January 2013

By | 16th February 2013

Pan-European property shares started the year positively with the index rising 3.18% (FTSE EPRA/NAREIT Developed Europe Index Total Return in GBP) however the sector underperformed the broader market where the FTSE All-Share Index rose 6.37%. Markets were dominated by the strength of EUR versus some other European currencies with EUR/GBP strengthening by 5.3% and EUR/CHF 2.3% in the month. The Fund’s index when viewed in EUR actually fell 2.25% such was the impact of currency and the weakness of Eurozone property shares which fell 1.4% in local currency.

This weakness in Continental European property stocks was in contrast to the broader EuroStoxx600 Index which rose 2.8% in January. Investors appear more positive about Europe’s prospects and the property equity sector’s outperformance in 2012 has seen some rotation away into perceived higher growth stocks. With equity prices standing close to asset value (and at premiums in a number of the better quality stocks) it is understandable that some view the sector’s valuation as full. However, our view is that when viewed alongside the tightening incorporate bond yields (BBB+) over the last six months, the dividend yield on the EPRA index(and the Fund) of over 4% remains attractive. The question is one of sustainability of income and whether there are (unlike bonds) underlying portfolios beneath these listed companies which will show capital growth in the near term. We think the answer is yes – if you pick carefully.

January’s top performing countries in local currency were Italy (+11.8%), Greece (+10.4%)and Sweden (+3.5%). Both Italian and Greek equities responded to the tightening in yields and the cost of their respective sovereign debt.Sweden was one of the poorest performers in 2012 and we believe an element of the new year’s performance so far has been rotation into those underperformers. The Riksbank cut rates three times in 2012 and this is feeding through into cheaper interest bills for our Swedish investments.

The Fund’s NAV rose 3.3% outperforming the index modestly. The strong performance in the first two weeks by a broad range of the weaker businesses in the sector was not beneficial for our positioning. However, we stick to our ‘quality’theme for both assets and balance sheets. The long awaited €1.5bn market cap IPO of LEG, a German residential investor took place on 31 January at €44 per share – the middle of the range. The results season is well underway and whilst there have been few surprises (a good thing), it is also encouraging to see a highly rated stock (and one of our largest relative overweights)Great Portland Estates perform well following its Q3 results presentation.

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