The board of Schroder European Real Estate Investment Trust plc has acquired two grocery anchored retail investments located in Rennes and Anglet (near Biarritz), France. The freehold properties are located in established retail parks which benefit from strong local catchments. The acquisition has been made in a joint venture with the vendor, with the company acquiring 70% of the investments and the vendor Mercialys retaining a 30% interest. The joint venture has an initial term of six years, during which time a sale of the investment requires the consent of both parties.
The combined purchase price (including costs) for the 70% interest is €43.2m, reflecting a net initial yield of 5%. The assets are 100% income producing and let on the basis of 12-year commercial leases to Casino and Boulanger, subject to market standard break clauses. The majority of income is from Casino, one of France's leading hypermarket operators.
The investments are subject to a one-time purchase option, exercisable by the Casino Group on the second anniversary of the acquisition date. This is exercisable only under specific conditions. The net-to-seller strike price for exercising this option is €44.8m for the company’s 70% interest.
The acquisition is in line with the company’s strategy to acquire dominant retail investments in growth regions.
Following this transaction, the company has invested over €150m of capital at a blended net initial yield of approximately 5.6%, completing the deployment of the initial equity and a substantial proportion of total investment capacity. The portfolio now comprises seven assets located in key target markets of France and Germany which demonstrate favourable growth characteristics. The company continues to pursue negotiations on a number of other potential transactions.
Commenting on the acquisition, Sir Julian Berney, non-executive chairman of the company, commented: "We are pleased to have secured this off-market opportunity in a sector that has been notoriously difficult for pan-European investment funds to access effectively. It is a strong addition to the portfolio and adds further diversification at the same time as maintaining a foundation of long term income for the company."
Tony Smedley, head of continental European investment at Schroder REIM, commented: "Against the background of the significant changes taking place in the retail markets across Europe, we have been focusing on sub-sectors which we believe are likely to be less impacted by the shift towards e-commerce, together with those locations which are dominant in their catchment. These two investments fit such criteria and are a positive diversifier to the existing retail assets in Berlin and Frankfurt. This transaction completes the deployment of the initial equity. We are in negotiations to draw debt against selected assets in the portfolio, which will be accretive to shareholder returns.”
The board and the manager are monitoring the impact of the UK vote to leave the EU which took place last week and any impact this may have on the portfolio and the company’s strategy. It is positive that the assets of the company are denominated in euros and that the company owns income producing assets in cities/regions which have traditionally proven to be stable and resilient over the long term. The board remains focused on the real estate fundamentals of our portfolio and generating attractive income and capital returns through active management. Furthermore, the company has additional investment capacity which means it is well positioned to take advantage of any short term market dislocation that may arise as a result of last week’s decision.
The Company has a long term investment strategy, targeting investments in large, liquid Continental European cities whose growth prospects exceed their domestic economies. We will continue to invest in accordance with the strategy without compromising on fundamentals.
