December 2017

By | 22nd January 2018

The last month of 2017 has turned out to be very positive for pan European real estate equities with the benchmark (in GBP) rising by 4.98% fuelled particularly by the very strong performance in the UK where stocks collectively rose 8.2%.

The UK had seriously underperformed its Continental counterparts prior to December as investors worried about the pace and outcome of the first phase of the Brexit negotiations, the slowing pace of economic growth and the weakening London economy (particularly falling house prices and slowing job creation. The strong performance in December was broad based reflected the relief that the Brexit negotiations were moving onto the next level (trade) but also that the gloomiest predictions of office leasing take up have proved unfounded with a swathe of deals announced across many sub-markets in the capital. This led to monthly rallies in excess of 11% in both Derwent London and Great Portland. However the strong performance came from 2017’s serial underperforming sector – retail – with the announcement of an agreed all paper merger between Intu and Hammerson with the combined entity’s board controlled by Hammerson and their management as CEO and CFO. Based on the Hammerson share price the deal reflects a 37% discount to Intu’s June 2017 NAV (we also expect the December valuation to fall). Intu’s share price rose 28.7% in the month.

Much like buses, M&A in the sector comes along in quick succession. A week later Unibail announced the acquisition of Westfield in a 65% paper, 35% cash transaction creating a €61bn portfolio of US and European assets. The implied cap rate for the Westfield assets is 4.3% and whilst the deal will be only modestly accretive and requires €3bn of sales by Unibail we believe it is strategically intelligent. Retail landlords are bulking up to help withstand the ongoing challenges of multi-channel retailing.

The final transaction was the announcement of Vovonia’s agreed cash bid for Buwog, the Austrian listed owner/developer who has over half its portfolio in Germany. Funded by debt, the market appears quite sanguine about the increased LTV at which Vonovia will trade and we are pleased as Buwog (+19% in the month) was an overweight position in the fund. Vonovia are clearly the sector consolidator having chalked up 3 transactions of over €1bn each in the last 4 years. At €29.05 per share the price reflects a 23% premium to the last NAV but financed by €3.7bn of cheap debt the acquisition will be earnings accretive.

The Trust’s NAV rose +5.46% in the month outperforming the benchmark by 49 bps with gains driven not only by our overweight to Buwog but strong performance from a number of overweight UK names including Great Portland, CLS, Land Securities and Segro. We also completed the sale of our two smallest properties to different parties. Our industrial building in Plymouth at £4.29m, slightly ahead of valuation and Beacon House, Wimbledon at £5.8m, 10% ahead of valuation.

The fund’s 12 month performance saw the NAV grow by 23.18% whilst the benchmark rose 17.04%. The share price total return was +37.29% reflecting a tightening in the discount to the NAV at which the shares trade.

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