Pan European property equities had a torrid month with our benchmark, FTSE EPRA Nareit Developed Europe (total returns, in sterling terms) falling -6.1%. Continental Europe fared even worse, returning -7.7% (in euro terms). The Trust’s net asset value total return was slightly better, falling -5.3% and the share price fell 3%.
Equity investors continue to focus on rising bond yields and the impact of this on property capitalisation rates. We still believe that the index-linked nature of much of our earnings is a significant protection mechanism in these inflationary times. Importantly, we see very little new speculative development coming through, given both the disruption to development during the pandemic and the subsequent price appreciation in many construction materials. The combination of supply chain disruption and tight labour markets is, clearly, causing significant supply driven inflation. Investors are now pricing in a more hawkish response from the central banks. Therefore, it is no surprise that Swedish property companies, the most leveraged in our universe, collectively had one of their worst months on record and fell -15.9%. This brings their year-to-date performance to -26.1%. We remain underweight to the region, and this positioning was the major driver of relative performance during the month.
German residential companies also had a poor month (falling around -10%) with lazy thinking seeing them only in terms of being bond proxies. We remain attracted to the security of income from sub-market rents coupled with equity valuations, which are well below rebuild costs.
Given the market turmoil, it is not a surprise that the traditional safe haven of Switzerland continued to attract investors. Switzerland was the only country to generate a positive performance over the month, returning +1.4% (in Swiss Francs). Since the beginning of March, we have added significantly to our position in Swiss Prime Site.
Merlin Properties, our largest Spanish holding at 3.2% of assets, announced the successful sale of their high street bank branch portfolio for €2bn. The net proceeds will allow them to accelerate their strategic shift away from retail property. The stock returned -1.6% during the month and, while a negative return is never good news, it was a strong relative outperformer as investors took the news positively.
Our UK portfolio saw a huge range of returns during the month. Our secure, long income real estate investment trusts (REITs) such as Secure Income REIT (-3.8%) and LXi (+0.1%), and our industrial companies such as Industrials REIT (+1.5%) and Segro (-0.2%), performed relatively well. Our small cap holdings such as Picton (+3.4%), which announced a raft of positive lease renewals and lettings, also performed well.
The sector’s performance deteriorated faster towards the end of the month as investors saw central banks demonstrating an even more hawkish tone than previously suspected. Markets began to price in the likelihood of an economic slowdown, accompanied by rising base rates as central banks attempt to reduce the risk of an inflation/wage increase spiral. The consequence will be slowing economic growth and falling corporate earnings. We will maintain our focus on the strongest companies both in terms of cashflow and sustainable leverage.
The full results for the year to March 2022 will be published on 1st June and will include the announcement of the final dividend.
Discrete rolling annual performance as at 31.10.2022 (%):
not be considered a guide to future performance. All fund performance data is net of all fees