December 2016

By | 16th January 2017

Pan European real estate equities (in GBP) rose 5.6% in December almost recovering the 6.3% loss in November. These dramatic price movements over a short period are driven by macro concerns / expectations as opposed to property fundamentals. The weakness in property shares which started after the summer and accelerated through October and November, dramatically reversed in December.

Whilst real estate has been viewed by many as a bond proxy, there may be a sneaking realisation that although bond yields are rising they remain not only low by any historic standards but also that the ECB intends to remain accommodative (albeit with monthly buybacks dropping to €60bn per month). With ‘reflation’ on many observers’ lips, we highlight that property remains a pro-cyclical asset class and the consensus expectations in earnings and dividend growth into 2017 and beyond is testament to this.

However, we cannot avoid the observation that the correlation between bond pricing and real estate equity pricing remains elevated with the 10 yr Bund falling 8bps (from 0.3% to 0.22%) and German residential names rising between 3 and 5% in the month. We note that they have collectively fallen in value in every calendar month since August as bond yields rose.

The Italian referendum result appeared priced in with Beni Stabili up 8.6% in the month. This was clearly a strong correction but well behind the broader Italian index,(MIB) rose +13.5%. Our exposure to Italy is through Fonciere des Regions (FdR), the French listed mini-conglomerate which owns 50% of Beni Stabili. FdR rose 11.9% in December.

The Spanish property companies continued to perform well, particularly Merlin (+8.6%) who post the month end announced the divestment of their hotel portfolio to Fonciere des Murs, a subsidiary of FdR. Further positive employment data encourages us to remain overweight Spanish real estate however our focus is through Hispania (mainly hotels).

Sweden was a poorer (relative) performer with an increasing concern that the Riksbank cannot remain as accommodative as they have been given the rate of economic growth. Finnish stocks performed well, possibly due to the expectation of improving economic conditions in Russia given the likely stabilisation in the oil price following the latest OPEC agreement.

In the UK, we saw strong recovery in all London-centric names. Even after double digit positive performance in the month, Derwent London and Great Portland still rank as very poor performers in 2016 returning -23.3% and -18.1% respectively.

The Trust’s NAV rose 5.7% in December slightly ahead of the benchmark but the share price rose just 4.3% resulting in the discount widening to 12.5%.

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