August 2015

By | 16th September 2015

Given the dramatic events in global stock markets during the second half of August it is pleasing to report that our benchmark fell just – 0.6% over the month. The benchmark is sterling denominated and with over 50% of our exposure in non-sterling assets, the strengthening of the euro late in the month helped performance. In euro terms the benchmark fell -3.4%. As a reminder, the fund’s currency exposure is always aligned with the benchmark exposure regardless of the underlying stock positioning and this ensures that relative performance is not impacted by currency movements. Whether viewed in sterling or euros, real estate equities were remarkably resilient when compared with broader European equities with the FTSE100 down -6.7% and EuroStoxx600 down -8.2%. Why? We think the sector continues to offer domestic focused income with many markets exhibiting sound fundamentals for rental growth coupled with sustainable earnings aided by lower debt costs. Short term rates in the eurozone are not rising and quantitative easing (QE) may get extended. In the UK where rental growth is now apparent across most office and industrial sector nationwide (but with retail the structural weakling) rates may rise but it is going to be modest.

Across Europe, Germany and Austria were the strongest performers, +1.9% and +2.7% with performance dominated by the residential stocks and in particular Deutsche Wohnen (+4.1%) and Deutsche Annington (+2.8%). In the case of the latter it is partly technical buying in anticipation of Deutsche Annington (now renamed Vonovia) entering the DAX in mid-September. We also feel that investors appreciate the resilience of the income stream from these large residential landlords who also continue to drive rental growth of 2- 2.5% per annum. In the UK, the top performers were the healthcare companies such as Primary Health Property (+0.9%) and higher yielding, quarterly dividend payers such as Tritax (+0.5%). Amongst the larger names Great Portland (-0.5%) and Derwent London (- 0.7%) the Central London specialists performed well following upbeat H1 reports.

With the H1 reporting season now complete (for those with Dec year ends), the broad message was both a mixture of further yield compression (particularly on the Continent) and rental growth (focused in the UK but not in the larger retail names). Businesses such as TLG (diversified German assets) which benefited from both yield compression and enhanced earnings (from lower debt costs) were well rewarded (+3.7% in the month).

The fund’s NAV fell -0.48% narrowly outperforming the benchmark, which was pleasing given that we remain positive (at the fundamental level) and therefore the Trust had some limited gearing (around 7% when adjusted for the direct property exposure) throughout this turbulent time.

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