February 2022

In summary, over February, investor sentiment was driven by macroeconomic events alongside a handful of corporate events (within our small real estate world). The second half of February was, clearly, dominated by the tragedy unfolding in Ukraine. This historical and terrible geo-political event essentially added huge uncertainty to the backdrop of inflation-averse central bank behaviour. Across the globe, we saw risk assets accelerate their declines as markets absorb the multiple threats to economic growth.

Pan European real estate equities have depreciated -6.3% since the beginning of the year; this compares well against the Stoxx 600 return of -12.7%. While the threat of higher interest rates is clearly damaging for leveraged assets, the high level of income indexation in the vast majority of property company portfolios is a significant benefit. Essentially, if the risk-free rate continues to climb, property looks a lot more attractive than both fixed income and growth focused equities.

While risk assets across the globe continued to react to events, we did see reminders that there is still a vast amount of liquidity looking for returns. In our world, well financed private equity continues to take advantage of the spread between property yields and the cost of money. Brookfield announced a bid for Befimmo at a 52% premium to the undisturbed share price. Befimmo, a Belgian office owner, was trading at a large discount to its last reported asset value; this reflects investors’ concerns over office demand in one of the more pedestrian office markets, which is dominated by government and state tenants. This low counterparty risk will, of course, be part of the attraction to a highly leveraged buyer. Even after the share price squeeze, Befimmo still underperforms the sector (EPRA Developed Europe, in euros, total return) by -55% over a 10-year period. Brookfield have also recently acquired Alstria, the German office owner. Such activity does provide support to many names in the listed space. Also in Germany, DIC surprised the market with a partial tender for 51% of VIB Vermoegen at €51 per share. This well-run Bavarian logistics owner/developer is listed on a local exchange and not the main market. DIC were able to acquire over 10% before announcing their intentions and they quickly reached 25% of the share capital (ahead of the tender). DIC had pre-warned investors that, if they did manage to take control, there would be a change to the distribution policy (effectively a threat of no dividends). At this point, we chose to sell our holding (3% of the Trust’s net assets) at a ‘block premium’ of €54 per share.

As the news from Eastern Europe deteriorated, we saw the traditional ‘refuge names’, such as Swiss property stocks, outperform (they were the only country to report a positive return, +1.1% in the month) alongside those with lower leverage and minimal counterparty risk (government, large company tenants). The weakest performance came from those deemed closest to the consumer (retail, leisure, hospitality) who will be impacted by rising energy costs and potentially negative real wage growth (if inflation outstrips wage increases).

Swedish property companies continued this year’s weak run with a -5.9% collective return. The poor performance was dominated by SBB (-20.8%) as Viceroy (a short seller) published a note alleging serious corporate governance issues, undisclosed related party transactions and other wrongdoing. Elsewhere in Sweden, the high levels of leverage frightened investors and the only positive return over the month came from Pandox (+3.3%), the hotel owner/operator, on easing Covid-19-related travel restrictions.

The Trust’s net asset value fell -2.5% and the benchmark returned -2.9%. However, the share price fell -7% and the discount widened to 5%.

Discrete rolling annual performance as at 28.04.2023 (%):

	2023	2022	2021	2020	2019
Fund	-26.50	6.33	27.93	-9.56	3.54
Benchmark	-25.77	-1.70	22.14	-11.44	-0.02
Share Price	-29.00	7.24	32.00	-13.65	2.72