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Pan-European real estate equities drifted sideways in April, returning a slightly weak -1.2% over the month. This stood in stark contrast to the strong performance in March (+4.8%), which took the first quarter’s total return to 9%. The Trust’s net asset value (NAV) fell less than the benchmark, at -0.36%, leading to 84 basis points (bps) of relative outperformance. The share price was even stronger, returning +1.6% in the first month of the new financial year.

Pan European real estate equities enjoyed a strong performance in March with the benchmark index rising 4.8% which more than compensated for the weakness in February. Adding in the strength in January the sector enjoyed a Q1 total return of 9%, its fastest quarterly growth since Q1, 2015. The Trust also enjoyed a strong performance returning 5.4% in March and this brought the full year total return to 9.1% versus the benchmark of 5.6% and relative outperformance, net of fees, of 344bps for the year. The share price total return was 6.2% over the 12 months.

After the stunning rally in January during which the benchmark rose 7.2%, February saw a steady reversal of the start-of-year euphoria. The benchmark corrected by -3.0% and managed only seven positive trading days in the month. However, much of this downward movement evaporates when you look at stock performance in local-currency terms. When viewed in euros, the benchmark fell just -1.2%. Sterling strengthened +1.8% during the month, bringing the year-to-date figure for sterling/euro to +4.8%. Currency markets appear to be pricing in a reduced risk of a ‘no deal’ or hard Brexit. As a reminder, the Trust’s currency exposure is managed in line with that of the benchmark by using forward contracts. This means that the manager’s stock-selection process is not driven by expectations of currency movements. The process also ensures consistency in the currency exposure, regardless of the underlying stock positioning. The net asset value (NAV) fell -2.3% over the month, delivering +76bps of relative outperformance. The share-price correction was even more modest, at -1.6%.

After the correction in late 2018, which totalled -11.2% for pan European real estate equities between September and December (as measured by the Trust’s benchmark FTSE EPRA/NAREIT Developed Europe net total return Index (in sterling), January saw a stunning reversal, with the index rising 7.2%. Every company in our universe made a positive return over the month. Viewed in euro terms, the return was even greater, at 10.3%. We would have to look back to the announcement of quantitative easing by the European Central Bank in 2015 to find a period of similar performance in the last decade. The recovery was driven by a mix of improving macroeconomic sentiment (US/Sino trade discussion, the increased likelihood of a soft Brexit) and the increased attractiveness of the sector, particularly relative to other assets. Another important factor was the renewed dovish commentary from central banks. Expectations of rate rises in Europe were pushed back even further, and the 10-year bund yield tightened from 0.24% to 0.15% as the German economy registered its second quarter of slowing growth. In essence, bad news (slower growth) appears to be (relatively) good news as far as income-sensitive assets such as real estate are concerned.

Global equity markets had a rollercoaster ride in December. Investors were buffeted by macroeconomic concerns coupled with weakening global growth data towards the Christmas break. This concoction culminated in dramatic price movements exacerbated by reduced trading volumes in the holiday period. Real estate equities were no exception, and while the benchmark closed down 3.8% for the month, we saw an intra-month correction of -5.3% between 12 and 27 December. However, the sector outperformed broader European equities, with the STOXX Europe 600 down 5.4%, bringing the 2018 performance down to -10.2%, its worst annual performance since the global financial crisis.

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