April 2014

By | 16th May 2014

European real estate stocks enjoyed a positive month with the Trust’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return (in GBP) rising 2.3%. Not only did property shares outperform the broader European market, as measured by the Stoxx 600 (+1.6%) but also for the second month in a row Eurozone property shares (+3.0%) outperformed the UK (+1.8%). This is clearly a short data series to be commenting on but it is important given the huge outperformance of the UK over Continental Europe in the previous two years. Peripheral Eurozone sovereign bonds are rapidly heading back to pre-crisis lows and the margins over Bunds are already testing the record books. Why? It appears that investors are increasingly confident that the ECB will introduce some form of unorthodox additional monetary stimulus (negative overnight rates, QE) to help combat the growing risk of deflation. For leveraged risk assets such as property this is seen as positive and helps counter concerns that average indexation across the Eurozone (on which rents are based) is likely to fall to c.1% over the next year. This low indexation figure is compounded by the strength of EUR which reduces import costs.

France was the strongest regional performer (+4.5%) and reflects the fact that it contains the largest number of stocks with the greatest liquidity. Investors want fast exposure to Eurozone property stocks and the French names are the most liquid group alongside Unibail (now a Dutch listed company) which rose +3.2% in the month. The other regional top performers were Austria and Finland, both +6.0% as investors were calmed by Putin’s slightly less aggressive stance towards Ukraine. Again, markets have been responding to short term macro drivers.

At the stock level, performance in April is often skewed by stocks going ex dividend. Most Continental property companies pay a single annual dividend rather than splitting it into two or even quarterly payments (as the largest UK REITs do). Investors requiring income will hold the stocks until the dividend date but there is often price weakness post the ex dates. For example, Corio’s total return was +8.1% but the dividend return alone was +6.4%.

The Sweden property companies (in SEK) rose +3.7% but just +1.9% in GBP. The expectation remains that the Riksbank may well cut rates from 0.75% to 0.5% during the summer as all central banks compete to keep their currencies as weak as possible. Swedish property companies have strongly outperformed as they tend to have greater leverage than their Eurozone cousins and April was no exception. They also benefit from 4 out of 10 names delivering dividends in the month. We participated in the IPO of a small Stockholm focused residential refurbishment specialist. D Carnegie raised SEK 600m (£55m) at 39 SEK per share. The share price ended the month at SEK 47.9 per share. The issue was heavily oversubscribed and the fund owns 1% of the company.

The NAV for the Trust rose +2.27% virtually in line with the benchmark whilst the share price only rose +0.65%. Within the direct property portfolio, contracts were exchanged for the sale of the office building in Vauxhall. The price agreed was in excess of the March 2014 independent valuation and completion will be in late May. At the Colonnades, the agreement for lease for their new store has been signed with Waitrose.

On 28th May the Board will announce the preliminary results for the full year to 31st March as well as declare the final dividend which is payable in August.

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