Pan European property shares continued their positive run through February with the benchmark index (FTSE EPRA/NAREIT Developed Europe Index Total Return in GBP) rising 2.5%, bringing the year-to-date figure to 5.8%. The Fund’s NAV rose 3.0% in February and is up 6.4% since the beginning of the year, 60bps ahead of the index.The share price has risen 7.5% in that two month period.
There is an important currency caveat which must be highlighted. The benchmark and the NAV of the Fund have benefited significantly from the weakening of the base currency (GBP) against the other European currencies, principally EUR which is 47% of the index. In EUR terms, the index has actually fallen 0.4% since the beginning of the year. Whilst GBP has been falling against EUR since the mid summer, the decline accelerated in 2013 with a devaluation of 5.7% over the last two months. The Fund’s overweight exposure to UK property companies remains heavily weighted to London. We believe that this (temporary) weakness in GBP is attracting investment in both residential and commercial property. It is certainly helping tourism and other local GDP generators. We continue to avoid investment outside of the South East of the UK. This tight focus on investable regions is a strong theme across the portfolio. German residential property remains favoured long-term, but share prices have stalled. The €1.5bn IPO of LEG Immobilien at the end of January has, we feel, created some indigestion amongst investors.Whilst the metrics for these businesses remain valid, returns are likely to be ‘single digit’ unless they continue to expand.
The reporting season is well underway and, in the main, results confirmed our views of the underlying property markets across Europe. The Dutch and Belgium office markets were as weak as expected with Nieuwe Steen, Befimmo and Cofinimmo all reporting pressure on rental values and declines in rental income (on a like for like basis). Corio, which invests in retail property across Europe, highlighted the key areas of weakness, particularly Spain, Southern Italy and Turkey. London-based companies such as Derwent London, and Capital & Counties produced great figures – exceeding even the most bullish expectations. St Modwen saw its share price move to a premium to asset value and promptly raised equity (10% placing) for its 2015 redevelopment of New Covent Garden Market in Vauxhall. Capital raisings by Citycon and Intu (previously called Capital Shopping Centres) ostensibly to fund acquisitions (Kista in Sweden and Midsummer Shopping Centre in Milton Keynes respectively) were both viewed as defensive moves to help strengthen the balance sheets.
