February 2023

The strong recovery in real estate equities, which began in the fourth quarter of last year and continued into January, lost momentum this month as markets reassessed their collective view that central banks were unlikely to turn less hawkish in the coming months. The slew of hotter-than-expected inflation data on both sides of the Atlantic forced investors to adjust upwards the expectations about the pace and scale of further rate hikes. Inflation is proving stickier than hoped, as is the battle to control wage inflation. Central banks had been clear that their decisions are data dependent and the data points to a stronger recovery in the US, while across Europe, tight labour markets and strong union negotiating power drives up wages through collective bargaining. Once again, it is the macroeconomic backdrop that is weighing on the sector, with the lowest yielding assets, as well as those companies with the greatest leverage, being most affected.

Residential names were the hardest hit in Germany, Sweden and Ireland. EPRA Germany fell -6.1%, where the residential focused names account for over 90% of the country index by value. Swedish and Finnish property companies remain among the most leveraged and those indexes corrected -3.8% and -9.3%, respectively. Ireland now only has one company in the benchmark, Irish Residential Properties, which corrected -4.5%. The German names were hit by the renewed expectation that further dividend cuts are inevitable to help stabilise balance sheets. Vonovia, the largest company in our universe with a market cap of €18bn, will announce full-year 2022 results on 17 March. Market expectations on the dividend pay-out have adjusted downwards in the last few weeks, contributing to the -7.8% correction in February. In Finland, Kojamo fell -11.1% as it reported weaker earnings on rising cost of debt and persistent vacancy levels.

The strongest performers, as we near the end of the reporting season, were those names that reinforced their dividend pay-out credentials. Providing investors with the message that index-linked income and solid balance sheets will deliver the required returns saw names such as Icade (+13.8%), Mercialys (+3.4%) and New River Retail (+7.1%) perform well. It is no coincidence that these retail owners were all trading at high earnings yields before they reassured the market. Retail property across the universe has continued to perform well – even after a strong relative performance in 2022. The structural headwinds are well understood but investors are clearly encouraged that the correction in rents to affordable levels has been reached in many markets. State assistance such as the cap on indexation for small retailers in France does ensure that vacancy levels have not increased materially. Wage inflation and goods inflation is feeding through into overall sales figures, with many shopping centres reporting turnover back at 2019 pre-pandemic levels.

Results from the office owners continue to reinforce our view that the best-in-class buildings delivering on location, quality and energy efficiency are attracting tenants at pre-pandemic rents. Beyond London and Paris, there has been a strong ‘return to office’ theme, where commuting costs (time and quality) are much lower in smaller cities. Our exposure to large caps such as Paris-focused Gecina (+14.7% year to date), as well as smaller names such as Madrid-focused Arima (+15.3 year to date), has been beneficial.

The Trust’s share price has been trading in a tight 2-8% discount to its net asset value over the last 12 months and this has recently widened to over 9%, providing a dividend yield (based on the last full year) of 4.7%.

	2025/2026	2024/2025	2023/2024	2022/2023	2021/2022
NAV (Inc)	– 0.5	11.6	22.5	– 19.3	– 16.5
Benchmark	– 0.1	9.7	21.4	– 19.8	– 21.5
Share Price	– 2.0	13.8	22.5	– 24.5	– 13.5