August 2012

By | 16th September 2012

Pan-European property shares rose modestly over what is traditionally the quietest month of the year. However, the shape of the month’s performance was more telling. The first week saw the continuation of the positive reaction (from 23 July) of investors to comments from Mario Draghi that the ECB would take steps to help peripheral sovereign bond markets. There then followed the lull in news through the rest of the month with share prices deflating on inactivity resulting in a total return of +0.44%. The Fund’s NAV rose +0.77% in the month and the share price rose 1.9%. Performance was driven by our overweights in the UK and France. These two countries, along with Norway (just one stock) were the only parts of Europe to register a positive return in the month.

As if to prove that markets remain driven by macro based sentiment, the announcement by the ECB on 6 September of their ‘unlimited’ bond buying (for those sovereigns willing to sign up to the attached conditions) ignited markets which had been drifting downwards for the previous three weeks. Our view is that such commitment by the central bank is clearly a positive, the real test will be whether there is the political will to subscribe to the required fiscal budgeting.

We remain focused on companies with high quality assets and appropriate gearing. Listed property companies, particularly the better resourced, continue to enjoy access to capital markets. British Land raised £400m of 2017 convertible bonds at a rate of 1.5%. The conversion premium was 31%. A great deal for the company and reflects their long duration income streams on quality assets. The marginal cost of debt continues to fall as property companies lock into lower rates.

Central London remains a rarity in European real estate, showing good rental growth across all subsectors. Derwent London’s results produced 2.8% rental growth in the first half and values rose 3.3%. Outstanding performances also came from Unite, the student housing specialist (+15.5%), St Modwen (+11.9%) and Quintain (+10.5%) all overweight positions in the Fund. Our underweight to the Swiss stocks, on valuation grounds, also helped with SPS falling -3.9% in the month. If the ECB’s strategy bears fruit we would expect to see these overpriced ‘defensive’ stocks weaken further.

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