December 2018

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.

Regarding the property benchmark, it is interesting to note that in local currency terms, the UK (-3.8%) outperformed Continental Europe (-5.1%), as the latter grappled with a number of issues, including concerns over President Macron’s decision to bust EU budget constraints as he sought to appease domestic protestors. Eurozone stocks were significant underperformers, with Sweden (+1.0%) and Norway (+1.9%) producing positive returns in local currency terms. Swedish property companies posted a huge 14.3% total return for 2018, fuelled by solid economic growth and strong real estate rental fundamentals and yet a relatively benign normalisation of the interest rate cycle. The outstanding performer was Catena, a small logistics investor/developer, which returned 44.7%, boosted by its entry into the benchmark index. The Trust owns 1.3% of the company directly but also indirectly (as CLS owns 10.6%, and the Trust has 3.5% of CLS). 

The largest Pan-European company and the Trust’s largest single holding, Vonovia, steadily continued its expansion outside of Germany with the acquisition of 2,300 affordable residential units in Sweden, for a total amount of circa 4.7bn krona (€450m). In our view, this highlights the attractiveness of the sub-sector, where substantial value can be captured through large scale renovations of buildings primarily built in the ’60 and ‘70s, currently held at low capital values and leased at affordable rents. However, share prices in the German residential sector, which have been highly correlated to long dated (eg.10-year) bund yields experienced a dramatic decoupling, with the bund yield falling (and prices rising) while property names fell dramatically; our largest relative exposure, LEG, fell 10.3% in December. There has been significant recovery in the first week of January across this sector, with LEG rising 4.5% (as of 7 January 2019). We believe it unwise to draw firm conclusions from the performance of stocks in the last week of the year given the heightened volatility. The performance of LEG over this period is a case in point.

Retail stocks across Europe and the UK continued to underperform, and so our underweight to European names was a positive contributor to relative performance. In the UK, our largest relative position in the sector remains Supermarket Income REIT, which was the only retail stock to have a positive total return in 2018, albeit a modest 0.3%. In contrast, the only other overweight position was Capital & Regional (0.5% overweight) which returned -46.5% in 2018 and is now the smallest UK stock in the benchmark, with a market cap of £152m. We remain confident that local shopping will withstand the competitive pressures of online alternatives where it is priced appropriately. The stock is now trading at a 50% discount to our estimate of fiscal year 2018 asset value and is a hold on valuation grounds. Hammerson (-14.7%) was the worst performer in the UK sector; investors continued to view the last independent valuer’s appraisal adjustment as too modest, particularly in relation to their retail warehouse portfolio, which is currently being marketed for sale.

While the Trust’s year end is in March, many investors like to know the calendar-year end results. The net asset value total return was -5.2%, while the benchmark fell -7.4% and the share price total return was -7.8%. The monthly performance in December was in line with the benchmark.

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Discrete performance as at 31.12.2018 (%):