December 2014

By | 16th January 2015

A volatile end to what has been a strong year for European property equities. The month was another tale of two halves with the benchmark falling -3.7% to the 15th halfway mark, only to rebound strongly +4.2% in the second half. With low volumes over the holiday period the year ended on a slightly weaker note and the month’s total return was -0.73%. More importantly the sector outperformed the broader Stoxx 600 Index not only in December (the broader index suffered a – 6.8% intra month peak – trough) but also over the year. The Stoxx 600 returned just 7.8% versus 16.6% for the real estate sector as measured by the fund’s benchmark. Broad European equities experienced greater volatility with 7 intra-month market corrections greater than 4%. We expect 2015 to be challenging in terms of further sharp drawdowns and rebounds in sentiment. Investors appear fixated with the hope that QE will buy time and support asset reflation. However we believe that QE cannot be a substitute for the overdue structural reforms in an anaemic growth environment in Europe. Income yielding real assets such as property will benefit from further reduction in both the price of risk and the lack of attractive alternatives in the skinny income returns from fixed income assets. We continue to seek out those pockets of real rental growth created by the lack of new development across Europe.

The fund’s total return in December was -0.23% resulting in relative outperformance of 50bps in the month. Our performance was aided by the overweight to Germany (+4.2%) the strongest performing country in the month. Deutsche Annington launched a take-over bid on Gagfah. The combined entity will be the largest German residential landlord with 350,000 flats valued at €21bn. The fund had overweight positions in both Annington (+8.6%) and Gagfah (+19.3%). The other strong performer in Germany was TLG. This company owns a mixed portfolio primarily focused on retail units let to discount food retailers. The stock has risen 25% since its IPO in October 2014. The fund sold its position (bought at IPO) in the month. Swedish property stocks also performed well (+6.1% in local currency) as investors predicted yield compression would be a consequence of the Riksbank’s latest cut in the base rate. These businesses are amongst the most leveraged in our universe and modest underlying valuation movements are magnified in net asset values. In the Netherlands, Wereldhave completed its 8 for 13 deeply discounted rights issue raising €550m to pay for the six French shopping centres acquired from Unibail. The stock was +3.9% in December and returned +21% in the year as it continues its transformation into a retail focused property company.

The Trust went ‘ex’ the interim dividend of 2.95p (an increase of 3.4% on the previous year) on 4th December. It was paid on 6th January. Over calendar 2014, the benchmark return was +16.9% and the fund’s total return was +23.4%. The share price total return (assuming dividend reinvestment) was 29.3%.

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