January 2019

After the correction in late 2018, which totalled -11.2% for pan European real estate equities between September and December (as measured by the Trust’s benchmark FTSE EPRA/NAREIT Developed Europe net total return Index (in sterling), January saw a stunning reversal, with the index rising 7.2%. Every company in our universe made a positive return over the month. Viewed in euro terms, the return was even greater, at 10.3%. We would have to look back to the announcement of quantitative easing by the European Central Bank in 2015 to find a period of similar performance in the last decade. The recovery was driven by a mix of improving macroeconomic sentiment (US/Sino trade discussion, the increased likelihood of a soft Brexit) and the increased attractiveness of the sector, particularly relative to other assets. Another important factor was the renewed dovish commentary from central banks. Expectations of rate rises in Europe were pushed back even further, and the 10-year bund yield tightened from 0.24% to 0.15% as the German economy registered its second quarter of slowing growth. In essence, bad news (slower growth) appears to be (relatively) good news as far as income-sensitive assets such as real estate are concerned.

Some of the strength reflected overselling in December, with the top-performing stocks coming from a broad range of asset types and jurisdictions. However, recovery in a number of retail companies was a clear feature, with Unibail-Rodamco (+16.1%), Hammerson (+12.9%) and Mercialys (+11.9%) gaining. The pan European retail sector rose 13% overall as investors hoped for some mean reversal after the weakness of 2018.

The reporting season got underway with many companies announcing key figures ahead of their more formal results in February. In the case of Unite (+13.0%), the revaluation of their funds USAF (+5%) and LSAV (+8.4%) drove performance. The best-in-class student accommodation owner/developer is a large holding for the fund, alongside Safestore, which also announced strong results that beat expectations. Both companies were among the larger contributors to our relative outperformance of +80 basis points (bps) versus the benchmark over the month. The Trust’s net asset value (NAV) grew by +8.0%, and the share price rose 8.3%.

The logistics sector enjoyed a good month, with Argan (+12.8%), reporting record breaking NAV growth on the back of rental growth, yield compression and successful pre-lets of new developments. Also in the logistics space, Tritax Big Box (+6.4%) raised £280m to acquire 87% of DB Symmetry, a logistics developer with a 2,500 acre (gross) UK logistics landbank. The Trust participated in the underwriting of the issue (130p per share), but we are unlikely to be able to acquire any shares as the price ended the month at 139.7p. With underwriting fees at 0.75%, the fund earned £284,000 with no capital outlay. WDP (+10.8%), the largest Continental European logistics owner/developer, reached multiple new share-price highs, and investors were rewarded with expectation-beating results and a new optimistic five-year growth plan.

British Land (+9.0%) announced a board restructure reducing the number of executives from four to two (the CEO and CFO). The roles of Head of Retail and Head of Offices have been amalgamated, with the incumbents leaving the business. We welcome the cost savings and the return to the ‘normal’ number of executives on the board.

Many of our small caps also performed strongly. CLS (+16.1%) gained following a positive pre-results update, while Terreis (+8.9%), the specialist prime Paris office owner, reported almost 11% NAV growth over the year, driven by rental growth and yield compression. The star performer in the UK was our London PRS developer, Telford Homes, which rose 19.4%. However, the stock is still 26% below its 2018 peak, a good example of the huge price volatility we are seeing as a result of sentiment towards the UK (particularly London-focused businesses). This looks set to continue.

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Discrete performance as at 31.01.2019 (%):