February 2016

By | 16th March 2016

The turbulence experienced in January continued into February. The general negative sentiment over prospects for global growth and slowing earnings across broad equities met some positive resistance from real estate names particularly on the Continent. We are deep into the results season and whilst no chief executive was wildly optimistic the numbers generally spoke for themselves. The essential message was that earnings were sustainable (and growing in some quarters), the lack of development provided comfort that a supply shock was not around the corner and central banks’ desire to help would lead to further debt cost reduction (where that is feasible). In fact further yield compression is anticipated in those markets with rental growth such as Paris and Stockholm. Continental European property stocks were only down -0.3% in the month.

However, it was the UK names – particularly the large caps and London-centric names who saw further aggressive selling pressure. Investors expect yield expansion (50bps is priced in) and worry about renewed supply (we don’t) as well as the uncertainty around Brexit. Well managed mid caps such as Derwent London and Great Portland are now trading at NAV having fallen 17% YTD with Land Securities and British Land at close to 30% discount to FY16 asset values. UK property names fell over 7% in February and Capital & Counties (the owner of the Earls Court residential site) was down 12.6% as investors anticipate a 10-15% price correction in high end residential values. Whilst the Trust owns no shares in Capital and Counties the NAV still fell -1.44% which was 41 bps lower than the benchmark.

Scandinavia proved to be the best performing region with Swedish property companies climbing 3.5% in the month partly on the back of an unanticipated rate cut by the Riksbank pushing negative rates from -0.35% to -0.5% as it seeks to maintain a weak Krona and generate bank lending. Whilst Norway grapples with the effects of the lower oil price, Entra the 50% state controlled property company produced great results and the stock rose 8.8% on the day and has now returned 4.9% YTD, the top performer in Europe so far in 2016. The lack of new supply in its key CBD markets enabled it to both retain tenants and move rents upwards.

Whilst UK stocks were the worst performers it is worth noting that two high yielding companies successfully raised capital in February, Tritax Big Box (£200m) and Redefine (£160m). This reflects the polarised demand with investors searching for high sustainable dividend income whilst happy to avoid stocks more dependent on the development cycle and economic growth. Given the headline weakness in UK stocks it may surprise investors that the benchmark fell just -1% in the month. It is worth reminding investors that the fund’s FX positioning matches that of the benchmark regardless of the underlying positioning. This is achieved using forward contracts to bring exposures in line. The underlying currency exposure of the benchmark is currently 33.7% GBP and 52.9% EUR whilst the fund NAV is denominated in GBP. Hence the 3.4% appreciation of EUR versus GBP in February was a benefit to the net asset value.

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