January 2020

The start of the new decade saw a pause in the six-month long recovery of UK property stocks from their August lows. The ‘Boris bounce’ and election euphoria has dissipated for the moment, with UK property stocks collectively returning -2.8%. However, Continental European stocks picked up the baton, returning +3.1% in euro terms and +2.3% in sterling. With the two regions combined, our benchmark return was 0.87%, slightly ahead of our net asset value (NAV) total return of 0.68%. The weaker sentiment in the UK weighed on the share price, which fell -2.3%.

Europe was generally stronger than the UK over the month. In the case of retail property stocks, this was more a question of relative weakness, given the negative performance from all retail stocks (apart from Supermarket Income REIT). Intu (-49.8%) now has the smallest market capitalisation in the EPRA UK universe, and its share price reflects the clear need for an almost total recapitalisation of the balance sheet. This is an abject lesson in the folly of gearing in an asset class which has been under structural pressure for several years. Hammerson fell -24.4%, as investors fretted about the enforced disposal programme. There has been press speculation that the retail warehouse portfolio will be sold at an initial yield 8%, with the valuation falling from £500m to £350m. On the continent, expectation of yield expansion (and therefore falls) in the December year-end valuations drove all retail stocks down, with Wereldhave (-14.4%), Unibail Rodamco (-12.8%), Eurocommercial (-9.8%) and Klepierre (-9.2%) all lower.

On the other side of the retail coin, logistics and online distribution continued to power ahead, with the Belgium stocks WDP (+11.3%) and Montea (+10.1%) leading the pack. Our largest logistics overweight is Argan (+3.5% versus the benchmark). This is a French owner/developer that returned +1.3% in the month, after an incredible 79.8% in 2019.

Switzerland continues to confound sceptics, with all stocks standing at record high premiums to asset value, despite modest growth prospects. Steady earnings and dividends at around 3% continue to attract local investors who are suffering negative rates on low-risk fixed income products.

Scandinavian stocks – both commercial and residential – continue to attract investors, thanks to their access to cheap debt and a strong investment market momentum, fuelling capital growth. The end of January saw the beginning of the reporting season. Sweden is always first, and investors liked what they heard. Collectively, Swedish stocks rose 6% (in Swedish krona), with Castellum (7.5%) and Fabege (6.2%) the early reporters. Nyfosa (16.4%) announced that it would acquire SEK 8bn of assets from SBBB, following that company’s take-over of Hemfosa. Given that Nyfosa was spun out of Hemfosa, investors would be forgiven for a little head-scratching over the ‘musical chairs of asset ownership’ among these various entities. The Swedish residential companies continue to perform well, with Swedish house prices rising on average 6% in 2019, with Balder (+5.6%) and Wallenstam (+11.4%) both gaining.

The UK saw a much more varied performance. The worst performers (retail) have already been covered, while the London office-focused businesses maintained their general-election response, with Great Portland (+8.3%) and Workspace (+3.3%) both up. Our preferred decentralised office plays CLS (-9.9% and McKay (0.1%) fared poorly after very strong performances in the fourth quarter of 2019. The UK logistics plays had a poorer month, with Tritax Bigbox (-6.1%), London Metric (-3.7%) and only Segro positive at +1.5%. The Trust enjoyed its own logistics property success with the renewal of Yodel’s lease at Almondsbury, Bristol. It has signed for a new five-year term at a rent 47% ahead of the previous passing rent. This implies annualised rental growth of just under 10% over the last five years.

Discrete rolling annual performance as at 31.01.2020 (%):