January 2014

By | 16th February 2014

European real estate stocks rose modestly in the month. The fund’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return in GBP returned +0.74% whilst the NAV rose + 0.55%. The New Year started positively for equities as investor optimism about a broad economic recovery, driven from the US continued to take root alongside steadily improving sentiment about Europe. Markets appeared undeterred by fears of deflationary forces and continued to drive peripheral Eurozone sovereign bond yields lower. The feel good factor which had been driven by the Fed comments in mid December had resulted in developed world equities rising by 3.5% (S&P 500) and 4.7% (FTSE All Share) between 16th Dec and 16th January. However the increasing concerns (and performance) of many emerging markets has once again spread across the developing world and all equity markets have given up their New Year gains by the end of the month. In fact US and German treasury yields have tightened again (with 10yr Treasury yields down 50bps this year) such is the nervousness of investors. It is therefore interesting (and to an extent encouraging) to note the performance of both European and US real estate stocks against this backdrop. During January the All Share fell -3.1% whilst UK property stocks rose +3.7%. In the US, the pattern was repeated with the S&P 500 falling -3.5% and US Reits rose +3.5%. We think the reasons are a combination of investors preferring developed market exposure (property shares are invariably locally focused) and the natural support to earnings of static or further falls in the cost of debt. Draghi has made it clear that rates are not set to rise in Europe and Carney confirmed at Davos that he does not view the employment rate as a sure fire rate trigger in the UK.

The top performers in the month were the peripheral Eurozone stocks in Italy (+10.9%) and Greece (+10.8% but just one stock) and amongst the larger countries it was the UK (+3.7%) and Sweden (+5.3% in SEK) who were the top performers. In the case of the UK and Sweden this outperformance is a continuation of the relative gains made in 2013. Investors quite rightly continue to focus on markets experiencing both rental growth and where debt availability is encouraging buyers to capitalise on the spread between the cost of borrowing and income yields. We have not bought back into peripheral Eurozone property stocks which we believe will benefit later in the credit cycle than some are suggesting. Whilst debt availability may improve there remains a huge amount of bad debt attached to property in Italy, Spain, Greece and Central & Eastern Europe where the credit transmission now enjoyed in many parts of Western Europe has yet to manifest itself.

Within our physical property portfolio we have now submitted our planning application for the retail extension and refurbishment at The Colonnades in Bayswater, London W2.

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