August 2019

On the face of it, an encouragingly positive month for pan European real estate equities with the Trust’s benchmark returning +2.73%. Continental property shares steadily rose over the month (+3.5%) with a large number of outstanding individual performances (13 companies returned more than 10% in the month with just 2 from the UK). However, the UK was much more a rollercoaster with the group down -3.2% by the middle of the month before recovering to finish +2.3%. The culprit continues to be politics and the risk of a ‘no deal’ or hard Brexit initially drove investors away from UK domestic stocks. Real estate names are a disproportionately large constituent of any ‘Brexit basket’ given their almost entirely domestic earnings profile. The recovery in UK equities in the second half of the month surprised us but probably reflected the hard line which the new Prime Minister is taking with his critics and the EU. Some investors perceive an opportunity for an improved negotiation with the EU given the real risk of a ‘no deal’ exit. At the very least, markets sense an end to some of the unknowns with events moving quickly over September.

The outperformance of Swiss (10% in CHF) and Swedish (9.3% in SEK) property companies encapsulates the dichotomy facing investors. Swiss companies (and CHF) are safe havens and perform well in periods of ‘risk off’ whilst Sweden offers investors the most highly leveraged property companies. Investors were therefore responding to both (1) fear of a global slowdown but simultaneously (2) the expectation of further central bank largesse, ie the cost of money would fall even lower benefiting the cashflow of leveraged businesses with short duration debt – the definition of Swedish propco balance sheets !

Elsewhere retail continued to underperform lead by Intu falling -14.8% and a market cap of just £460m. Hammerson however saw some recovery adding 10.5% as investors focused on the sale of their largest Paris shopping centre and the appointment of more personnel focused on the disposal strategy. Continental retail names were also mixed with Unibail -1.6% whilst Mercialys recovered +6.4%. The former is likely to be excluded from the Stoxx50, a further damaging reflection of the share price performance post the ill-fated acquisition of Westfield.

The top performing stock was Catena (+20.8%), the Swedish logistics investor and developer. Our initial investment 2 years ago was at SEK 143.5 and the stock reached SEK 365. We have additional exposure to this company through CLS Holdings (2.3% of NAV) which owns 11% of Catena. In the first week of September, CLS placed their holding at SEK 340, netting £115m swelling their war chest for further acquisitions.

The German residential names continued to be in the doldrums as investors awaited the detail of the draft law published by the Berlin Senate published on 2^nd September. We remain underweight to Berlin versus the benchmark but our large position in Phoenix Spree (-4.8%) was a drag on performance. ADO Properties, the other small cap berlin specialist also fell -4.2%. We are not holders. Meanwhile German commercial property values remain robust regardless of the slowdown in the economy with Aroundtown (+4.6%), Alstria (+3%), TLG (+2.8%) and Sirius, our largest holding returning +4.6%.

At our largest property, the Colonnades in Bayswater, marketing has commenced on the unique 3 bedroom apartment created out of the upper parts of the old public house.

The Trust’s net asset value rose +2.67% in the month just slightly below the benchmark return of +2.73%. The share price return was +1.7% as the discount moved out slightly.

Discrete rolling annual performance as at 30.08.2019 (%):