August 2021

Pan European real estate equities returned a healthy 3.2% (in sterling) in what is traditionally the quietest month of the year, and the Trust’s net asset value rose slightly more at 3.3%. A tug of war continues between an abundant supply of liquidity (the ’there is no alternative’ mindset) and investor worries; this drives a lack of conviction around the macroeconomics. The Jackson Hole symposium provided little new information for market participants, and bond yields have demonstrated little volatility. For many parts of the real estate landscape, the outlook is favourable. Inflation is here and, whether you view it as temporary or persistent, you want to protect your earnings. For this reason, index-linked income or earnings which respond to economic growth are attractive.

In August, the top performing markets were Sweden (+5.7% in Swedish krona), the UK (+4.3% in sterling), and the Netherlands (4.3% in euros) the latter of which was driven by Unibail-Rodamco. Swedish property companies consistently maintain higher levels of leverage than other European listed real estate companies. Their continued collective outperformance reflects the fact that investors do not anticipate dramatic upward shifts in bond yields. The UK enjoyed strong performance from economically sensitive companies like Tritax Big box (+13.3%), Safestore (+9.4%), Workspace (+7.8%) and, London retail specialist, Shaftesbury (+8.9%). However, broader UK retail companies continued to struggle with falls from Hammerson (-1.8%) and NewRiver Retail (-6.8%), which depreciated after it announced the disposal of its pubs subsidiary at the lower end of the range. European retail also suffered, except for Unibail-Rodamco which rose +5.7%. Meanwhile, Eurocommercial (+1.2%) produced acceptable interim results with a positive outcome but that failed to excite investors.

German residential companies had a poor month; investors began to fret about a change in the direction of the polls with less than a month to the general election. The Social Democratic Party have overtaken the CDU/CSU. There is now a real possibility of a left of centre coalition, which could lead to more restrictions on rental growth. The fundamentals (of demand with weak supply) remain positive, and we are hopeful that the new chancellor will realise that restricting returns further will not deliver the new homes which are badly needed.

As people begin to head ‘back to school’ and ‘back to office’, we continue to see higher levels of office occupancy in cities with shorter commutes. The shortage of high grade, new office deals has, in many markets, resulted in high profile lettings at close to record rents. The weakness will be felt in secondary markets. But, with so many businesses preferring a hybrid approach of office and work from home, we feel that the rental correction for many of our companies with high quality portfolios will be limited.

Discrete rolling annual performance as at 30.09.2021 (%):