February 2017

By | 22nd March 2017

Pan European real estate equities, along with broader equities enjoyed a positive month after the weakness of January. The Trust’s NAV rose 4.07%, a little ahead of the benchmark at 3.93%. Encouragingly, the share price rose 6.2% closing the discount to NAV from 14% to 12%.

Normally the results season provides plenty of opportunity for share prices and investors to focus on the ‘bottom up’ detailed data reported by companies, the vast majority of whom have December year ends. However, this year has been overshadowed by non-company specific news flow particularly from France but also the US. There is now a growing consensus that the Fed will lift rates again as early as March and investors remain focused on the expectation of an ongoing reflationary environment in the US aided by the new administration’s (as yet undefined) fiscal policies. Closer to home, we were fully aware that the elections across Europe would cause sentiment to ebb and flow. However the French Presidential race is looking very different to expectations given the issues surrounding Fillon and this has heightened the price of risk with French bonds at their widest margin to German bonds for many years. Not surprisingly French property shares were amongst the weakest performers (+0.3%). The winners were Germany (+6.8%), the UK (6.4%), Italy (10.4%) and Norway (6.7%) – the latter two on the back of just one stock respectively.

22 companies have now reported and the clear message is that earnings per share have grown, on average 7% and that this is set to continue, albeit moderating in most cases. Net asset values also grew, on average by 9%, but we expect that rate of growth to reduce significantly and that includes slight yield expansion in the UK (London offices and retail). However, in many core European cities there is evidence of yield stability or even tightening as evidenced by recent transactions in Paris, Berlin, Milan and Barcelona. However, parts of the occupational landscape are not as strong as investors might hope for and markets which may experience weakness include Paris offices where demand needs to maintain its momentum given renewed supply, French retail (more supply and Madrid offices where improving demand must be sustained to have an impact on the large office availability particularly in peripheral sub-markets.

Berlin residential continues to see headline growth with Deutsche Wohnen beating market estimates but then raising €850m of new equity. Hispania, our preferred Spanish hotel play, announced that it will liquidate over the next 3 years although it has extended its investment period until December 2017 to capture its acquisition pipeline.

In the UK, every company which reported has beaten consensus numbers and share prices rallied following each set of results, only to slip back once the initial exuberance has worn off. Generalist investors are not focused on the sector but given the sound fundamentals, therein lies the opportunity. Amongst the fund’s smallest companies, 4 of them accounting for over 6% of assets have enjoyed a strong start to the year with McKay (+16.8%), and CLS (12.3%) in the UK and Terreis (+8.4% ) and Argan (+9.6%) in France having their respective moments in the sun.

Download factsheet