February was another positive month for listed real estate company share prices. The year-end reporting season got into full swing, with most companies reporting positive growth in net asset values, earnings and dividends. There has been little evidence to support sell-side analyst forecasts of negative capital growth for 2012.We remain confident in our own forecasts for low positive capital growth across the sector, albeit showing wide dispersion between sectors and countries.
The Ordinary share class NAV with income increased by 1.76% in February, giving a total of 6.54% for the calendar year to date. This compares to 1.53% for the index in the month and 5.56% for the first two months of the year. The outperformance by the Fund reflects our positioning in high quality companies exposed to those sub-markets which we believe will perform best in a low growth environment. Gearing at 10.6% reflects the 11.8% exposure of net assets to physical property (of which 78% is exposed to London assets).
Consequently, the exposure to equities is broadly ungeared. Our slightly positive view of certain key underlying real estate markets continues to be tempered by expectations of further volatility in both equity and bond markets.
The Eurozone continues to be the main source of volatility. The second ECB three year Long Term Refinancing Operation injected a further €530 billion of liquidity into the financial system albeit part of this was offset by lower take up in shorter refinancing operations earlier in the month. Whether there is a causal link or not, Italian 10-year bond yields have fallen to around 5% for the first time since last summer, putting a spring in the step of Eurozone politicians. The performance of Beni Stabili, Italy’s only listed REIT has been highly correlated and the stock has recovered 46% from its mid-December low point. The Fund has a long position in this company.
However, at the same time a number of peripheral Eurozone countries including Greece and, more worryingly, Spain continue to miss their deficit targets, pointing to the major structural changes that need to take place within Europe over the long term if further crises are to be averted. The Fund continues to have no direct stock holdings in Spanish real estate companies.
Within the direct property portfolio, we continue to progress lease negotiations at our office building in Harlow with an existing tenant.