August 2020

Pan European real estate equities rose +1.49% (when measured in GBP) with the Trust’s NAV +2.15%. The share price rose an encouraging +5.4% as the discount tightened towards 10%. The month was characterised by a continuation of the theme of the top performing sectors (industrial/logistics, residential, long income) keeping on winning and weakened sectors (retail, hospitality, short income) falling further. The most prominent casualty was Unibail Rodamco which fell -12% as short sellers were emboldened by the (so far unfounded) rumour of an equity raise. The problem for URW is partly one of size, if it does need to raise then it requires several billion euros. The second issue is that the problems in the US portfolio will be harder to resolve. This is amplified by a newly configured management team following the departure of previous (Westfield) management. However, the poorest performance in the month goes to Hammerson (-24.5%) as investors were presented with the details of a £525m emergency deeply discounted rights issue alongside the disposal of its 50% share in the VIA Outlets to its JV partner for c.£275m. The wilful ignoring of clear market trends and the siren call of (short lived) earnings enhancement through increased (cheap) leverage ensured the mass destruction of shareholders’ equity firstly at Intu and now at Hammerson. Across Europe, retail names fared poorly with Mercialys (-16%) as the major shareholder, Casino, tries to reduce its holding. The only bright spot was Vastned (+14%) but that looks short lived with the largest shareholder (a private investor) demanding managerial change which we don’t agree with.

On a more positive note, our residential exposure particularly in Germany enjoyed solid returns with Vonovia (+8.7%), LEG (+7.3%) and TAG (+12.7%). Our preferred Berlin exposure, Phoenix Spree rose 5.2% on the back of an increasing expectation that the Berlin State’s unilateral decision to freeze rents will be deemed unconstitutional by Germany’s Supreme Court. Our supermarket exposure also helped performance with our newest holding CIBUS rising 9% on solid figures and an intention to move to monthly dividends fuelling local private investor interest.

As we move into the autumn from the holiday period, a key battleground (in terms of divergence of opinion) is the office sector. There is no dispute over the direction of short term travel (ie more flexibility in work location), the issue is the scale , timing and regional divergence. London continues to be most impacted (lowest office utilisation rates in Europe) coupled with the poor messaging from HM Government. Our European office names are seeing a range of utilisation rates but all significantly higher than London. This is no surprise given that London office workers have the longest average commute of all European workers. We remain over exposed to regional offices in the UK through McKay, CLS Holdings (a pleasing new entrant into EPRA) and Picton Property (+4.8%).

Income remains the crucial driver of investor demand and the portfolio remains focused on companies where we are confident of dividend and payout ratios.

Discrete rolling annual performance as at 28.08.2020 (%):