January 2017

By | 22nd February 2017

The New Year has opened with a correction in pan European property equity prices following a strong finish in December. The benchmark, FTSE EPRA / NAREIT Europe Index (in GBP) fell 2.7% in the month with the UK (-4.3%) and France (-6.6% in EUR) the poorest performers. Given that both these markets are collective regional overweights in the portfolio it was encouraging to see the fund’s asset value fall less than 2% resulting in 68bps of relative outperformance in the month.

This was a reminder of how stock specific performance can be with our four largest off benchmark positions, which are all either UK or French companies, all contributing to performance. McKay Securities rose +11.5% making up its drastic underperformance in 2016, whilst CLS Holdings (+4.5%) issued a reverse profits warning, stating that their results in March would be well ahead of expectations. In France, Argan, the logistics developer announced record figures and the stock rose +4.4% whilst our owner of core Paris offices, Terreis, rose +8.1% on strong full year numbers which reflected the yield compression from strong investor demand for CBD Paris offices.

Sentiment towards the sector continues to be lacklustre as generalist investors remain believers in the sunny uplands of the US driven reflation environment and see real estate as a bond proxy. However closer to home we see investors still prepared to buy sustainable income plays especially if there is the likelihood of inflation protection through indexation or rental growth. In the UK, industrial and logistic continue to see rental growth whilst the expectation of falling rents in London remains high. Little surprise that the top performers fitted these criteria with Picton (+5.6% in the month and +17.4% in 12 months), Segro (+0.8%) whilst Derwent London (-11%), Great Portland (-7.3%) and Capital & Counties (-8.5%) were at the bottom of the table.

As mentioned, French stocks were particularly weak with Fonciere des Regions surprising the market with a 10% accelerated book build at a 4.7% discount to the previous price. This deleveraging has of course been viewed cautiously and the stock is down a further 2% to the month end. Gecina announced the removal of its well regarded CEO replaced by one of its non executive directors linked to a large shareholder. The stock fell 9.2% in the month reflecting these corporate governance concerns.

Spain was a relative bright spot recording +0.8% return with Hispania (+1.8%) the best performer. This hotel owner and manager is the fund’s largest Spanish position as we believe in the structural shift to ‘safecationing’ in Western Europe. We are also confident that employment growth will translate into steady rental growth in Madrid and Barcelona in late 2017 and beyond and maintain our office exposure in those markets.

The reporting season gets underway from the beginning of February and we remain confident that many of our companies will illustrate steady, if subdued rental and earnings growth. The key will be the sustainability of that growth in the medium term which we believe will see investors re-engaging with the asset class as bonds continue to undeliver in an inflationary environment.

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