the economic ramifications (particularly inflation) and the structural change that the Covid-19 pandemic had the potential to expedite, which could affect the use and prospects of some real estate sectors, and is keeping this under review, particularly in connection with its decisions to re-deploy investable cash.

Otherwise, the principal risks and uncertainties faced by the Company have largely remained unchanged throughout the year. Actions taken by the Board and 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, Valuation and Risk 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, Valuation and Risk Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The Board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company and its subsidiaries is set out in note 22 on pages 72 to 75 of the 2022 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 assessmentof 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 1.9 years and the average unexpired lease term, assuming all tenants vacate at the earliest opportunity, is 4.4 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 28 to 32 of the 2022 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/reletting 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 30 to 32 of the 2022 Report and Accounts are also taken into account.

Based on the assessment, and having considered in detail base and downside scenarios modelling, 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 Board believes it is appropriate to adopt the going concern basis in preparing the financial statements. A comprehensive going concern statement setting out the reasons the Board considers this to be the case is set out in note 1on page 58 of the 2022 Report and Accounts.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual 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 the Company financial statements in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006. Under company law, 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 the financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· state whether applicable UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 have been followed for the Group financial statements and UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;

· make judgements and accounting estimates that are reasonable and prudent; and

· prepare the financial statements on the going concern basis unlessit is inappropriate to presume that the Group and Company 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 also responsible for keeping adequate accounting records that are sufficient to show and explain the Group's 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 comply with the Companies Act 2006.

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 positionand performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge:

· the Group financial statements, which have been prepared in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 give a true and fair view of the assets, liabilities, financial position and profit of the Group;

· the Company financial statements, which have been prepared in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position 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.

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 2022

Consolidated and Company Statements of Financial Position

As at 30 September 2022

Consolidated and Company Statements of Changes in Equity

For the year ended 30 September 2022

1 These reserves form the distributable reserves of the Company (excluding any accumulated, unrealised profits) 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 2022

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 the United Kingdom. The consolidated financial statements of the Company for the year ended 30 September 2022 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 JSE Limited (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 under the UK- adopted 'International Accounting Standards in conformity 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

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group and the Company financial statements in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006.

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: the ability to refinance certain third-party loans in 2023 with due consideration of both cash held and the liquidity of assets; forward-looking compliance with third-party debt covenants, in particular the loan to value covenant and interest cover ratios; the payment of contingent tax liabilities; potential falls in property valuations; the non-collection of rent and service charges; and the existing and future expected cash requirements of the Group.

Furthermore, the ongoing war in Ukraine, and macroeconomic variables such as rising interest rates and inflation, have also been considered regarding the Group's property investments in France, Germany, Spain and the Netherlands.

Cash flow forecasts, based on plausible downside scenarios, have led the Board to conclude that the Group will have sufficient cash reserves to continue in operation for the foreseeable future.

The Group has seven loans secured by individual assets, with no cross-collateralisation. All loans are in compliance with their default covenants, though there is a cash trap in operation and LTV breach for the Seville loan. More details of the individual loans, and headroom on the loan to value and net income default covenants, is provided on page 71 of the 2022 Report and Accounts. Three loans totalling €27 million fall due for repayment in 2023. Although the Group has firm plans to refinance some of these loans, the Group has considered in its plausible downside scenario whereby refinancing is not possible and therefore all three loans need to be repaid out of cash reserves with there being sufficient cash to do so if required.

After due consideration, 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 12 months from the date of the approval of the consolidated annual report and 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 under the UK adopted international accounting standards, in conformity with the Companies Act 2006, 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 an external professional valuer to determine the relevant amounts.

The following are deemed to be the other key areas of judgement:

· Accounting for development revenue and variable consideration regarding Paris, Boulogne-Billancourt: When estimating an appropriate level of development revenue to be recognised in the reporting period, the Group considered the contractual penalties of not meeting certain criteria within the agreement; the total development costs incurred; the stage of completion of the refurbishment; the milestones achieved and still to be achieved; the timing of further future cash receipts from the purchaser; and the overall general development risk to form a considered judgement of revenue to be appropriately recognised in the financial statements. Further details of the estimated variable consideration are disclosed in note 14.

· Tax provisioning and disclosure: Management uses external tax advisers to monitor changes in tax laws in countries where the Group has operations. New tax laws that have been substantively enacted are recognised in the Group's and Company'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 (further details are disclosed in note 10).

· IFRS 9 expected credit losses: IFRS 9 became effective for accounting periods of entities beginning on or after 1 January 2018 and requires an impairment review to be made for certain financial assets held on the Group and Company's balance sheet using a forward-looking expected credit loss model. All receivables, inter-company and joint venture loans are considered to be such financial assets and must therefore be assessed at each reporting period for potential impairment. Where any impairment is required to be made, appropriate recognition is required in the consolidated statement of comprehensive income, together with appropriate disclosure and sensitivity analysis in the notes to the financial statements (further details are disclosed in note 6). The Seville joint venture loan has been calculated on the lifetime expected credit loss method. The following factors were considered when determining the probability of default used for the impairment provision calculation for the Seville joint venture loan: the property valuation and future potential movements; that there is an LTV breach and a cash trap in place; cash flow forecasts; the longer term effects of the prior lockdown measures in Spain on tenants and their trading; and rent collection rates. An evaluation of these factors has allowed management to make a judgement on the probability of default which is considered to be the key input for the impairment calculation. These estimates and judgements were also considered within the impairment in the investments held in subsidiaries for the parent company.

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.

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 an 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 the 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 23, 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.

Please refer to note 13 for disclosure of key inputs, assumptions and sensitivities with respect to the fair valuation of investment properties.

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, loans to joint venture, 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 the 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. The Company's accounting policy is to fix the share capital at the spot rate at the date of issue, in accordance with IAS 21. The Company does not retranslate its Share capital at the end of each reporting period.

Share premium

Share premium represents the excess of proceeds received over the nominal value of new shares issued. The Company's accounting policy is to fix the share premium at the spot rate at the date of issue, in accordance with IAS 21. The Company does not retranslate its share premium at the end of each reporting period.

Other reserves

Other reserves mainly consist of a share premium reduction reserve arising from the conversion of share premium into a distributable reserve.

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 and Company's non-financial assets, other than investment property but including joint ventures and investments held in subsidiaries, 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.

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.

Where a rent incentive fits the definition of a lease modification under IFRS 16, the cost of incentives is recognised over the remaining lease term starting from the effective date of the lease modification, on a straight-line basis, as a reduction of rental income.

Revenue from forward funded sale contracts

Performance obligations of such contracts with a counterparty are identified at source.

The transaction price for the sale of the asset is determined with regard to the deemed fair value of the asset at the date of the transfer of the legal title to the purchaser.

Where a development obligation includes variable revenue, consideration is given to the sum of any contractual penalties; the percentage of the total development cost incurred and the stage of completion; the milestones successfully achieved and the likelihood of meeting further future milestones; the timing of future contractual receipts; and the wider overall risks attributable to the development at the end of the reporting period. A percentage of the total development revenue is then calculated with regard to these factors and recognised in the financial statements.

For specific further details with regards to the Paris, Boulogne-Billancourt forward funded sale agreement, see note 14.

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.

Environmental, Social and Governance factors

The Group has incorporated Environmental, Social and Governance ('ESG') objectives into its core investment strategy and at every stage of the investment process. It has clearly defined its social and environmental targets into distinct categories, for which each has clear and measurable impact objectives.

The Group has the potential to implement a sustainability initiative on the Apeldoorn investment. Subject to the tenants' occupancy requirements, the Group will be looking to invest in the asset, substantially enhancing the sustainability rating and overall institutional appeal. Successful implementation of this has the potential for value creation whilst enhancing the investment's liquidity. There is no provision or contingent liability in the consolidated financial statements for this investment given there is no constructive or legal obligation for the Group to complete these initiatives.

On other assets in the portfolio, the valuers have taken certain ESG and climate change considerations into their valuations and this has been discussed in more detail in note 13.

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 2022, have not had a material impact on the Group or Company.

There are no new standards or amendments which have been applied for the first time for its annual reporting period commencing 1 October 2021.

3. Rental and service charge income

4. Property operating expenses

All the above amounts relate to service charge expenses which are all recoverable except for €1,174,000 (2021: €230,000).

5. 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 12th 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 12 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 €2,198,000 (2021: €2,181,000). At the year end €717,000 (2021: €706,000 ) was outstanding.

SREIM provides accounting services to the Group with a minimum contracted annual charge of €81,000 (£70,000). The total charge to the Group was €112,000 (2021: €110,000). These are included in Administrator's and accounting fees in the consolidated statement of comprehensive income. At the year end €35,000 (2021: €25,000) was outstanding.

SREIM provides administrative and company secretarial services to the Group with a contracted annual charge of €58,000 (£50,000). The total charge to the Group was €58,000 (2021: €58,000). These are included in Administrator's and accounting fees in the consolidated statement of comprehensive income. At the year end €19,000 (2021: €19,000) 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 16.

The Company received management fees of €1,623,000 (2021: €1,690,000) from subsidiary companies during the year. The amounts recharged to subsidiaries and outstanding are provided in the following table.

6. Provision of loan made to Seville joint venture

As at 30 September 2022 the Group owned 50% of the Metromar JV, which owns a shopping centre in Seville, and had advanced €10,000,000 as a loan and was owed interest of €1,544,000 (2021: €1,100,000). The loan carries a fixed interest rate of 4.37% per annum payable quarterly and matures in April 2024.

When considering an appropriate level of impairment, deemed to be a significant judgement, the Company primarily considered: the property valuation and future potential movements; debt covenant breaches; cash flow forecasts; the longer term effects of the prior lockdown measures in Spain on tenants and their trading; and rent collection rates.

A default rate of 100% has been applied to the above loan and unpaid interest at year end. The impairment provision booked during the year was €444,000 (2021: €8,471,000) bringing the cumulative impairment to €11,537,000 and the Group's investment with regard to Seville now stands at €Nil (2021: €Nil)

7. Auditors' remuneration and assurance fees

The Group's total audit fees for the year are €330,000 (2021: €340,000) which includes the Group audit and the individual statutory audits. The Company's total audit fees for the year were €289,000 (2021: €303,000) which only covers the Group audit.

The interim review fee was €51,500 (2021: €51,000) which is an assurance related non-audit service and is included in the total Auditors' remuneration for the year. The auditors did not perform any other non-audit services for the Group during the year (2021: €Nil).

8. Dividends received

During the year the Group did not receive any dividends from its joint venture operation Urban SEREIT Holdings Spain S.L. (2021: €Nil) (see note 15).

During the year the Company received dividends from its subsidiary undertakings. €1,100,000 (2021: €30,385,000) from OPPCI SEREIT France, €Nil (2021: €2,735,000) was received from SEREIT Holdings Sàrl and €Nil (2021: €1,000) from SCI SEREIT Directoire.

9. Other expenses

Directors are the only officers of the Company and there are no other key personnel. The Group has one employee; for further details see note 27. The Directors' annual remuneration for services to the Group was €198,375 (2021: €156,882), as set out in the Directors' Remuneration Report on pages 44 to 46 of the 2022 Report and Accounts. The total charge for Directors' fees was €217,000 (2021: €180,000), which included employer's National Insurance contributions.

10. Taxation

The effective tax rate is a weighted average of the applicable tax rates in the countries the Group has operations. A potential deferred tax asset of €845,000 (2021: €394,000) arose on tax losses which has not been provided for.

SEREIT Plc has elected to be treated as a société d'investissement immobilier cotée ("SIIC") for French tax purposes. Provided that SEREIT Plc meets certain requirements, the SIIC should be exempt from French CIT on net rental income and gains arising from interests in property. Management intends that the Group will continue to comply with the SIIC regulations for the foreseeable future.

The Group operates in a number of jurisdictions and is subject to periodic challenges by local tax authorities on a range of tax matters during the normal course of business. The tax impact can be uncertain until a conclusion is reached with the relevant tax authority or through a legal process. The Group addresses this uncertainty by closely monitoring tax developments, seeking independent advice and maintaining transparency with the authorities it deals with as and when any enquiries are made. As a result of its monitoring, the Group has identified a potential tax exposure attributable to the ongoing applicability of tax treatments adopted in respect of the Group's tax structures. The range of potential outcomes is a possible outflow of minimum £nil and maximum £9.3 million (excluding possible interest and penalties). The Directors have not provided for this amount because they do not believe an outflow is probable.

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 2021 and 2022.

Headline earnings per share

The headline earnings and diluted headline earnings for the Group is 4.5 euro cents per share (2021: 4.9 euro cents per share) as detailed on page 78 of the 2022 Report and Accounts.

12. Dividends paid

Interim and special dividends of €25,207,000 (2021: €8,532,000) were paid to the shareholders of SEREIT Plc during the year as follows:

13. Investment property

In 2021 and 2022, the Group held one leasehold property. The value of the respective sectors held were as follows:

The fair value of investment properties, as determined by the valuer, totals €218,700,000 (2021: €201,075,000) 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 consolidated financial statements of €217,456,000 includes a tenant incentive adjustment of €1,244,000 (30 September 2021: €1,348,000).

The net valuation gain on investment property of €6,351,000 (2021: €8,134,000) consists of net property revaluation gains of €6,472,000 (2021: €8,475,000) and a movement of the above mentioned tenant incentive adjustment of €104,000 (2021: €341,000).

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 November 2021, incorporating the International Valuations Standards, and RICS Professional Standards UK, November 2018 (effective January 2019).

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.

During the year, the Group acquired Venray II, a light industrial asset adjacent to the existing Venray asset for a purchase price of €1,557,000 in December 2021 and a car showroom in Cannes for a purchase price of €8,400,000 in June 2022.

The valuers take into account environmental considerations in their assessment of ERV, discount rate and capital expenditure assumptions for each asset. Some examples include:

1. Houten, Netherlands: Upgrade to HVAC, solar panel installation and LED lighting to improve the asset's sustainability profile and ensure it meets future standards. The cost of this is €1.5 million and is included in capital commitments in note 26.

2. Hamburg, Germany: A €1 million provision is included in the valuation to cover future ESG-related costs including BMS, HVAC and tenant wellbeing measures in order continue to keep the asset relevant for occupiers.

3. Rumilly, France: Installation of smart metering and LED lighting together with a provision to improve roof waterproofing and sprinkler system.

4. St Cloud, France: The valuers have included a capital expenditure provision of €2.8 million relating to fire security enhancements and co-ownership works which will improve ESG ratings.

5. Pleudihen, France: circa €600k provision for improving ventilation, management system and ICPE certification.

None of the above amounts have been provided for in the 30 September 2022 annual accounts as there is no legal or constructive obligation to perform these works at the reporting date.

The Group's total valuation fees for the year are €50,000 (2021: €39,000). The fee payable to Knight Frank LLP 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 This table includes the joint venture investment property valued at €26.4 million which is disclosed within the summarised information within note 16 as part of total assets.

2 Weighted by market value.

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

1 This table includes the joint venture investment property valued at €29.2 million which is disclosed within the summarised information within note 16 as part of total assets.

2 Weighted by market value.

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

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. Recognition of development revenue and profit

During the financial year ended 30 September 2021, the Group transferred the legal title of its office asset in Paris, Boulogne-Billancourt to a purchaser.

The forward funded sale agreement which the Group entered into is comprised of two key performance obligations: i) to sell the asset as referenced above; and ii) to undertake a comprehensive refurbishment of the asset on behalf of the purchaser.

On 16 December 2020 the Group transferred, as part of the sale, the legal title to the purchaser for a deemed sale price of €69.8 million. In return, the Group received on the completion date an initial €52.9 million cash receipt from the purchaser and €16.9 million was paid in the year to 30 September 2022 upon the completion of certain milestones.

The forward funded sale contract also included a development element whereby the Group would undertake a comprehensive refurbishment of the asset on behalf of the purchaser over an approximate 18 month period with practical completion occurring in the second quarter of 2022. The amount of revenue the Group will receive for the development of the asset is variable as it is based on the Group achieving certain milestones.

When forming a judgement as to an appropriate level of development revenue to be recognised in the reporting period, the Group considered the contractual penalties of not meeting certain criteria within the agreement; the total development costs incurred; the stage of completion of the refurbishment; the milestones achieved and still to be achieved; the timing of further future cash receipts from the purchaser; and the overall general development risk.

The Group has estimated that it will receive total development revenue of €30.2 million (2021: €25.5 million).

During the year €15.4 million of development cost has been incurred (2021: €8.27 million) which cumulatively to date, represents 96% of the total project expenditure and a sum of €17.9 million (2021: €9.81 million) of development revenue has been recognised following consideration of the factors identified above. Total development revenue from this contract recognised since inception is €27.7 million, which represents 91% of total development revenue. The remaining development revenue is expected to be predominantly recognised in the year-ending 30 September 2023. The lag between development revenue and development cost represents the inherent development risk that is still evident in the project.

The total amount of the contract asset recognised by the Group that is due from the purchaser thereby totalled €10.3 million (September 2021: €26.7 million) at the end of the financial year and is included in Trade and other receivables.

The below sensitivity table presents the change in the total development revenue expected from the purchaser if the variable consideration increases or decreases by 10%. Note that the maximum amount of variable revenue remaining that could be recognised is €2.7 million. This is also the expected amount of revenue to be received therefore no +10% analysis is performed.

15. Investment in subsidiaries

During the year, SEREIT Plc invested €1 in SEREIT LC Invest, a new entity created to acquire the Cannes property. In the year ended 30 September 2021, OPPCI SEREIT France repurchased €40,524,000 of its own shares from SEREIT Plc and SEREIT Holdings France SAS repurchased €590,000 of its own shares from SEREIT Plc. SEREIT Plc invested €1,010,000 in SEREIT France Invest SAS, a new wholly-owned subsidiary of the Company.

In the year ended 30 September 2021, the Company made a full impairment for its investment in SEREIT (Jersey) Limited of €7,279,000 following the provision of a loan made to the Seville joint venture which was held by SEREIT (Jersey) Limited (see note 6 for further details). No investments in subsidiaries were impaired in the year ended 30 September 2022.

The subsidiary companies listed below are those which were part of the Group as at 30 September 2022. 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 registered address of the Luxembourg entities has changed in the year. The registered address for all Luxembourg entities as at 30 September 2021 was 5, rue Höhenhof L-1736 Senningerberg.

16. 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.

As at 30 September 2022, the joint venture in Seville, of which SEREIT holds a 50% share, had total net liabilities of €19,146,000 (2021: €14,610,000). The Group has therefore recognised a nil interest as its investment in the joint venture and would only recognise its share of net liabilities where certain legal or constructive obligations are in force. No such obligations exist with regard to the Seville joint venture.

A reduction in rental income has resulted in a requirement under the minimum net rental income covenant in the loan agreement for the lender to retain all excess rental income generated by the Seville property in the property-owning special purpose vehicle ('SPV'). This position will continue until the rental income increases sufficiently to meet the level required under the loan. A significant fall in valuation over the financial year has resulted in a 'Hard LTV' covenant breach which leads to an automatic increase in the interest margin. The bank have agreed a waiver for until the maturity date of the additional interest margin.

In 2021 and 2022, within total liabilities of the joint venture, there is also a loan amount of €10,000,000 owed to the Group. The Group has fully impaired the loan and interest receivable from the joint venture and further details are provided in note 6. 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.

In the valuation report as at 30 September 2021, the Group's valuers included a 'material valuation uncertainty' clause with respect to the Seville shopping centre. This clause has been removed for the 30 September 2022 valuation.

Sensitivity analysis with respect to the estimated movement in fair value of investment properties, including the Group's share of the joint venture investment property at 30 September 2022, can be found in note 13.

17. Trade and other receivables

1 Refer to note 14 for proceeds due from the development of Boulogne-Billancourt in Paris.

Other debtors and prepayments includes tenant incentives of €1,244,000 (2021: €1,348,000). There were no provisions against the above amounts in 2022 (2021: Nil).

18. Share capital and share premium