Real estate equities across the globe had a torrid August on both an absolute and relative basis. Interestingly, European property companies were amongst the better performers (compared to the US and Asian stocks) but were still down -5.6% (as measured by the Trust’s benchmark – FTSE EPRA / NAREIT Developed Europe TR Index in GBP). Investors continued to fret about the impact of rising long term rates across the globe sucked up by the rising momentum in US Treasuries. Our view is that European central bankers will do their utmost to keep short rates as low as possible for as long as feasible. Whilst PMI data (in the UK in particular) is improving across manufacturing and services, it is the employment data which the BoE is focused on (as its preferred definition of spare capacity) and we await more conclusive evidence that this is improving at a pace which will bring forward our expected timing of short rates hikes.
The fund’s NAV fell -5.0% in the month, 60 bps less than the benchmark. This relative outperformance was driven by our overweight positions in Germany and our positioning in the UK. However our gearing (at 13%) clearly did not help – but it should be noted that our physical assets (c.8% of NAV) are ungeared and therefore our ‘see-through’ gearing is broadly in line with the benchmark’s. Performance was therefore driven by our bottom up positioning and here we were helped by having no holding in Capital & Counties (-11.8%) and Intu (-9.1%). Investors remain concerned about the lack of real (as opposed to nominal) wage growth in the UK and whilst the warm weather helped recent retail sales we believe that retailers continue to face structural headwinds. Industrial owners were in vogue with Hansteen’s (+4.5%) performance aided by their announcement that they have taken control of the Ashtenne Industrial Fund (previously owner/managed by Warner). Ashtenne was the Hansteen management team’s previous vehicle (sold to Warner in 2006) – ‘what goes around comes around’. Swiss property stocks which had failed to outperform the pan European property equity market in the initial ‘tapering talk’ sell off (mid May to late June) did so in August falling just -0.7% (in local currency), reinstating their previous safe haven status.
A significant new position in the month was the acquisition of £5m of New River Retail CULS (Convertible Unsecured Loan Stock) December 2015. The strike price is 259p and the share price was 242p. The yield to redemption is 4.7% (in the event that conversion does not happen before that date). We are attracted by the underpinning income and at 103p (per 100p) the premium was modest affording a high level of capital protection whilst retaining the opportunity to participate in the equity growth story in due course.