December 2015

By | 16th January 2016

Pan European property shares held up well as the year ended, with the Trust’s benchmark returning 1.4% in GBP terms in December. However the weakening of GBP versus EUR (a theme throughout the month) resulted in a negative return of -3.4% when viewed in EUR terms. December’s performance is always subject to the lighter volumes (and hence greater volatility) associated with the holiday season and so it makes sense to review the whole year alongside the month. Property equities had another good year, particularly when viewed against the broader market. The benchmark rose 12.2% when viewed in GBP and a tremendous 18.1% in EUR (due to EUR weakness earlier in the year). This compares to -2.5% for the All Share (in GBP) and +8.8% from the Euro Stoxx 600 (in EUR). Property equities have continued to benefit from the loose monetary stance of the ECB and further falls in the cost of capital engineered by more QE (in the Eurozone). Allied to this, and in the face of clear global growth uncertainties, the attraction of steady recurring earnings which are locally focused against a positive backdrop of little new supply of commercial space in most markets continues to be attractive.

The regional star performers of 2015 were Sweden (+24.5% in SEK) and Spain (+23.8%). The Riksbank remain determined to keep overnight rates negative and maintain pressure on their currency even whilst house prices reach all time highs. Local banks have also been accommodative with lending to property businesses on ever tightening margins. Spain was the focus of capital raisings in 2014 and again in 2015 and this deployment of capital in competition with private equity and leveraged buyers has driven down yields faster than we expected.

The three top performers in the year were two Swedish businesses Balder (+89.3%) which benefited from the floatation of a subsidiary, Collector as well as residential price growth and Pandox which has risen 41% since IPO in June together with Merlin in Spain (+44%). The fund participated in the IPO of Pandox and has held an overweight position in Balder for several years. Whilst we participated in the various rights issues in Merlin we have been underweight this business as we continue to worry about the pace of rental growth following such a sharp fall in yields.

The fund’s NAV rose 1.15% in the month underperforming the benchmark by 25bps. Whilst the fund’s financial year end is March the calendar year performance saw the NAV grow by 16.9%, 473 bps ahead of the benchmark.

January has opened considerably weaker across all markets and property equities have been no exception. However it is worthy of note that our benchmark is broadly flat YTD (8th Jan) whilst the All Share has fallen -4.9% and the Euro Stoxx 600 is down -6.2%.

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