Schroders boss’s guide to green shoots

The latest results from Schroder REIT have given real estate players some longed-for good news, as fund manager and Schroders head of real estate investment Nick Montgomery welcomed what he called a “nascent recovery” for the market. “I think there’s a more realistic sense of cautious optimism looking to the end of this year and into next,” Montgomery told EG in an interview following the publication of the REIT’s accounts for the year to 31 March. Schroder REIT says ‘nascent recovery’ for real estate is here Highlighting the REIT’s portfolio valuation, Montgomery said there were signs of a turnaround in the fact that despite a 2.8% fall over the year, the most recent quarter saw values unchanged. That could mark a long-awaited turning point after an extended spell in which values have plunged even as rents have rocketed. “I can’t remember a period like it,” Montgomery said. “If you go back to 2022 and the correction and the mini-Budget, over that period [since], average values are down 25%. But average rents across all property are up about 7%. Average industrial rents are up about 13% and even offices are up 4%. And our portfolio has done better than that. “It’s striking that you’ve got this contrasting position between what capital markets are doing – principally driven by the risk re-rate – and what occupational markets are doing, which is driven more directly by underlying fundamentals and lack of supply.” He added: “Were it not for the capital market volatility and uncertainty, values would behave very differently. We are enjoying a period of rental growth which is meaningfully above average.” The shortage of supply when it comes to sustainable grade-A or repositioned grade-B office stock will continue to support that growth, Montgomery said. “If you’re in big cities – obviously London, where the Elizabeth Line is changing geography in a way we all knew it would but which is fantastic to see in practice, or Manchester city centre, or Edinburgh – there are [leasing] deals being done at headline rents that we haven’t seen before,” he said. “For active managers like us it creates the opportunity to work hard at improving grade-B assets to capture a meaningful part of that growth.” The potential that the asset value falls have now hit their lowest could now signal an improvement in the capital markets too.  “We need a catalyst to see a re-rating both of the listed market but also to see a meaningful pick up in transactional activity, and I do think we’re beginning to see more of that – there’s a lot more being discussed, both corporately and in the direct market,” Montgomery said. “We will see interest rates tick down, but actually we don’t need to see the return to anywhere near rates from the past few years to justify a decent return going forward. “Post-election, as we move towards the end of this year and into next, I’m increasingly confident that we’re going to see increased flows coming to the UK for real estate.” Main image © Micheile Henderson/Unsplash