December brought a strong end to the calendar year with the net asset value (NAV) rising +1.8%, while the benchmark rose 0.6%. The share price gained 2.7% over the month, which brought the share price total return for the year to 23.5%; this reflects both the 18.6% growth in the NAV over 12 months and the discount (price/NAV) narrowing to less than 1%. The narrowing discount reflects an increased appetite for (relatively) high yielding real assets, which offer the potential for inflation protection – particularly where the underlying income is index-linked. We expect this theme to continue into 2022.
Over December, the best performing sectors continued to show strength, including self-storage +15% and industrial/logistics companies +8.4%. Residential businesses, particularly in Germany, performed poorly (-4.9%), which also continues a theme that has persisted over the year. While regulated rental income (such as German residential tenancies) is often considered a bond proxy (where the risk of rising rates seen as negative), this subsector’s performance was dominated by Vonovia, the sector’s only serious large cap (in a global context), and its takeover of Deutsche Wohnen. This required a well flagged €8 billion rights issue, which subdued the stock performance through quarter four. Elsewhere in the German residential space, we saw LEG buy 31% of BCP’s holding in Adler, with the option to acquire the rest of BCP’s holding. While the price was at a discount to the NAV, it was a premium to the share price. Mergers and acquisitions (really consolidation) remains a theme in the sector.
A surprise newspaper report – not denied – was released before Christmas that claimed that the Chairman of Merlin (a representative of the largest shareholder Santander) had attempted to oust the company’s well-respected CEO. At a hastily convened extraordinary board meeting, the non-executives were provided with indications of support for the management from a range of stakeholders. There is no doubt that the 6% fall in the company’s share price will have also helped focus their minds. We remain hopeful that this attempted board room coup has been permanently thwarted. Separately, we understand that the company will be marketing their BBVA bank branch portfolio (value €2 billion) in 2022, which is a positive development.
Through 2021, Swedish property stocks were, collectively, the standout performers at the country level with collective total return of 44%. They are among the most leveraged property companies in our area, and the dovish behaviour and commentary of central banks encouraged investors. However, December saw a collective -2.5% correction among Swedish property companies as investors look at the renewed likelihood of a change in the rate curve and an increased chance of rate rises during 2023.
Retail property saw a divergence in performance; retail warehousing and supermarkets continue to perform well as investors see them as key components of retailers’ omnichannel exposure. Shopping centre rents continue to fall; however, market participants (particularly private equity) are beginning to make acquisitions. Importantly for the listed sector, Landsec have announced the intention to acquire additional elements of partially owned shopping centres and have bought a further 25% of Bluewater at an 8.2% yield for £172 million. Their current 30% holding in this prime shopping centre was last valued at £259 million in March 2021 and, therefore, this purchase equates to a 20% further correction in values through the year. We are pleased to see early signs of price discovery in some key shopping centre assets but, so far, investors only appear interested in the most dominant. We remain concerned that the ongoing oversupply of retail space will continue to put downward pressure on rents for some time to come.
Looking forward, we remain confident that real assets, particularly where rents are index linked, will remain a popular part of any diversified portfolio.
Discrete rolling annual performance as at 29.04.2022 (%):
Past performance should not be seen as an indication of future performance