Good morning, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust annual results presentation. My name's James Lowe. I work in the Schroders Capital Business Development team. Very pleased to be joined in the studio here this morning by our two portfolio managers. That's Bradley Biggins and Nick Montgomery. Just a couple of things before we get into the presentation. If you do want to ask us a question, please do do so via the Q&A tab on your screen. That'll come through to me on the iPad, and I will ask the guys at the end of the presentation. You also can now download a copy of the annual results presentation and also the report. If you want to follow along in a bit more detail, please do download that as well. With that, I'll hand you over to Nick to start the presentation.
Nick.
Fantastic. Thanks, James. As James said, welcome everyone to the year-end results for Schroder Real Estate Investment Trust. I'm very pleased to say that it is a robust set of results. We are pleased with the progress that we are making both over the year to 31 March, but obviously post as well. We will give you some color on that as we go through the presentation. As it says on the top, we think we are well positioned from a portfolio allocation perspective, and that is complemented by an above-average income return and, really importantly, a low debt cost. We would argue sector-leading low debt cost. One of the things you will have seen in the notes already is that we continue to be 100% covered, and that is having increased our dividend by about 7.3%.
If you look at the dividend per share in the quarter immediately prior to the financial year. We would argue that that is differentiated versus our peers. That is about top-line earnings growth. It is also about having that great visibility on our interest cost with that sector-leading both duration and low interest rate. We have seen through, I think, a combination of efforts and improvements in our share price rating. I think that is partly because of what seems to be an improvement in sentiment towards the sector, and we will come on to that later on.
I also think the more that we're doing in the portfolio that demonstrates the value of our strategic evolution in terms of how sustainability is fully integrated in what we're doing, that is allowing us to drive that higher earnings growth, extracting that green premium, I think is a key driver to returns. What it's also allowing us to do is get in front of an increasingly diverse group of shareholders, so both in terms of some new wealth managers, who it's fantastic to have those on the register, but also we've noted in the report the continued uptick in retail platform investors. We're now up to about 32% of those three main platforms. We did a lot of work with the team around ISA Season, and we will continue that momentum through platforms like Investor Meet Company.
Although, as it notes here, we remain at that sort of 13-14% discount to NAV, we have seen a continued uptick in the share price. In fact, the share price itself is up around 25% compared with where we were at the end of the last financial year. A little bit more on the results. Again, we're very pleased to announce the 11% net asset value total return, just to give an illustration of how the market has moved. The comparable number from 12 months ago was around 1.1%, so a meaningful shift. That's largely down to our asset allocation, continued good returns coming out of our multi-industrial estates, but actually less polarization going forward, we think, between the sectors.
We think that having not just the industrial exposure, but also value retail warehousing, convenience retail, and interestingly, and Bradley will talk later to activity around Bloomsbury, we think we are well positioned to see continued growth in NAV and earnings through that allocations, but also through the active management. We think we remain, we believe, well positioned. In terms of performance of the underlying portfolio, which obviously drove that NAV total return of 11%, having won the award that we announced last year for the best return on a risk-adjusted basis over 10 years for all Europe, we have continued that relative outperformance against the benchmark. The latest data points, for the 12 months to March, our portfolio return of 9.1% versus the index of about 6.2%. Over three years, about 460 basis points of relative outperformance.
The numbers obviously lower because of the correction that we saw. Interestingly, if you look over a three-year period, we were fifth out of 132 funds in the index from a total return perspective and 11th from an income return perspective. Doing exactly what we should be doing both on a short term and also on a longer term basis. As I've touched on, very pleased with the continued uptick in the dividends. We'll give you some sense as we go through the presentation about where we see that earnings growth continuing. As we've always said, we want to be adopting a progressive policy over time. Lots of work, as I say, going on in relation to the strategic evolution, really importantly, work on the ground, so asset level improvements. Alongside that, huge amount of data capture.
We are on track to deliver the KPIs we've set ourselves or the board have set us, including most recently a 5% reduction over the year in terms of energy and carbon intensity. Final point, we've always tried to be a step ahead when it comes to governance and looking at what's happening in the peer group and the wider investment company universe in terms of governance and fees, obviously. We raised that with the board. We could see that in some areas, companies were moving to a market capitalization linked fee.
We have agreed with the board, as I say, it was something we raised to convert half of our current NAV linked fee to a market capitalization linked fee, which will provide further alignment with shareholders just to really demonstrate our commitment to that alignment and will deliver a saving when that takes effect from the 1st of October at the effectively the half year point. That has been put in place. The other thing to note from a governance perspective is relation to succession. Firstly, our Chair, Alastair Hughes, will come to the end of his nine years next year. Measures are being put in place to seek a replacement. We thank Alastair for all his efforts and the efforts still to come.
Also, I think lots of you are aware that I now have an expanded role as head of the wider real estate business. Having discussed the matter with the board and the team, we will be looking for a replacement for me to work alongside Bradley as fund manager. Obviously, we've, I think, made a great team, and I'm sure we will find somebody that will allow us to continue in that vein. I think it's good from Bradley's perspective, but I will remain involved. I chair the investment committee, and that committee is the entity that will be making the strategic recommendations to the board, obviously with Bradley and his new colleagues, a recommendation to the committee. I will remain involved, but we wanted just to highlight that today, given the strategic importance of the company to our real estate business.
Now, on the numbers, I won't go through these in great detail. I've touched on the fact that we have delivered outperformance at portfolio level, so net capital value change of 3.4% versus the index at 1.4%. That obviously was a key driver behind the 4.8% uplift in the NAV. That, together with the dividends that we paid, was resulting in that net asset value total return of 11%. If we go down here, you can see we're continuing to invest capital expenditure in our assets. That's likely to pick up over the coming year or two as we implement the sustainability-driven improvements. There are a couple of really good examples in the deck later on. As I noted at the intro, fully covered. So EPRA earnings of GBP 17 million, matching the dividends paid.
I have noted already, but really importantly, hopefully you'll get a sense of the further earnings growth that we hope we can deliver by implementing our strategy. The last point to note, and this goes to the real value of our fixed rate loan, is if you were to fair value that Canada Life facility at the end of the financial year, the fair value would come out at about GBP 18.5 million, which obviously is not in the NAV, which we are unable to do under IFRS. Now, on the income statement, I think very positive movements here. If you look firstly at the top part of the table, you can see there across the direct portfolio, very healthy uptick in rent as we implement our strategy, both in relation to the direct portfolio, but also what we have to call the joint ventures.
The two assets we have a part share in, but very healthy uptick in rents. We did see a reduction in other income. This is always quite a volatile number. It relates to things like dilapidations receipts, surrender premiums. It does tend to move up and down. Even with that reduction, just because of fewer receipts over the year, you can see there that 4% uplift in rent and related income. Likewise, property expenses up. That is for good reasons, because obviously we put leasing fees, legal fees through those property expenses line, and that is what is driving that higher earnings. We will have more of that coming through this quarter as we continue to lease up at the vacant space, which we will talk to you later. All those efforts combined, you can see there resulted in that 4% uplift in EPRA earnings.
We have a continued strong focus on keeping costs under control. The ongoing charges number calculated in line with the AIC methodology, you can see there at about 1.25% as at today. Those are the numbers on the income statement. Again, I've touched on this, but we're giving you the up-to-date position on our debt. You can see there the Canada Life facility, the blended 11 years, fantastic low cost of debt. Alongside that, you can see the GBP 50 million or so that we have drawn on our revolving credit facility. That is obviously more expensive, particularly because of the unhedged components. We are slowly, but we are continuing to sell a number of our smaller assets.
As we sell those, we will either be reinvesting those proceeds into activity in the portfolio, or we will aim over the course of the next few months, particularly if we sell a couple of slightly larger assets, use those proceeds to repay debt pending redeployment. Now, again, I have touched on this, but I think it is very helpful because I think it does differentiate us from our peers to show the progression in that quarterly dividend over the last five years or so. We do go back to Q4 2019 because that is the quarter when we implemented the refinancing with Canada Life, some of you will remember.
You can see there, obviously the 7% uplift in the quarterly dividend versus the end of last financial year, but really interesting, 40% uplift in the quarterly dividend if you go all the way back to that refinancing in 2019. Doing exactly what we said we would do. Now, I've touched on performance. I won't go through all these numbers. What I'd just ask you to do is if you look at the bottom right-hand corner of this slide showing you the relative outperformance against the index over three months, one year, three years, and five years. You can see the 460 basis points outperformance versus the benchmark over three years. We're very proud of our performance.
I think what's also interesting to note, particularly as we move into a market where we see less polarization between the sectors, is outperformance in all the main food groups, industrial, office, retail. Other is a very small component of our portfolio. The underperformance there relates to a leisure asset where we have an asset management strategy in play. Really showing the value, I think, of specialist sector expertise that we have within the business alongside obviously the sustainability resources that are supporting Bradley and me as we implement the strategy. Just a bit in relation to market context. Obviously geopolitics, highly unpredictable, continued uncertainty, obviously regarding what happens or doesn't happen in relation to the fiscal stimulus in the U.S. and the impact that might have on rates.
I think though, interestingly, the sort of the EU fiscal decision that was determined in the Oval Office and the Germans removing the debt break, I think actually is positive for the continental European economy. Obviously the U.K. economy, a little bit slower and as a small open economy is obviously being buffeted by these global events. Having said all of that, energy prices coming down a bit does mean that we are, for other reasons, beginning to see inflationary expectations come off. Therefore we are expecting to see rates trend down. I think we have been probably more cautious than most about where that will go directionally, just because of our views about sort of inflation, again, taking a slightly longer term view, not least the sort of the need to decarbonize the economy.
I do think falling rates will provide some support to the real estate market, whether or not they cut in later this month or in August, we will see. I think directionally, I think that should provide some support. Obviously, we've got the budget review today. I think it will be interesting to see announcements around infrastructure, particularly in relation to heavy impact that might have on regional real estate markets, particularly around housing, which I think should be viewed positively for a portfolio like ours where we do have that regional allocation. What does that mean for real estate markets?
On the right-hand side here, we're showing you our typical chart that shows a spread between the risk-free rate, if you like, the 10-year gilt rate, which today is at about 460 basis points, and where the average, and this is the slightly higher orange line, where we think the average is for U.K. real estate. You can see today the MSCI index is at around 5.2. Our forecasts, and the only certainty is that they're wrong, but our forecasts are that we will see that 10-year rate trend down. Let's say that gets to around 4% perhaps at the end of the year. The spread between that risk-free rate and the average real estate initial yields are around 100 basis points. That is below the long run average.
We are, I think, hedged against that a little bit because obviously we're starting at a much higher income return post a rent-free of one of our bigger tenants. Our initial yield is about 6.1%. We have already got 100 basis points head start or 200 basis points premium. Actually, I think for reasons that we have highlighted in previous meetings, the outlook for real estate returns is driven less by, if you like, where rates go as much as what is happening on the rental side. Obviously for a company like ours, which is earnings focused, that is really key. Just giving you a brief comment on each of these. Top left-hand corner, you can see that the U.K. has corrected, certainly ahead of other continental European markets.
We also had less of an upswing compared with some of those markets like Germany, not least because of factors such as Brexit. I think there is a sense now that the U.K. real estate market has turned a corner. I think because perhaps, at least on a relative basis, less political uncertainty, we are beginning to see more international investment interest looking at real estate in the U.K. The right-hand side, top right-hand side, you can see the behavior of rents. Here we are focusing on industrial rental growth in nominal terms. You can see, despite having a meaningful correction, 25% over the sort of two or three years up to middle of last year, we have seen, and this is very different to past cycles, rents continue to tick up.
Our portfolio continues to deliver more than what we're showing here, which is industrial rents growing by about 19% over the last few years, which compared with the industrial rents actually falling in the equivalent period post financial crisis. Now, bottom left-hand side, important point here. One of the reasons we are optimistic about further rental growth is cost push inflation. In most parts of the U.K. market, particularly the sort of the bigger cities and the industrial and retail around those cities, there is a significant shortage of space. Our research team interestingly have just shown me some data. If you look at the correlation between construction costs and prime rents, very high correlation. If you look at across Europe over the last 25 years, construction costs doubled, prime rents doubled.
Particularly against a backdrop of skills shortage, material shortage, potential, I mean, ultimately, let's say rebuilding in Ukraine, Gaza, we can only see those cost push inflation factors increasing. When you overlay that on the right-hand side, bottom right-hand side, if you look even just at the office market, there is already a shortage of high-quality sustainability compliance space. Therefore, firstly, that in itself should lead to rental growth, but it also creates an opportunity for our strategy to use our specialist expertise to create better quality sustainable buildings. That is brown to green strategy that is behind everything that we're doing. I guess just in summary, I think it is an interesting point for investors to look at the U.K. real estate sector. We have obviously seen that to an extent in the way that our rating has changed.
I think more broadly, the sector is structurally supported by that supply shortage. The rate environment, I think, should provide some support, but actually you do not need a huge amount of rate support because we do believe a combination of that attractive income return and that rental growth will deliver returns above the long run average. With that, I will hand over to Bradley.
Great. Thanks, Nick. Good morning, everyone. I have got some interesting portfolio activity to talk to as we run through the presentation, as well as touching on initiatives where we think we can generate total returns looking forwards. Now, sustainability is a core tenet of our strategy, but that is considered alongside other real estate fundamentals, as Nick has just outlined. The reason for this focus on sustainability is clear. It is because we think it will enhance long-term total returns for our shareholders.
Whilst it's fantastic that we're reducing carbon emissions and creating better assets, it really is a focus on total return as to the underlying reason for this strategic imperative. In terms of that total return, a proof of concept on the right-hand side is Stanley Green Trading Estate. We've got 11 EPC A+ BREEAM Excellent units on this estate. They sit alongside 14 older units. What we've seen is the rents for the 11 EPC A+ units are 39% higher than for those of a similar size on the older existing estate. Not only do you get that rental premium, there's also a keener yield applied by the independent valuer to those 11 new units. That's around 5.2% for an occupied unit, which compares to 6.25%-6.75% for the older estate units.
That is a really sort of clear, compelling example of that green premium in action. The question is, has it been profitable to develop those units? We think absolutely yes. That is clear in the total returns achieved since acquisition. It is 16.7% for our asset, and that compares to 8.2% per annum for the MSCI All Industrial. Really strong outperformance as a result of that investment. In terms of next steps for Stanley Green, we are undertaking rolling refurbishments and renovations of the existing estate. We have recently done what we call block four, so there are a number of units we have refurbished. The idea is to close the gap between the rents, so that 40% gap on the older units compared to the new units. Is it working? We have just completed a deal with Screwfix, who trade really well at the scheme.
Their rents increasing by 54% on their previous passing level. That is a result of those works we're undertaking and just generally making the estate better. You get this washover effect. In addition, we're currently in negotiations with Heldens, who are also on the scheme. We're also refurbishing their unit. We hope to achieve a strong uplift there as well. Further examples of that brown to green strategy in action. A couple of initiatives that we've undertaken in the last year or so. These two initiatives alone have added GBP 400,000 of new rent. That is new rent, so it wasn't in our passing rent at the end of the financial year. On the left-hand side, we show some John's Retail Park in Bedford and Headingley Central in Leeds. These are our two largest retail assets by value.
What we've done here is we've partnered with BEV, who are part of Octopus Energy. They're going to install 11 EV chargers at both schemes. The combined rent for that is GBP 146,000 per annum. That rent is linked to CPI in terms of future rent reviews. The lease term is also 20 years straight. There are no breaks. This is income we're creating effectively out of nothing, whilst at the same time enhancing the sustainability credentials of the assets, but also creating a more attractive sort of scheme for our underlying customers. You might remember we recently developed a new Starbucks drive for us on John's Retail Park. That's bringing in rent of GBP 155,000 per annum. Again, that's just showing our ability to actively manage our assets to create new rental income streams.
The way we were able to get such strong terms for the EV charging points across the SREI assets is we undertook a tender across the whole of the Schroder 's U.K. portfolio. That enabled us to drive best terms with BEV because they obviously benefited from SREIT implementing this across a number of assets rather than just the two SREI assets. On the right-hand side, a really powerful brown to green example in 19 Hodding Lane, which is on Stacey Bushes Industrial Estate, a large multi-let industrial estate in Milton Keynes. It is actually our largest asset by value. Just taking a step back, looking at Stacey Bushes, this has been a strong performer. Another strong performer since acquisition, just like Stanley Green. We generated a total return since 2014 of 16% per annum. That compares to the MSCI All Industrial of 10.8% per annum.
Really strong performing asset, good real estate fundamentals, and has really benefited from the lack of development there's been in multi-layer industrial estates over the last few years as compared to, say, big boxes, which you see up and down the motorways. Now, 19 Hodding Lane was developed on the site of an older sort of small unit. It had very low site cover. It was around 5,000 sq ft, whereas 19 Hodding Lane is now around 17,000 sq ft. It's EPC A+ rated. It's BREEAM Excellent. Very similar to the Stanley Green units. We were really able to apply that strategy here. Again, the question comes, was it worthwhile spending that money? It costs us GBP 3 million to develop. Since the year end, we've completed the lease with BYD, who are the world's largest EV manufacturer. They're using this unit to store bus batteries.
They recently won a contract in the south of the country to supply batteries for some bus fleets. The rents that we've achieved here are 40% ahead of the estate average ERV. In addition to that, they're 40% ahead of the passing rent for similar size units on the scheme. It's really interesting. We've achieved a pretty similar rental uplift in terms of sort of a green premium and a new premium as at Stanley Green. You also get that similar benefit of the keener yield in terms of the valuation. Another powerful example of our brown to green strategy in action. Now, looking at Millshaw Park Industrial Estate in Leeds, this is really to talk about, I guess, a future opportunity.
Again, just taking a quick step back on Millshaw and a brief background of the asset, this has been another strong performance since acquisition. Since 2015, it has generated a total return of 12.3% per annum. That compares to 9.8% per annum for the MSCI All Industrial over the same time period. This is a 460,000 sq ft estate across 28 acres. It is just south of Leeds City Centre and is right by the M62 motorway. Really strategically located next to an urban centre. It is one of the largest single-owned industrial estates in Leeds. The site cover is low at around 37%. The valuation is underpinned by alternative uses as well. Now, what is interesting about the Leeds industrial market is it has a vacancy rate of around 3%, which compares to just over 5% for the national average. Really tight supply in Leeds.
We have seen that in our rent reviews we have been agreeing over the last year, which are a significant uplift to the previous passing level. In terms of the opportunity looking forward, we see more Hodding Lane type refurbishments to create better quality units and push those rents on. For example, unit 22, we got this unit back yesterday. It is 50,000 sq ft, which is around 10% of the asset GIA. What we are doing here is we have signed off a brown to green refurbishment to generate a unit that is EPC A. It will cost us GBP 1.9 million including fees. The question is, is that going to be profitable? Is it worthwhile spending that money? We think absolutely yes. We are going to be quoting a rent of GBP 9 per sq ft. That is GBP 465,000 per annum.
That's an 86% increase on the rent that was passing as of yesterday. Now, the net valuation uplift after all costs and rent freeze is around GBP 1.1 million-GBP 1.5 million. Not only do you get that sort of hit in terms of valuation uplift to this unit, but you again get that washover effect to the rest of the estate as the rental tone moves on, the quality of the estate improves. Watch this space at Millshaw Park. Final example from me in terms of active asset management, University of Law is on Store Street in Bloomsbury, a really interesting location. This is a freehold site. It's 0.8 acres. It's in Camden. It's very rare to have a freehold site in this area. The asset's got really low site density. There's scope to increase the massing and increase the height.
Currently, it's on a lease to the University of Law, which expires at the end of 2029. There are fixed uplifts throughout that lease to the end of 2029. What's interesting at the moment is just the location. This West End location, there's so much happening. For example, University of Law is less than 500 meters from Tottenham Court Road, Elizabeth Line station. The area is benefiting from infrastructure improvements. Not just the Elizabeth Line, but also the West End project, which Camden is undertaking. There's a diverse range of knowledge-based occupational demands. You see the University of London is around the corner. The British Museum is just around the corner. As a result of all this activity, there's understandably been quite a lot of activity on the real estate front. We've outlined lots of that on the slide.
There's lots of stats to look through. I think the key takeaway for us is just the rental growth and the rents achieved at assets right next to ours. Our passing rent at the moment is GBP 55 per sq ft, subject to the rent free expiring in October. We're seeing rents agreed more than three times that level. Now, we're not going to achieve that at the asset today as it stands. What we're doing is working with Camden on a pre-application in terms of planning to potentially redevelop the site to increase that massing, increase sustainability performance of the asset, and achieve those higher rents. Those higher rents are making the development really attractive. Just to finish, on the left-hand side is a CGI of what a developed asset could look like. On the right-hand side, it shows the current structure.
You can see the blue and yellow buildings are our two buildings. I think it's clear from the courtyards and the low height that there is an opportunity to increase the massing here. This is an initiative currently in progress and we'll update you in the future. Looking at portfolio now, some key metrics we've shown on the slide. We've got a really granular portfolio, 38 assets, more than 300 tenants, which we think spread risk. We've got a really attractive income profile, which Nick spoke to earlier. The net initial yield, 5.6%, well ahead of the benchmark. That will increase to 6.1% in October once the University of Law rent free has expired. The reversionary yield is also extremely high, 8.4%, well ahead of the benchmark at 6.2%.
We have a slide on that shortly where we can sort of look at what that looks like in terms of pound notes for our shareholders. Key point on the right-hand side are our overweight weightings to industrial and retail warehouse. Playing on the multi-industrial theme that we really like and the convenience theme in terms of retail warehouse and the fact that time is becoming a precious commodity for everyone. Those two sectors account for 63% of our portfolio value. Now, on the void, and we are asked about this a lot and rightly so, we see it as an opportunity. Whilst the void was 12.3% at the financial year end, that is a result of all the work we have been doing in terms of refurbishments and developments. I have outlined some examples already of where those leases are completed or exchanged post-year end.
We do have of that 12.3%, 4.2% has already either is already under offer or completed. The BYD lease is a great example of that. Also at Sterling Court in Swindon, we have all the void under offer at a rent that is in excess of ERV. At The Lakes in Northampton, we have all the void under offer at ERV. That is the case as you look up and down that list. In terms of the reversion, in pound notes, our reversionary rent is GBP 11.4 million higher than our passing cash rent at the financial year end. That compares with our current annualized dividend of GBP 17.5 million. That reversion is really material in the context of our dividend. If we're able to capture that rent, it should put us in a good position to potentially increase the dividend looking forward.
In terms of how we're going to get there, since the year end, we've already had GBP 800,000 of fixed uplifts. That's where rent frees have expired. By the end of March next year, there will be a further GBP 3.3 million of fixed uplifts, which is again almost entirely rent frees expiring. GBP 2.4 million of that relates to the University of Law, which we've discussed. At the year end, we had exchanged a number of AFLs totaling GBP 900,000 in rent. That isn't reflected in our full year results or in our passing rent at the year end. That will be upside looking forward when we complete those leases. There are units where the market rent has moved in excess of our current passing rent. As we get around to rent reviews and renewals, we will be moving those rents on.
We touched on vacant space on the previous slide, which we see as a huge opportunity. We are working hard to bring that down and bring that rent in. With that, I'll hand back to Nick. We would welcome any questions that you have.
Great. Thanks, Bradley. What hopefully comes across clearly is there has been a huge amount of activity over the year and since. Obviously, there is a lot that we want to close out that is in pretty advanced stages, particularly on the leasing side, to get that void rate down, which is a real strategic priority. Our strategic evolution is paying dividends. I think it has helped us drive higher earnings growth, that discipline around how we are incorporating those sustainability improvements to extract that green premium.
We have been and will continue to push really hard in terms of attracting new shareholder interest, both in relation to specialist wealth managers, new wealth managers, but also that core retail base, which I think has been one of the reasons we have seen that uptick in the rating, particularly against some of our peers over particularly the last few months or so. I will not talk for all of these, but just in headlines, I think we are cautiously optimistic about the outlook for the real estate markets over the course of the next 18-24 months, particularly because of that supply side shortage and the potential for that cost push inflation to come through. As it relates to our portfolio, hopefully what has come across really clearly is that we continue to extract a really interesting pipeline of asset management opportunity through the portfolio.
We will look to fund some of those bigger projects through sales, which again, as I said earlier on, we have in train. I'll just end by saying thank you very much, everybody, for attending, for those shareholders on the call. Thank you for your support. We, I think, have some time now to take questions.
We do indeed. Thank you, everyone, for sending in your questions. We have a number of them. If you do have questions as we go through this, send them in. I'll ask the guys as we go through. I'm going to start. We've got sort of high-level questions and then some more granular questions and then some more corporate-level questions, let's say. I'm going to start at the high level. We'll then dive into the more specifics, and then we'll end probably with the corporate questions.
Just a question, a more high-level market point, Nick, for you. Just about one of the questions is about the open-ended property funds that are closing. Therefore, are you finding any attractive opportunities to buy assets at discounts?
Yeah. I guess we are somewhat capital constrained at the moment in Schroders Capital. The capital that we do have available that we are recycling is going into portfolio activity where we are happy that we can drive attractive returns. If we did have more capital available, then as we are on behalf of other funds that we manage, we would be very selectively, but we would be buying because we do think the market is bottoming out. Others think that too. You mentioned open-ended funds. Those redemptions, I mean, across the sector, they have slowed, but there are still redemptions.
Where you have had bigger portfolio deals done is USPE. Interestingly, in London, we touched obviously about Store Street. Even for some of the bigger assets in London now, where there has been very little liquidity, you are now beginning to see more activity. A couple of big insurance companies are buying really quite sizable assets in London. Going to the question, PE, institutions, privates, we are seeing more interest, but being realistic, off a fairly low base because the geopolitical uncertainty has meant that the kind of recovery in volumes that we were expecting has been somewhat delayed. We do see that coming through in terms of sentiment.
Great. That is super useful background. Maybe just staying at a high level here, there is a question that has come through.
I think this relates to some of the data that we saw in the market backdrop slides around particularly I was surprised to see that retail was actually the most resilient since 2022 on your high-level capital value decrease slides. We also saw that offices had declined quite dramatically. I think it is a really good question to take a step back here and just ask, given the changes in working practices, we are hearing a lot about AI at the moment. How are you seeing that disrupt the market? We have seen, yeah, there is the chart there on the left. How are you thinking about that in terms of managing the portfolio?
I sort of touched on it, but I think what is interesting, and I made the point about we are expecting less polarization.
If you look at the three years from 2018, so if you look at the run-up effectively to that data point, average industrial value has doubled, average retail value has halved. What you are seeing in the data here where we are showing the correction is retail had gone through an extremely challenging period, the many shopping centers falling off the map, turning into something else. On retail, I think partly because of such a significant valuation correction, but as you say, changing consumer behavior. I think we are expecting online share to increase, but the rate of increase is slowing. There is an acknowledgement now that particularly value retail warehousing is a really important part of retailers' multi-channel retailing strategy. You sell out the front, distribute out the back. We are seeing healthy levels of both investor, but really importantly, occupational demands.
We've not touched on it here, but we've obviously got the pre-let. We've done a Salisbury to Lidl. And there are other examples like that across the portfolio. I think our views going forward are we are expecting less polarization between the sectors. We still think multi-let industrial on a risk adjusted basis probably will outperform the other sectors. But equally, we think value retail warehousing, we think very selectively within the office sector, we think the big six regional cities, selective London submarkets now are looking really interesting. We're not the only ones saying that now. You are beginning to see more positive sentiment. I guess that's sort of responding to the points about why retail's behaved as it has done. Also, I think for us, we have a diversified strategy where we can tack and change between the sectors. I think it's our market.
I think it's a great opportunity.
That takes us really nicely to another question as a segue around the office market that's come in, just around the overweighting to offices in the portfolio. Are you therefore looking to pivot around that, given your views at a sector level?
We're not overweight. I mean, again, it depends on what you're measuring as GSE. If you compare us against the index, we're actually underweight. I do understand from some quarters, the MSCI index is less relevant. We have deliberately versus peers gone overweight industrial, underweight offices. Our office exposure is selective. Manchester City Centre, Edinburgh. One of the reasons we've highlighted Bloomsbury, that's our biggest office exposure. It's in a really interesting part of London where we're seeing infrastructure, mixed use, GPE buying a building around the corner.
Alpha Place, for those that know it, has got sort of a scheme at the top of Alpha Place, which one of our funds has actually got planning consent for. There is a scheme at the bottom where we think we will see a redevelopment. We see that location improving significantly, which is why we are doing the work we can do. Going to offices, I think we see it. We are not going to sell our industrial and buy offices, to be clear. We may trim around the edges. We may selectively acquire office around the edges. Compared to where we were a year, two, three years ago, we think it is much more interesting.
Great. Maybe just picking up on the selling of assets. You mentioned we are selling some of our smaller assets.
There's just a question here that's come in around what's the strategy on what you describe as maybe non-core assets within that definition? Are you actually seeing strong market demand to sell those into?
Dealing with those in order, smaller non-core holdings is what we're principally focused on, where we've delivered on the asset management. The small shop in Truro, we've leased it up over the period, and we've sold it at a 20% premium to book. We got an asset at auction today, a small asset at auction today. We've got a number of those smaller high-street assets where we've done lease route structuring where we're selling tiny one, two, three million. In other areas, we are looking at possibly selling assets where they are a bit bigger, where we've delivered our business plan.
We have one industrial asset fully leased up, where if we can get the right price, we'll sell that. I think from a strategic perspective, if we're selling industrial assets in sort of 5%-6%, if we use those proceeds to repay our revolving credit facilities, accretive, we get the loan value back down within our target guidance. Obviously, that's supported in terms of earnings. We can redraw that when we've got activity to fund within the portfolio. That's the plan.
Perfect. We've run through the higher-level questions, so I'm going to focus now more in on the portfolio. There's a question, should be a relatively quick one, just about who owns, can you disclose who owns the other half of the Bloomsbury assets that we discussed in the case study? Is it Schroder's owned or?
Schroder's managed fund. Yes.
Okay. I told you it would be a quick one. The second question that's a bit more detailed is around Stacey Bushes in Milton Keynes. Bradley mentioned the rent, 40% ahead of the estate average ERV for EPC A-plus unit. Could you just explain a bit more about what the average EPC rating for the rest of the estate is, just for comparison?
Yeah. So sort of B to D. So there's a real range. There's more than 60 units. So yeah, very similar to Stanley Green and very similar result in terms of the rental premium. Good stuff.
Yeah. Also just a question here, and this should be a quick one as well, but I'm keen we cover off all the questions. Question just about you mentioned BREEAM Excellent a couple of times, just for one of the investors, and probably many other, myself included.
Could you just explain what BREEAM Excellent means?
This is what we call a green building certificate. I think a good way of looking at it is it's just a more comprehensive EPC. It's more advanced. It's more modern. I think most occupiers, particularly institutional occupiers, will be looking for a BREEAM label on a high-quality sort of piece of real estate they're looking to invest in for their business and for their staff.
Maybe just as I've taken you onto the sustainability context, there was a question here around maybe challenging slightly. We've shown lots of really good examples of where sustainability change has driven value increases or rental uplifts. Are there any examples in the portfolio where it just doesn't make sense, quite frankly, to do that?
Yeah, frankly, yes.
That is where we would be looking to sell ahead of any sort of risk events. I think our really detailed look at the portfolio in terms of looking at it through the sustainability lens helps us to identify those risks. The answer is yes.
Maybe just again, I am moving around a bit here because we are getting lots of questions coming through. There is a question here about you mentioned the EV charging points you are putting in a couple of sites. Clearly, that comes with CPI-linked longer lease type income. The question here is sort of analyzing the difference between the sustainability strategy where you are doing that now because you are thinking about sustainability versus is that something you would have done anyway?
I think this is unpicking how much of this is consequential and normal business now in a real estate strategy versus we're going above and beyond to drive value here through sustainability development.
Yeah, look, I think that we would have, of course, done that. I do think that having the investment objective and the KPIs and the investment policy really focused the mind. I think our teams, our sector specialist teams are really clear on what we're looking for in terms of transactions. So they're bringing us these opportunities in line with our very clear investment objective and policy. Yeah, we would have done these deals in the past. I think we're seeing more opportunity and flow. I think we'll get better at executing. For example, the BEV deal, yeah, it would have been something we would have done.
To bring together the whole U.K. platform in one big tender, I think took a lot of sort of organization and focus. If the House did not have the sustainability at the front of mind, it probably would have been more difficult to achieve. I think a proactive approach to sustainability just helps you get these really strong results.
Definitely. I think it is the fact it is fully integrated. As Bradley said, across our asset management teams, it is an interesting integral part of all the asset management activity that we are now doing. We get the platform benefits by putting in place these arrangements across multiple funds.
Yep. Makes a lot of sense. Question specifically on City Tower, one of the larger office assets. What is the share of CapEx planned for the next 12 months on that asset? Is that something we can share?
We can. Yeah, we can give some guidance on that, can't we? Do you want to just touch to that over the next 12 months with the leasing? Also, we're doing an update on where we are with the leasing.
Yeah. At City Tower, I think City Tower is a mixed-use asset. You've got the hotel, which is on a long lease to 2060, inflationally topped lease without caps, so pretty attractive. You've got the retail element on the ground floor, fully let. There's a car park let to NCP, again, for a long period of time into the 2040s. Then you have what we call podiums, so they're kind of big office sections. One of them is fully let to the government. The other one is under offer to an education provider, subject to planning.
You have a kind of smaller building, almost standalone, let to the University of Law, again, on a longer lease. You have the tower, which is the office tower. The elements aside from the office tower are pretty much sort of fixed in terms of tenancies. There will be some CapEx required for the education provider taking on the podium space. That will obviously be accretive in terms of the lease, which we have agreed a 15-year straight lease for. In terms of the CapEx, it pretty much relates to the office tower. What we are looking at is improving the space to get that tower as let as possible. You would have seen on the void slide, that is quite a large element on the void. Future CapEx costs around GBP 1 million to refurb a floor.
If we get a floor let, we'll spend GBP 1 million on the refurb. Again, that comes with a lease. I think other things we're looking to do, improving the amenity space. We've got the Sky Lounge on the 28th floor, the top floor, which has been really popular. We're adding another lounge in on the 16th floor. We're looking at improving things like the lifts and potentially other elements of the building as we look forward. In terms of the spend over the next year for SREI , I think we're looking at a couple of million quid.
Yeah. I think it's important to note that part of that relates to what we hope will be the completed pre-letting, subject to planning, of the podium space. I understand why someone's asked the question because it is an asset.
It's a highly intensive asset management strategy. Bradley did a very good summary of what it comprises. What I would say is we are having an asset tour next week in Manchester and Leeds. Obviously, City Tower is a key part of that. Our colleagues in Manchester will be making a full presentation. We will be producing a deck to accompany the asset tour. There will be a lot of detail on City Tower, including a more granular breakdown of the capital expenditure we're expecting, because that's a key question. The answer is a couple of million. We can provide that breakdown and what that activity relates to. For those that can't attend the tour in the normal course, we'll stick it on the website.
I think that's probably something that I don't know who asked the question, but for those that are interested, if you're not on the tour, then we'll make that available next week.
Sounds good. I imagine that will go onto the website. Look out for that. Just onto the corporate side now, as we've got about five minutes left. A question here just about fees. Obviously, the move to 50/50 NAV market cap, an important alignment tool for the business alongside shareholders. A question here that others have gone, obviously, a step further and taken that to 100% market cap fee. Could you just give a bit of feel for how the board and the conversation went there?
Yeah. Look, I mean, it was something that, I mean, it was a very constructive discussion with the board. We prompted the discussion.
It was probably in their minds from seeing what was happening in the wider landscape. I should also note, in the same vein, about four years ago, we did also prompt a discussion that reduced our fee from 110 basis points down to 90 basis points of NAV, again, to ensure that we were bang in line with the peer group. I think from a manager perspective, we commit huge resource to this. We are, hopefully, as you can hear and see, we're applying a lot of resource, not just to this piece, but the active management, the sustainability, which is in-house. From our perspective, it was striking that balance between giving us as a manager enough visibility on where our earnings were, whilst at the same time demonstrating further alignment with that link to the market cap. Ultimately, we arrived at that as being the right balance.
I think there is a cost to running a vehicle like this, the attention it deserves, the activity it deserves, which meant that we felt that that was the right level.
Makes a lot of sense. Thanks, Nick. Sticking on the corporate side, and it's always tough to comment on these types of questions, I understand. Just any comments on ongoing M&A activity? We're obviously seeing some in the industrial logistics space. Is there any opportunity here for SREI to scale in that way?
I hope we can. I think ultimately, matters relating to M&A are for the board, obviously with our advice, but they're not here to comment. I think what the board and we have said is we have a very clear strategy that is focused on driving higher earnings growth with the sustainability alignment, and it's working, right?
We're seeing an improvement in rating, and we are seeing, interestingly, an evolution in our shareholder base. No surprise is that we're targeting shareholders where that M&A is happening because we think some of those retail investors will have capital to reallocate. All of that is around delivering maximum returns for shareholders, improving the rating, which should, in time, in a rational world, improve the rating to a point where we start to have those options. M&A, as we've seen, and we've obviously spoken before about being asked to participate in processes, it can be a huge distraction. It can be hugely expensive. When our focus and the Board's focus for us is on delivering that business as usual, what I would say to conclude is, as you've heard today, we are typically getting more bang for our buck by owning, asset managing, repositioning bigger assets.
I think if we can get to a point where we're nearer to an EV, we have already been thinking about how would we do it, where would we deploy. We just got to keep cranking the handle and hope we get to that point.
Yeah, sure we will. Maybe just time for a final question, a bit more specific, but in a similar vein to the last question, just pointing out that Custodian REIT, just in a property transaction of swapping shares in the company for privately held property, is this again, are we exploring other ways of raising capital in similar ways?
Yeah, I mean, we have considered it. I think the REIT structure has the benefit of washing out capital gains within U.K. entities. There is an advantage there.
I mean, we've done it actually in the past with an asset acquisition via a corporate. I don't know very much about those numbers. I don't know, for example, how the seller sort of rationalized getting paper at a discount and what that meant for the pricing of the underlying assets. Certainly, in that case, the assets would be too small and granular for us. I don't know much more about those than just sort of the headlines we've all read. Again, getting behind the numbers of that deal, I think we will do to try and understand how they did get that to work. As a principle, absolutely.
Yep, makes sense. Then just finally, I realize I missed one of the last questions, and we do have four minutes left, so I will ask it.
Question here just about you showed on one of the slides the increased construction costs. Have you looked at how that, how does it look, SREI's portfolio in terms of fair value in comparison to its replacement or rebuild costs? Has the construction cost increase made a big difference to that?
Yeah, I mean, in various of our offices, I valued a material discount replacement cost. Even our industrials, if you want to comment.
Yeah, so it costs to build Stanley Green just for the construction costs around GBP 110 per sq ft, and that was a few years ago. Many of our multi-industrial estates are valued at less than GBP 100 per sq ft. Clearly, really supportive in terms of our valuations. In addition, if anyone does decide to build multi-industrials near us, the rents to justify that would be far in excess of what we're charging.
Actually, it would be quite helpful.
Yeah, makes a lot of sense. That is a good story to finish with. Thank you, everyone, for sending in your questions this morning. Thank you very much for joining us for the SREI annual results. You can hopefully now see a feedback form appearing on your screen. Please do give us feedback. We read it, and we massively appreciate it. That is all we have time for. Thanks for joining again, and speak to you all again soon. Goodbye. Thank you.