April 2015

By | 16th May 2015

Pan European property equities fell -1.2% as measured by the benchmark, FTSE EPRA/NAREIT Developed Europe TR Net in sterling terms. The weakness was focused in the eurozone with those stocks collectively falling -2.5% whilst the UK returned +0.2%. The drivers of this weaker sentiment continues to be macro based rather than concerns about the underlying property markets – which in most cases are showing varying degrees of improvement. Rather ironically it appears that the weakness in share prices may have been driven by an expectation of an improvement in eurozone economic data points. The speed of the decline in the euro has certainly helped European exports and will ultimately import inflation as well. All of this helps the ECB towards its fight to avoid deflation. With deflation seen as less likely, yields on sovereign bonds have risen. With bond yields so low, small increases in yield move values significantly. The 10 year Bund yield moves from 0.1% to 0.5% contributed to the -3% decline in German property company prices as that sector is dominated by residential businesses which have had a very high correlation to Bunds over the last year. They are large, liquid stocks offering a pure domestic German focus with a highly granular tenant base paying affordable rents – the income whilst not AAA is very high quality. These businesses have benefited hugely from lowering their cost of debt as bond yields have tumbled.

The Greek situation also rumbles on in the background. Whilst its share of European GDP is very modest, the melodrama continues to remind investors of the deep flaws within the European Union’s structure and the difficulty of a single currency and base rate overlaying multiple sovereign fiscal bodies. Greek property names fell -5.8%. At the same time, there are clear signs of self-help and the Spanish economy appears to be making clear headway. International investors have been active buyers of commercial and leisure assets, driving yields down and prices up. Spanish property stocks rose +3.5% in April with Merlin Properties raising €617m in a discounted rights issue to expand its portfolio by over €1bn.

The UK underperformed Continental Europe during the first quarter as the ECB’s QE programme drove bond yields even lower. However, April saw the UK stocks end the month where they began, even in the face of election uncertainties. One significant outperformer was Unite Group (+4%) this specialist in student accommodation has been a long term favourite. We participated in the 10% overnight placing which raised an additional £115m for expansion.

The net asset value 0.99% in the month, resulting in +23bps of relative performance in the month. The full year results and the final dividend will be published on 27th May.

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