December 2020

By | 15th January 2021

December brought a positive end to a difficult year for Pan-European real estate. The Trust’s benchmark recorded growth of +3.7% (GBP) over the month, but finished the calendar year with a total return of -5.7%. Given that over the first quarter of 2020 the benchmark had a total return of -22.7%, the last nine months have brought a period of strong recovery. Encouragingly, financial markets appear to be performing better than expected given the current, weak, economic conditions. Current market performance may seem overly optimistic, but with a huge amount of support from central bank stimulus and deeply negative real rates on many income-generating assets, there is little alternative. We continue to believe that the right real assets will perform well in the post-vaccine environment we expect in the second half of 2021.

The real estate sector was not without festive cheer. In Scandinavia, the battle for Entra (+9.2%), Norway’s largest office real estate investment trust (REIT), saw increased bids from both Castellum (-1.6%) and SBBB (-1.2%). These revised offers (part cash) reflect a price of 185-190 Norwegian Krone. The current share price of 194 is pricing in further activity with no current firm Board recommendation. The announcement that the CEO (and major shareholder) of Klövern had resigned and was planning to become the chairman of Castellum certainly had some Anglo-Saxon corporate governance teams scratching their heads. The trust does not own Klövern, and the press reported that some members of Castellum’s Election Committee have expressed their displeasure at the announcement.

More informatively, the sector has seen strong investment activity, and a swathe of companies have reported asset sales as they seek to reduce debts in an environment of strong demand. Mercialys, the indebted, food-anchored retail investor, sold three supermarkets and two hypermarkets along with a more complex partial sale of interests in two further centres that totalled €120m. Covivio (+10%) announced the sale of two Milan offices for €137m, while British Land confirmed the sale of a 75% interest in three Marylebone offices for £401m to Allianz. In all instances, valuations were at, or higher than, book value. This reinforces our view that demand is strong for the right assets, and reflects the quality of, and opportunity for, rental growth over the medium term. Invaluably, in the case of retail property, this means long and strong income streams with food anchors. We may be approaching the point where there is demand for a broader range of retail assets, but most certainly not at current book values.

Residential was a strong performer in 2020, particularly in Germany, where the combination of very robust earnings and inflation-linked growth is essentially what many real estate investors are seeking. December saw stocks such as LEG (+6.4%), Deutsche Wohnen (+3.9%) and Vonovia (+3.9%) deliver returns of 23.8%, 22.6% and 27.8% for 2020; these were significantly ahead of the benchmark. Commercial property in Germany also performed well. The economy withstood the challenges of the COVID-19 pandemic and was aided by huge governmental assistance to corporates and consumers. Sirius (+5.5%), the London-listed owner of light industrial and office workspace across Germany, returned 30% in the last quarter. Alstria (+9.7%), the office-focused real estate company, also enjoyed returns of 30% in quarter four.

Retail stocks across Europe continued their autumnal recovery in December. The broader equity market rotation from growth to value exhibited itself strongly in the mostly deeply discounted part of the listed real estate world: retail. Coupled with short closing, and fund managers keen to bank performance that they generated earlier in the year (through lower retail property exposure), this resulted in some strong movements during the month which topped off record quarterly gains. Unibail-Rodamco-Westfield returned +8.5% in the month and 105% in the quarter. However, its total return for 2020 was still -50.2%. This highlights how far shopping centre REITs had fallen in value before their stellar recovery over quarter four.

The Trust returned 3.6% in December and was just behind the benchmark of 3.7%. But the share price gain of 7.7% saw the discount (net asset value to share price) narrow into single digits. For calendar year 2020, the Trust’s net asset value (NAV) total return of -3.2% was ahead of the benchmark, which returned -5.7%. Our financial year end is March, so the first three quarters of this current financial year highlight the substantial recovery in asset prices since the market low last year with NAV +26.4%, the benchmark +22.1%, and the share price total return +35%

Discrete rolling annual performance as at 31.12.2020 (%):

20162017201820192020
Fund9.3823.22-5.2328.30-3.20
Benchmark9.6917.04-7.3721.32-5.70
Share Price2.3037.30-7.8141.42-11.97

Past performance should not be seen as an indication of future performance