April 2019

By | 15th May 2019

Pan-European real estate equities drifted sideways in April, returning a slightly weak -1.2% over the month. This stood in stark contrast to the strong performance in March (+4.8%), which took the first quarter’s total return to 9%. The Trust’s net asset value (NAV) fell less than the benchmark, at -0.36%, leading to 84 basis points (bps) of relative outperformance. The share price was even stronger, returning +1.6% in the first month of the new financial year.

Equities, particularly cyclical stocks, broadly had a solid month on the back of improved Purchasing Managers’ Index/Institute for Supply Management data, renewed optimism towards aspects of the US-China trade negotiations, and a decent set of first-quarter results. The potential for improvements in the economy enabled some improvement in bond yields, with the 10-year bund yield lifting from its 27 March low of -0.08% (a negative figure) to a still-anaemic +0.1% at the end of April. This move, coupled with concerns around the populist backlash against rising rents (particularly in Berlin), meant that German residential companies were the weakest subsector in April. The EPRA Germany index fell -4.7%, with the two largest Berlin-focused residential businesses falling the most. Deutsche Wohnen fell by -7.3% and ADO Properties by -7.6%. The London-listed company Phoenix Spree (1.4% of the Trust’s NAV) performed slightly better, falling -3.1%. We note that the populist referendum initiative to ‘expropriate’ landlords in the German capital with more than 3,000 dwellings would technically not apply to Phoenix Spree, which owns fewer flats.

Investors now need to balance March’s message from the European Central Bank (ECB) of renewed dovish behaviour (and the commensurate expectation that the next rate hike in Europe will now be over two years away) with some improved economic datapoints, and then assess whether or not this is a more solid trend. This is tricky to balance.

Among property stocks, UK companies fared better than their Continental counterparts, rising 0.9%, collectively. Unite (4% of NAV), our student accommodation exposure, rose 4.8% on valuation improvements in its joint ventures. Safestore (2.6% of NAV) enjoyed a strong run, gaining +8%. The self-storage sector is among the most sensitive to changes in short-term economic conditions (after hotels). The sector continues to attract a broad range of investors who do not necessarily view the sector as real estate, but more as operating businesses.

Retail holdings (particularly in the UK) continued to suffer from the announcement of the Debenhams CVA and the press noise about the likelihood of a similar event for the Arcadia Group. Intu fell -11.5% (we had no exposure), Hammerson was down by -4.1% (we held a market-weight position), and Capital & Regional lost -3.3% (it accounts for 0.4% of NAV). The one bright spot in the retail firmament was Supermarket Income REIT (1.2% of NAV), which raised £45m at a 5% premium to asset value at the end of March. The share price rose +0.5% in April.

Logistics/industrial companies were the other side of that particular coin, with Tritax Big Box REIT up +3.5%, LondonMetric Property gaining +1.3%, and Mucklow pleasingly rising by +7.3%. The latter company is a new position for the Trust. It is a family-controlled, West-Midlands-based industrial developer / owner in which we had the opportunity to acquire a reasonably sized holding (it is thinly traded) at an average price of 510p.The stock finished April at 547p; we had cleared the selling interest.

European retail companies fared better, with Unibail-Rodamco-Westfield recovering +4.9% following the announcement of the sale of Majunga, a new office tower in Paris, for €850m. This is an important element of the company’s enlarged asset-disposal programme announced with its results. Even when this month’s rally is included, the stock still made a total return of -17.5% over the last 12 months, as investors awaited more news on the strategy of the US portfolio.

Green REIT (2% of NAV) returned +13% in April, after the board announced its intention to initiate a process for the sale of the company or its portfolio of assets owing to ‘the structural discount in the Company’s share price relative to its NAV’. The share price has struggled to reflect the positive dynamics in the Dublin office and industrial markets, and we welcome this decision, given the relatively mature stage of the commercial property cycle in Ireland.

The Trust’s full-year results and the Board’s final dividend recommendation will be announced on 24 May.

Discrete rolling annual performance as at 30.04.2019 (%):

Share Price23.222.2715.39