January 2015

By | 16th February 2015

The New Year started very strongly for pan European property shares with the benchmark, FTSE EPRA/NAREIT Developed Europe TR Net (GBP) climbing 9.6% and the Trust’s NAV slightly higher at +9.8%. Broader European equities as measured by Eurostoxx 600 rose 7.3%. Market sentiment and performance was entirely dominated by macro events, the widely anticipated QE from the ECB preceded by the completely unexpected removal of the EUR/CHF currency cap by the Swiss National Bank and the introduction of a negative 75bps rate on deposits held at the SNB. Alongside the obvious consequence of the Swiss Franc’s immediate appreciation we also saw heavy buying of Swiss property stocks as they offer sustainable dividend yields of over 3.5%. Swiss stocks rose 9% in local currency and 22% in GBP. The Trust maintains currency weightings in line with the benchmark. This ensures that the relative performance of the manager does not include artificial benefit or losses from currency movements. Swiss stocks (and Swiss Franc) exposure is 6% of the benchmark.

The immediate impact of the ECB announcement has been very positive for property stocks particularly those with the highest leverage (where further falls in the cost of debt is anticipated) and those with high and relatively secure earnings and dividends. The Eurozone stocks rose 14.2% (in EUR) and 10.5% (in GBP), outstripping the UK +7.7%. European stock performance was dominated by the region’s largest property company Unibail Rodamco which rose 17.5%. With a market cap of EUR 24bn it is nearly double the size of the second largest , Land Securities (EUR 13bn) and therefore acts as a bellwether for global interest in the relatively small (in the global context) world of pan European property stocks. Unibail published its full year results at the end of the month and whilst a disposal programme (of its smaller centres) will lead to a falling EPS next year, the dividend will be maintained and management forecast a 5 year CAGR of 6-8% from 2016. The stock stands at a 50% premium to its NAV and reflects the investor appetite for perceived high and growing earnings when income is increasingly scarce. The stock is the Trust’s largest individual position although we moved to a neutral weight (versus the benchmark) at the end of January.

The other group of strong performers were smaller stocks with higher leverage. A number of these we do not hold as we consider their underlying property markets to remain weak with limited tenant demand. However investors see yield compression (and asset value increases) as a consequence of QE reducing the cost of debt. In Germany, DIC and Deutsche Office rose 25% and 21% respectively, whilst Citycon in Finland (+16.5%) and CA Immo in Austria all fitted the bill of laggards in 2014 who have enjoyed the rising tide lifting all boats.

The December year end results season has now begun and we expect upbeat messages from our companies as regards investment demand for their income producing assets. What is of greater importance is identifying those businesses in a position to capture tenant demand and we continue to expect that to be stronger in the UK than Continental Europe.

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