February 2014

By | 16th March 2014

European real estate stocks had a tremendous month. The fund’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return in GBP returned +6.83% whilst the fund’s NAV rose + 8.0%. The sector is now up +7.3% for the year so far and ahead of the broader European equity market as measured by the Stoxx 600 which is +3.3% (total return in EUR). The currency exposure of the fund should be noted with just 41% denominated in GBP. EUR strengthened by nearly 0.5% against GBP in the month.

The nervousness of late January was replaced by renewed optimism towards Europe as investors continued to retreat from emerging market exposure. For the first time in many months, the UK (+6.5%) underperformed the remainder of Europe (+7.1%). We believe that European property shares have benefited from (1) investors seeking developed markets exposure – property is predominantly domestic (2) continued expectation that the ECB will seek to fight the fear of deflation with ultra loose monetary policy but that this will not result in QE and (3) the ongoing need for income. On top of these broad factors there has been a sustained improvement in sentiment towards peripheral European markets. The tightening in sovereign bond yields in Spain, Portugal, Italy and Ireland has been reflected in risk asset values cross the region. Italy was the top performing country in the benchmark, rising +17% in the month. Sweden was the next highest performer rising +9.4% as investors focused on economic growth in the broad Scandinavian region coupled with the Riksbank’s commitment to continued monetary easing. Residential property prices continue to improve across the UK, Germany and Sweden as governments continue to try to bolster consumer confidence.

As stocks now trade at premiums to asset values in many quarters, it is no surprise that there have an increasing number of capital raisings for existing businesses as well as IPOs. In the UK, Mckay Securities successfully doubled their market cap, raising £86.7m gross at 189p per share. We were already investors in Mckay and welcome this capital increase, the fund participated and now owns 6.5% of the company (based on the month end price of 210p). Kennedy Wilson, the US investment manager raised £1bn for a listed fund which has started life with only 20% of the cash invested. The stock rose to a 10% premium on the first day of listing, such was demand even for what is primarily a cash shell. The vehicle intends to buy property in the UK, Ireland and Spain. We expect considerable further issuance of both primary and secondary equity and just after the month end, Deutsche Annington placed €500m in a combination of existing shares from their private equity owner, Terra Firma and new shares. There will undoubtedly be more to come.

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