Well, good morning, ladies and gentlemen, and thank you very much indeed for joining us this morning for the Schroder European Real Estate Investment Trust annual results presentation. My name's James Lowe. I look after sales for the Schroder Investment Trust business. I'm very pleased to be joined in the studio this morning by my two colleagues, Jeff O'Dwyer, Portfolio Manager for the European REIT, and Rick Murphy, Finance Manager. Just before you hear from the team on the presentation of the results, a couple of things from me. If you'd like to ask the team questions, then please do so via the Q&A tab. You can also download a couple of things on your screens.
If you'd like to follow along with the presentation, you can download a copy of the presentation, and also there is a copy now of the annual report available to download if you'd like to get into some more of the detail. But with that short introduction, I'll hand you over to Jeff to start the presentation. Jeff?
Great. Thanks, James, and good morning, everyone, and thanks for dialing in to the results. Just before I go through the results and give an update, I just wanted to, sort of, touch base and remind investors what we offer. Firstly, the European REIT's a unique and compelling opportunity or proposition that gives investors exposure to a diversified portfolio in growth European cities, and those cities include Berlin, Hamburg, Stuttgart, Frankfurt, and Paris. It's obviously a very strong diversifier to what we have here in the UK. Secondly, approximately 100% of the leases are subject to indexation, so therefore offering a good inflation hedge. Thirdly, at the interims, you may remember that we made a decision to really go conservative and move to a covered dividend.
We retained quite a bit of capital and strengthened the balance sheet, really to position the company in the strongest position possible. We're now sitting here today with this strength, and giving us the opportunity now to invest in or improve the quality of the portfolio, potentially look at a new acquisition as well, as a means of trying to drive earnings growth going forward. Obviously, today, for a new investor, we think the shares provide a compelling investment case, and those that sort of buy the shares today can come in at a 40% discount to NAV, getting a 7.6% dividend yield, and obviously some headroom in cover. Later in the presentation, I'll give some flavor on transaction evidence, to give a bit more comfort around asset values.
I'll talk you through the robustness of the dividend against interest expense and some comfort on how we're managing 2024 refinancings. And then finally, with the Schroder platform, obviously, having teams on the ground is a very key part of our story, and those teams are specialists across a multi-sector basis. So we have office specialists, retail specialists, industrial specialists. On top of that, we've got sustainability specialists, which is becoming increasingly key, particularly in terms of trying to provide a solution to tenants and therefore retaining tenants to help drive performance going forward. Just moving to the operational side of things in terms of what we've done over the year, obviously, the portfolio's held up exceptionally well. We've got 97% occupancy. There's pretty well only one asset that has some vacancy, and that's the Saint-Cloud office building.
That'll continue to be a bumpy asset. Through the year, we've obviously increased rents. We've been able to, on the back of the indexation that I touched on earlier, drive rents by about 5.3%, so that's helped with earnings. We've done sort of roughly 15 new leases and regears across about EUR 1.5 million of contracted rent. We did a little transaction earlier in the year, which helped sort of strengthen our exposure to the growth industrial side, again, a sector that we see stronger rental growth in. This was also an asset that not only enhanced the income profile, given it was a 20-year lease, but also the quality of the portfolio, given the nature.
It was an award-winning industrial asset in a very strong location in the Netherlands called Alkmaar. In terms of looking now, I did sort of present in the interims our decision to retain that capital, and we're doing some sustainability audits at the moment. They're in process. We'll have the results of those in sort of January, February. It's two parts, really. It's really to understand the whole net zero modeling, but also to benchmark the assets against a scoreboard or a scorecard that we have in here as a means of us being able to then pivot and potentially sort of half and half, mid-next year, sort of pivot to being more sustainable.
T hat's why we've retained some of that capital that we have, but we're in a very strong position now to be able to invest in the portfolio or potentially do another acquisition, as I touched on. Just on this slide, I just wanted to highlight, and I think in terms of where we're sitting in the discount that I touched on, at around 40%, we've got one of the lowest LTVs out there in the peer group. I haven't named all the peers here, but you can see there's diversified sector-specific U.K.-listed vehicles. We do look attractive. We've got a dividend cover that's 106% for the last six months.
We've got an attractive dividend yield, and obviously, that discount, we feel, probably overpenalizes the trust relative to the other peer group. I'll stop there. I'll let you sort of read that on your own. There may be some questions later on, but I'll now hand over to Rick to talk through the financial results.
Thanks, Jeff, and good morning, everybody. L ooking at the financial highlights for the September 2023 year ends, and beginning, first of all, with the balance sheet, we can see on screen that as of the financial year ends, the company had EUR 32 million of cash on its balance sheet, which we really feel, moving into 2024, does provide the company with significant flexibility around upcoming loan refinancings and also the opportunity for potential investment opportunities in the new year. With regard to loan refinancings, 2 loans were successfully refinanced in 2023, and Jeff will talk a little bit more around that success later in the presentation, in a few slides' time.
With regard to LTV, Net LTV, net of cash of only 24% at the financial year end. Dividend cover of 106% for the second half of the financial year, and that's post a rebasing of the dividend, from 1.85 EUR per share, down to 1.48 EUR per share, and an 89% dividend cover for the full financial year. With regard to EPRA earnings, really pleasing to be able to say that these have jumped from EUR 6.1 million in 2022 to EUR 8 million as of September 2023, 31% increase, driven in part by like-for-like rental income growth, indexations, and the acquisition in Alkmaar, the Netherlands, for circa EUR 11 million back in March 2023.
With regard to the income base of the company, almost every lease currently is index linked or some sort of form of inflation uplift. With regard to rent collection, full rent collection across the financial year, bar the shopping center, Metromar , Seville, Spain, for which the group wrote down its investment fully back in 2021. Just finally, on the slide, from a performance perspective, NAV total return of -5%, against the 7.3% the prior year, predominantly driven by valuation declines over the financial year. Moving to the next slide, we see the NAV movement bridge. So an opening NAV of EUR 188.2 million, or EUR 1.408 per share, and a closing NAV of EUR 171.4 million.
A fall in NAV over the year of EUR 16.8 million. We can see off that EUR 16.8 million, EUR 15.7 million is in that top line. That's unrealized valuation losses across the portfolio in the twelve months, predominantly as yields have deteriorated and moved out over the period. With regard to transaction costs, EUR 1.2 million was invested as part of the acquisition of Alkmaar in the Netherlands, back in the spring. Capital expenditure of EUR 2.8 million was invested, predominantly at the Houten asset in the Netherlands and the office asset in Saint-Cloud, Paris. With regard to Paris Boulogne-Billancourt, development profit, EUR 1.5 million has come through the NAV this financial year.
As we move into financial year 2024, and there's a maximum of a further EUR 1 million of potential NAV uplift to now come through, through that sale and developments, going to next year. Just positively as well, with regard to Paris Boulogne-Billancourt, it's really pleasing to be able to say that as of today's date, that full sale development, EUR 100 million to be received, and EUR 98 million has been received by the company, to today's date. With regard to the Seville, joint venture investment, as mentioned, we fully impaired this back at the interims in 2021, and no reversal of that impairment, in the 2023 financial year end. EPRA earnings of EUR 8 million, non-cash capital items of EUR 0.8 million positive.
That's predominantly a reversal of certain deferred taxes off valuation declines over the financial period. And then dividends paid to investors of EUR 7.5 million in the financial year, so bringing our NAV down to EUR 171.4 or $1.282 per share terms. On the next slide, we can see a summary of the income statements. So the top line, we can see a 31% increase in EPRA earnings year-on-year. EUR 6.1 million were our EPRA earnings for 2022, and just under EUR 8 million for 2023. And that top block, we can see that rental income has been a real boost to that. So that's like for like rental growth, indexations, and as mentioned, that acquisition in Alkmaar around the half year.
Together with an improvement in the cost base, we worked closely with suppliers to try and maximize value for the company. And we can see, while net finance costs have gone up EUR 574,000, obviously, with increasing Euribor rates over the financial period, we try to actively manage our cash. I say, we've got EUR 32 million on the balance sheet and try to maximize interest rates to partly offset some of those interest costs that have increased over the financial year. T hen, so together with a fall in taxes, has meant that that improvement in EPRA earnings of EUR 8 million. And just moving to the dividends, here we can see the trajectory of the dividends over recent financial periods, and particularly post the sale of Paris Boulogne-Billancourt a couple of years ago.
Dividend cover, just as a reminder, for the second half of the 2022 financial year, was 72%. That increased to 76% for our interims, so the first six months of 2023. Currently, 106% dividend cover for the second six months of the financial year. Fully covered dividend. We can see on the screen, as mentioned, the dividend had fallen and been rebased, as Jeff mentioned, from 185 EUR down to 148 EUR, and this was deemed to be a strong move by the company for a few different reasons. It really is felt that having a fully covered, sustainable dividend moving into next year is important for the balance sheets. It's an acknowledgement of the rising interest cost base we've seen, as Euribor rates have increased over this year, 2023.
A lso, finally, with regards to capital employment, capital deployment, it just allows a patient deployment of that capital, as investment opportunities potentially arise going into 2024, with a view to hopefully maybe moving on that dividend cover from 1.06 a little bit further into 2024. W ith that, I'll pass back to Jeff.
Sorry, just moving through the portfolio, and a couple of things here I'll highlight, not only in terms of the acquisition that we made in Alkmaar, obviously, that's enhanced the quality of the portfolio, not only from a construction point of view, ESG sustainability, but also from an income, particularly around the lease length being 20 years and the covenant strength of that asset.
Our allocation, and you can sort of see here, there's a sprinkling of assets across the different sectors, but we've got around a third in offices, around 30% exposure to in the industrial sector, about 16% to retail, and a small allocation to alternatives, which is the data center and the car showroom, and we've about 12% in cash. I want to talk a little bit more around some of the liquidity and some of the pricing that we're seeing, and I know investment volumes have sort of fallen off a cliff, and there's a slide next that I'll talk through in a bit more detail on that.
I just wanted to share with you some recent evidence that gives you some comfort around values and how this portfolio has been valued. And it's the top left asset in Berlin. It's probably one of my favorite assets, given we're sitting on four hectares of land, but actually, there's been a very similar asset leased to Hornbach sold that's located in the northern part of Berlin. Identical building in terms of size of lettable area, size of site, and same tenant, and that's traded at a value that's about 10% premium to what we're valued at. So again, highlighting the liquidity and the value for this type of retail, being sort of standalone, big box, that there is demand certainly from privates, high net worths, high net worths.
Equally, in Frankfurt, we have another retail asset, it's a smaller grocery asset. With another Schroder fund, we've been in the market selling two grocery assets in Germany. We've had 20 bids come in for those assets at pricing, and that, again, is about a 5%-10% premium to what we're valued at here. So that gives me a lot of comfort around the retail, in particular, that we can sell these, and there is demand and liquidity, and supporting the net asset value that these particular assets are valued at. On the office side, we're located, particularly in Germany, in two sub-markets, being Hamburg, or two cities being Hamburg and Stuttgart, that have very tight supply, so particularly Stuttgart, where we have record low levels of vacancy. It's about 2%. There's just no choice.
They're both lot sizes that are in sort of around the EUR 20 million mark, so again, very palatable and where we're seeing demand. Then the rest of the portfolio is primarily industrial, and again, a sector that is holding up exceptionally well. I think we've probably seen a bit of a floor in terms of where values are for the industrial side, and I feel very comfortable that if we were to sell these assets, that they would be highly demanded and very, very liquid. Just on the investment volume side, the left-hand side chart, you can see here, obviously, volumes in total falling off, but interestingly, the ratio or the focus has been on the smaller lot sizes, so those lot sizes that are sub EUR 30 million, which is where our strategy has been focused on.
Y ou can see there, sort of over the last, what, sort of 15, 16 years, that, the nature of or the percentage of assets or deal size, less than EUR 30 million, has moved from 40% to 75%. The right-hand side, I just wanted to sort of share with you where some of the different, sort of sectors across our fund have fallen. So on the industrial side, we've seen a reduction over the year of about 8%. The sub-portfolio of industrial represents about a 6.5% Net Initial Yield, so debt is still accretive. And if you then start thinking through and pairing that against where sort of risk-free rates are, there's a really attractive premium that we have there.
O n the industrial side, you're getting 380 basis points, through to the office is around 225, and then the retail, above sort of 300 basis points. Obviously, the 10-year sort of bond has been moving around pretty aggressively, i t's fallen again this morning. T hat sort of gap has increased, s o again, not only is debt accretive, but obviously that premium that you're getting remains attractive, in terms of relative to the risk of government bonds. This slide really just highlights us as investment managers and how we can de-risk an office building. So this was a Grade C building, where we turned that into a Grade A BREEAM rated asset. We provided a solution to the tenant, created value here.
Obviously, it was what went behind the special dividends that we gave back to investors in 2022, so j ust highlighting really how we can de-risk and create value through our asset management expertise. L ooking forward, where can we look to do that in some of the sort of other assets now? At the smaller end, we've got the Frankfurt investment. We'll probably be doing some regearing there and strengthening the profile of that, particularly maybe looking at expanding the Lidl. In Apeldoorn, we're in discussions with KPN about how do we extend or how do we provide a solution to them to stay. At the moment, it's used as a data center and office building. The data center is quite critical for them. It's an asset that also has some benefit in terms of alternate use.
There is medium-density residential that surrounds this asset. We've still got 3 years left on the lease, but it's something we're trying to work with the tenant to see how we can de-risk that and provide a solution to them. Berlin, I've talked about, again, longer term, try and create value here through planning, getting approval for a mixed-use concept, having the 4 hectares there in a growth part of Berlin, in a capital city that is naturally undersupplied from a residential point of view. T hat's more of a longer-term angle, then Saint-Cloud, we've got the train station that comes outside the building, not till 2030, but that's certainly an angle where we see potential ERV growth on the back of that infrastructure improvements. And that's generally the nature of how we've looked at investing.
We typically look at sub-markets where there's supply constraints, where we're buying off rents that are affordable, where we're buying into areas where there is improvements in infrastructure, and where there is competing demands for users. Y ou've seen, and I've talked before, about how those sort of four elements come into the acquisition strategy that we've presented. Obviously, in the inflation hedge sort of talked through before, pretty well all the leases are indexed. In Germany, there's a slight nuance where you have to wait for the hurdle to be hit. Obviously, we've seen inflation starting to come back and really pull back quite aggressively. Forecast now for next year are between sort of 2.5 and 3%.
We did see actually some pretty strong double-digit inflation in the Netherlands, and that's what went behind that sort of 5.3% growth that I touched on earlier. On the debt side, and this is one of the reasons why we did retain some capital. We had some 2023 expiries that really positively we can say that we've de-risked. So in particular, the Dutch logistics, we entered into a new refinancing there with ABN. We decided to take a little bit more capital there to give us a bit more protection as well. We're now in discussions and in advanced discussions about bringing forward the refinancing of the Saint-Cloud loan, so that doesn't expire till December next year.
W hat we're thinking of doing there is actually refinancing now, but keeping the hedge that we have. So we've got a cap that's in the money at 1.25%. We'll keep that in place for another year, and then we'll likely enter into a forward from December next year. We've agreed heads of terms on that with the existing lender. Still need to go through internal approvals and with the board, but again, positive to sort of say that actually there is debt available for counterparties like us, who have the ability to de-risk the sustainability side. It's likely we'll probably repay a little bit of that loan, so move the EUR 717 million loan principal down a little bit.
I t is positive news that we do have availability of debt there. The other loan that we have been working on and have sort of terms or interest agreed is on the Rennes Logistics. So that's a loan that expires in March next year. Feel very comfortable about refinancing. That's obviously in a sweet spot where lenders, particularly given it's an industrial asset with decent lease length on that, very strong covenant, there is a lot of banks out there wanting to lend on that. So I feel very, very comfortable on that refinancing. So overall, we're in a really strong position.
If you then sort of think about if you take out Saint-Cloud, and that's a loan where we're in discussions with the bank about trying to facilitate a sale here, but if you remove Saint-Cloud from the numbers, our gearing position actually falls by about 3%. So we move from a 33% LTV or 24% net of cash to 30% and 20% net of cash. A really healthy position, going forward. The point about, well, what happened to your earnings if you've got sort of interest expense increasing? So what we've tried to sort of do with this slide is sort of show, well, okay, if we refinance the Saint-Cloud, if we refinance the Dutch loan that we've done, and we refinance Rennes, what happens to our interest expense?
B y the end of next year, with all those refinancing, if you assumed an interest cost of sort of between high fours for the Ren and, say, 5% for the Saint-Cloud, you end up with an average interest of 3.9%, which means that our interest expense goes up by about EUR 200,000 per quarter. So what needs to happen in order for us to maintain 100% dividend cover? Obviously, we've got 106% cover at the moment. We basically need rents to go up by 2% to ensure that the dividend remains sustainable.
Obviously, in terms of the forecast we've given there, around where inflation is, between 2.5 and 3, you can get comfort there that we're gonna see indexation that covers the interest expense that we're gonna be seeing. I still feel comfortable that we'll be able to maintain the dividend that we have going forward. In summary, we think it's a very compelling investment case, particularly where the shares are priced today, particularly given the cities that we have exposure to. These are growth cities that include Berlin, Hamburg, Stuttgart, Frankfurt, and Paris. We're diversified, so we've got a third in offices, roughly 30% on the industrial side, where we see stronger growth going forward.
The retail that we've got is very good retail and very liquid retail, so feel very, very comfortable about holding that. We've got a little bit of exposure on the alternatives with the data center. O verall, the portfolio has held up really well from an occupancy point of view a nd I think moving forward, having a team and having expertise on the ground, being able to deliver the sustainability side, having that operational excellence, and also being able to provide solutions to tenants t hat's becoming increasingly key as an asset manager and how we're gonna drive returns going forward. I'm happy to stop there. I'm sure there's a couple of questions, but that's that. Over to you, James, for any questions.
Thank you, Jeff. Thank you, Rick. Yes, we do have a couple of questions. If you do have any as we go through the Q&A, then please do send them in. I will ask the team. Just kicking off with a relatively high-level question, probably one for you, Jeff. One of our listeners has inquired into one of the comments we made actually in the deck at the start, where we spoke about the return resilience of the European REIT strategy versus the U.K. peers. Could you just elaborate a little bit on what it is that has been driving that relative resilience in returns over the past year?
Yeah, well, if you think about the valuation side, although you've had yields sort of deteriorating, and I think for this portfolio, we've seen between 50 and 200 basis points, depending on the asset, but you have the income side increasing on the back of inflation, and that's a unique difference that European leases have relative to the U.K. Sorry, let me just, I think the slides are getting a bit wild. So you have a situation where although you've got the denominator in terms of yield deteriorating, you've got the income increasing, so that's sort of offsetting, and that's what's led to this sort of valuation fall that's relatively modest compared to what the U.K. peer group have seen.
Great, that's really useful context. J ust staying on the sort of the more sort of higher level sector areas, where we've also had a question on offices. The question here is really around what you're seeing. You've spoken previously on these calls around the different types of office offices you're seeing, and also the bifurcation you're seeing between particularly primary office, secondary, tertiary areas of the market. It's something we've particularly seen in the UK market, where that spread between primary and secondary is as high as it's ever been, almost. Is that the same trend you're seeing in Europe? How are you feeling about the offices in the portfolio in SE REIT?
Yeah, very, very much so, and I'll use Paris as a good example. I mean, central Paris is seeing rents now driving through to sort of 1,000 euros a meter, and anything that is Grade A certified is seeing very, very strong demand, and vacancy there is very, very limited. As you get to sort of some of the secondary locations, it's a bit more difficult. So if you look at La Défense, vacancy there is certainly sort of high teens. Thankfully, we don't have any exposure to there. We do have Saint-Cloud, which is in the southern sort of on the river in the southern part of Paris. That's an asset that will be bumpy. I mean, we are having some success in terms of leasing. I had a call yesterday with the team.
We're in discussions about leasing a potential floor in that, but really, the driver for that asset's gonna be once we have the infrastructure improvements coming there. But definitely for offices, it's the certification where we're seeing stronger rental growth, we're seeing sort of less vacancy, better demand, and we definitely know that actually having certified buildings in that particular sector, you're gonna see stronger returns, and that's where we potentially can pivot. We've only got three office assets. Thankfully, with Stuttgart, obviously vacancy there is 2%. We're off rents there that are so affordable that we could... If we had to improve the quality of that building, we could move the rents. They're less than half of where prime rents are, so that would help us pay for the refurbishment that we do.
Just like we did in Paris with the slide I gave before, where we took a Grade C building that was leased at sort of EUR 320 a meter. We invested EUR 40 million, turned it into a Grade A BREEAM-rated asset, but we moved rents to EUR 450 a meter. Similar sort of mindset that we can do, and that's the benefit of being able to come off, sort of affordable rents with office buildings like this. I'd be a bit more nervous if I didn't have that luxury of that affordability.
So clearly, a requirement to be more active in the current environment than previously, would you say that's the case?
Yeah, and that's the solution-based piece that I sort of touched on before, about being a house that can actually de-risk and provide a solution to a, to a tenant, whether it be an office tenant-
Mm.
The data center or retail tenant. That expertise is so key, and that's what certainly the bigger occupiers want. It's not their expertise, it's ours, and that's what we can deliver to them. That's how we see we can grow returns going forward.
T hen just picking you up there, we've had a question come in, on the tenant side. Could you just give us a couple of comments around how tenants are feeling on the ground, the tenants in the portfolio? Obviously, rent collection's been strong in this period, so they, they must be doing relatively well, but just a bit of color, I think, would be useful for our, our listeners.
Yeah, rent collection's been very strong and actually even through the pandemic, which seems obviously a long time ago now, but we did hold up exceptionally well. We've got sort of 100% rent collection. We've got around 50 tenants that were cross-section of industries, whether it be from sort of government through logistics, telecommunications, healthcare, insurance. A good cross-section there, all holding up very well. We haven't had any tenants sort of come forward, not being able to pay, for instance, the indexation that I touched on before. I mean, in the Netherlands, we had letters sent out to tenants where we were increasing their rents by 14%, so they were still paying that. They're contractually obligated.
Again, this point about coming off affordable rents, it's a bit more palatable to apply an index of between sort of 5%-14% to a lower rent than it is to, say, having a prime asset in Paris. So yeah, the rental side of things is holding up very well, and again, that affordability is key to this strategy.
Thanks, Jeff. And so just moving on to a slightly different topic, and it is related to the cash that we have on the balance sheet. I'm gonna try and bundle them in, in sort of the interest of time. There are a number of questions that are coming in, asking around how you assess the relative attractiveness of purchasing new assets with that cash versus buybacks, and then there's a number of other questions on buybacks. So if you could just give us some thoughts about cash management deployment versus buybacks. I know it's the million-dollar question-
Look-
and buybacks haven't actually always worked in recent times, but
Yeah
... how are the board thinking about that? How are you thinking about that?
Well, yeah, it's a heavily debated point that I have with the board constantly. es, we're in a very strong position to have some capital where we can either look at investing in the portfolio and improve the quality, or we can look at a new acquisition, or, as you touched on, we can do a share buyback, and particularly with the shares at a 40% discount, mathematically, that's very, very compelling. The decision as to what we do with the capital really is gonna be deferred a little bit longer until we have the results from the sustainability audits that we're going through, so that's sort of January, February.
I do think that we'll have a bit of capacity left over to either do a new acquisition or potentially do a small buyback, s o that's how we're thinking. There may even be scope, and particularly the commentary I gave earlier around the Frankfurt retail, where there's very, very strong demand for grocery retail, and if we get offered a price that is north of what we're valued at, well, maybe that's an opportunity as well to recycle some capital. T hat's how we're thinking about sort of capital management. Thankfully, we're in a strong position where we've got that cash to be able to look at a number of different angles. But it is a debate that I have constantly with the board as to which way we go.
Great. Thanks, Jeff, for the color. Question, good question here, just on the, I think it's relating to the Apeldoorn data center. Just one of the listeners has picked out that the net initial yield is pretty high on that particular asset. Can you just give a bit of background and additional color? What's driving the -
Yeah, it's a-
The value of that yield?
Yeah, so the valuers, so these are independent valuations, so Knight Frank is the fund's valuer. So they're valuing this asset as an obsolete asset because they're saying, "Okay, you've got three years left on the income. We don't know where the KPN are going to stay. Yes, it's a strategic... Particularly the data center is strategically important for KPN. But we're gonna value this with the remaining income and then the residual land value." So if you think about, we've got three years left, income's about EUR 3 million. So of that EUR 15.4 million value, roughly EUR 9 million is in the income side, and then the residual value, in terms of what one can do, whether it be to alternative use to residential, there's some offices nearby, there's some industrial.
T here's a number of different angles that one has in terms of the residual on this, and this will continue to fall in value as we lose the remaining unexpired lease term on this, and that's just the nature of how Knight Frank are looking at this. If we were to regear the lease with KPN, obviously we'd then see a pretty significant valuation change that goes with that.
Great, and there's just... Again, I'm jumping around here, so apologies.
It's fine.
T here's lots of good questions coming through. Please do keep sending them in if you have, more questions. There are, again, a number of questions I'm gonna bundle here on the ESG status of the portfolio and the development. I know you've mentioned a number of times that we're going through the audits at the moment, but is there any sort of further color you can give on the existing portfolio, how we're positioned currently? And then, I guess, any elaboration you can give on the types of things you're expecting to see in those audits, or it may be too early.
No, it's. I mean, there's opportunities here. I mean, I guess, and I'll use Stuttgart as a very good example, because it's an office building leased to the government. It's in a very strong part of Stuttgart. It's a Grade C building. It's leased off rents of EUR 15 per sq m per month. Prime rents in Stuttgart are EUR 35-36. So if the tenant wants us to turn this into a better quality, Grade A certified building, well, we can do that, and that's one of the opportunities that we have through the sustainability audit. Now, not every government tenant wants to be in a Grade A building. They can't afford to do that, so the fact there's just no choice in Stuttgart, there may be, well, be that we end up just regearing that lease, doing some minor works.
We've actually just done some LED upgrades there. On the back of that, I think we'll get some wins in terms of moving that EPC rating as well. So there is some sort of sustainability impact initiatives that we can do that aren't that expensive, so that the LED changing was around EUR 50,000, so it's not a huge amount of money. I mean, we're probably looking a little bit more actively is maybe on the putting in solar PV on some of the industrial assets. We've done that successfully in Houten, as part of the regear that we did during the year. Berlin, obviously being a big single-tenanted building, we're looking at ways can we actually be and have sort of on-site renewable there?
It's those side of kind of things that the audits will deliver as well. And then it's a matter of then sitting down with the tenant and saying, "Okay, well, we're up for doing this, but these need to make sense from a financial point of view." We're not just gonna run out there and just allocate this capital just to turn the buildings into certified buildings for the sake of it. It needs to make sense from a financial point of view as well. But there is different angles that we're working on, and we definitely do see, particularly around the on-site renewable, those sort of areas where we can drive earnings and income through making those type of investments.
Do you, do you see differences based on different sectors? It sort of, it logically seems to, to feel that on an office, you can do more than you could on an industrials asset, for instance, but maybe I'm, I'm missing the point.
I t's a good question. I think you're the point around the offices is it's so much more pertinent for certainly the bigger institutional occupiers wanting to be in a certified. W hat we're—certified buildings. What we're seeing is they're taking less space to be in a premier quality building, so they're happy to pay a higher rent for that better quality, that they might be reducing their overall, sort of, floor plate or footprint, I should say.
Their overall sort of rent bill stays the same, but they're in less space, and obviously using that space very differently, where you've got agile working, breakout areas, gyms, terraces, restaurants, just a better environment, much more conducive, and also just attractive for getting people back into the office as well.
Great. Thanks, Jeff. That's really useful on ESG. Moving on to the debt markets now, there's a couple of questions that's come in on debt. I guess, the main question here is, we've obviously gone through a big change in where interest rates are over the last 12, 18 months. How are you—I know you've given quite a lot of information on the actual portfolio debt and how we're doing regears, et cetera, but the question here is really about how the conversations are changing with the banks around the availability of debt, and how are those conversations changing in terms of availability of debt and risk? You know, the risk that the bank is willing to take.
Have you seen a change in those conversations over the last 12 months?
Yeah, I mean, it is, it is changing and still changing for the worse, particularly around the office side. And I think, and I use this word discerning, which I think I used a lot in the interims, where banks are being much more discerning, not only in terms of the type of real estate they're lending on, but also the counterparty. They wanna be lending to someone that actually can manage the sustainability risk. So I think from an office point of view, there's going to be a bit more distress and less availability of debt around offices, particularly for whether it be family offices, high net worths, that don't have the sustainability credibility and teams to be able to de-risk that. So we were nervous and be very open, and that's why we retained a bit of capital around Stuttgart.
Clear as to what would happen there. But thankfully, we've agreed heads of terms, and yes, we may have to repay some of that loan principal, but we're happy to do that given the cash that we've got. But I think that's gonna be a natural, sort of progression, that the levels of gearing that were previously provided to offices, that's no longer going to exist, so therefore, there's gonna be more equity required, and I think that will create some...
I don't like to use the word distress, because we haven't seen that yet, but I think it will create a bit more anxiety and therefore potentially some better buying opportunities for us throughout 2024, if we wanted to take on some offices and therefore be able to de-risk those and turn them into certified buildings, given the teams and expertise that we have on the ground.
T hat is absolutely fantastic segue into exactly the next question that's just come through, which was, and I guess this is somewhat related to conditions in the debt market, but the question is more around: Are you seeing distress in the market, and what opportunities does that present for the European REIT? And I guess the final question I'll ask is around if, with the cash, if you were going out into the market right now, are you seeing a strong pipeline, and can you sort of pull out some examples?
Yeah. I wouldn't say a strong pipeline, 'cause I think in general, obviously you saw before in the slide, in terms of investment volumes really stopping. So there's a lot of, I guess, vendors or owners sort of sitting there and waiting. But I think that's gonna be pushed as certainly they're coming to their expiry of their debt. They're gonna be forced into making a decision. Either they... They're not gonna get the same refinancing terms. They've got to put in more equity. They may not have that equity, so therefore they're gonna be selling. So that's the bit where we're kind of waiting. I think if I was to do another acquisition, it's probably more likely going to be on the industrial side. Again, strengthen our industrial exposure.
We do think there's gonna be stronger rental growth that goes with that sector across the continent, particularly around urban industrial. I think select offices, and there's not a reason why we wouldn't look at that, particularly given the teams that we have, and there's probably gonna be a bit more opportunity there and a better pricing to do something in that space, and equally on the select retail as well. W e won't be deviating away really from those main sectors, and we won't be deviating away from the jurisdictions that we have allocated to as well. So being France, Germany, and the Netherlands, and obviously where we've got the strongest teams that can identify products.
I think we're still seeing product, but not to the degree where I think we're still to come. And that will sort of come out over the course of 2024.
Fantastic. So I think, with that, we're sort of, we've got through a lot of the questions there. Thank you to our audience for sending through your questions. Really do appreciate your engagement on these calls. But we'll call it time there. So just to say thank you very much to Rick and Jeff for the presentation. Thank you, everyone, for dialing in this morning, and hope you found it useful. You should have a feedback form appearing on your screen. If you do have time to do that, please do, provide us with your feedback. We do appreciate it, and we do read it, so please do that. But that leaves me to say thank you for listening, and speak to you all again, very soon. Goodbye.