February 2020

Pan European real estate equities – much like many other equity sectors – reached all time highs this month. This record statistic was swiftly followed by another more ominous one, that of consecutive daily market corrections. In the case of our index a fall of -9.1% between 21^st and 28^th February. The UK element of the benchmark was even weaker at -11%. Given the strong performance earlier in the month, the final tally for the benchmark return was -5.4% with the Trust’s NAV falling a similar amount in the month.

Clearly, the extent and impact on global growth of this epidemic is as yet unquantifiable. What is becoming clearer is that central banks will offer assistance through rate cuts, QE and other unorthodox monetary stimulus. Property as a leveraged asset class with its bond-like income characteristics will respond to the reduced cost of debt. However where rental income is short term or counterparty risk is high we expect investors to steer clear even when presented with prices reflecting deep discounts to published net asset values.

In many respects the initial stages of the sell off in February (as opposed to the more dramatic subsequent events in March) were as expected with those businesses owning short dated income or with direct operational exposure being hit hardest. Leisure, food & beverage, hotels and retail were all hit hard alongside those high ‘beta’ names with the most aggressive gearing (principally in Sweden). One of the poorest performers was the Swedish business Pandox, the index’s only pure hotel owner /operator which fell -17.4% in the month. Other highly leveraged Scandinavian names which suffered significantly include Nyfosa (-16.8%), Atrium Ljungberg (-16.1%) and Catena (-23.2%). This final name is a logistic owner/developer which has enjoyed very strong returns and even after this correction is still standing at its Q3 2019 share price. The traditionally ‘safe haven’ names such as the Swiss property companies had strong relative performance falling just -1.6% (in CHF) across the group. Long income with government backed income (eg healthcare) performed well with the Belgium medical focused businesses Aedifica (-3.6%) and Cofinimmo, a diversified player with ever growing nursing home exposure returning +0.3%. In the UK, Assura (-5.3%) and Target Healthcare (-2.3%) also outperformed relative to broader real estate equities.

Retail continues to be unloved and the expected impact of fewer shoppers weighed heavily across the sub-sector. The market predicted further capital value corrections and even before this market correction many names stood at historically wide discounts to the last published net asset values. Now investors are questioning whether loan covenants will be breached and we expect Intu (-28.7%) to be the first. Post month end the company announced that it has been unsuccessful in raising capital and will now to negotiate with its lenders. New River Retail (-17.2%) was also weak given its excessive leverage and even the London focused retail names suffered poorly, Shaftesbury (-11.3%) and Capital & Counties (-18.7%) as tourism dries up.

In France it felt more indiscriminate with shopping centre owner Klepierre (-12.1%) , diversified Covivio (-10.5%) and Paris office and healthcare owner Icade (-10.5%). The French outperformer was the pure Paris office player, Gecina (-5.6%) mirrored by Colonial (-4.7%) which is a mix of Paris, Madrid and Barcelona offices.

German residential has often been viewed as a bond proxy and the secure, granular income streams proved popular with a range of monthly returns of between -3.9% (ADO) to -8.3% (Grand City) but the biggest players Vonovia (-5.7%) and Deutsche Wohnen (-4.6%) were strong relative performers. We expect that to continue as bond yields fall further as the global economy slows and the likelihood of central bank stimulus increases.

Discrete rolling annual performance as at 28.02.2020 (%):