January 2021

January 2021 has been described by one real estate equity broker as ‘a long year’ and that neatly sums up what has been a tumultuous month. The net asset value (NAV) movement at -3.1% and the benchmark fall of -3.7% belies a huge amount of activity which led to very high levels of volatility and significant price changes (both positive and negative) in individual stocks.

No followers of financial markets could have missed the dramatic ‘short squeezes’ created by an army of retail investors coordinating their buying power into a small group of heavily shorted stocks, principally in the US. There was spill-over into Europe in the large Continental shopping centre owners Unibail and Klepierre, which saw prices squeezed up +32% and +34% (peak to trough) over the month and returned +7.6% and +8%, respectively, over January.

The merger and activity (M&A) activity surrounding Entra (down -1.8% over the month) continued. Castellum (-3.7%) and SBBB (-3.7%) have both tabled offers, while Balder (-2.2%) announced that it held over 25% of the company and wouldn’t accept either offer. In Austria, the crossholdings by various shareholders in CA Immo (+13.4%), Immofinanz and S Immo have resulted in a hugely complex tussle for control of CA Immo with its large Central and Eastern European landbank. Starwood own 29.9% of CA Immo; this is just one example of an increasing number of large /controlling interests by private equity capital in the listed real estate market. 

The last two months of 2020 were dominated by the shift into ‘value’ (ie stocks trading at large discounts to their NAV, particularly retail, hospitality and hotels), coinciding with the vaccine-driven surge in pricing. In January, however, there was a renewed focus on property fundamentals. Tritax Bigbox (+9.8%) effectively issued a positive profit warning ahead of its FY20 results, with capital growth of c8% in the second half of the year and strong tenant demand translating into better-than-expected rental growth. This news was reinforced across Europe, with positive results from Argan and WDP (+4.9%); the former reported a 25bps yield compression across the entire portfolio. Self-storage also reported strong growth, with the NAV of Safestore (+3.9%) rising by an impressive 17% and Big Yellow (+0.8%) reporting like-for-like occupancy growth of +5.8%.

The weak fundamentals in retail reasserted themselves in investors’ minds, particularly in the UK (where there was no short squeezes) with Hammerson (-6.8%) and Shaftesbury (-1.7%) both lower. The majors, Landsec and British Land (with 40% to 50% exposure to retail and hospitality) also performed poorly and almost identically with returns of -8.8% and -6.6%, respectively.

While the vaccine rollout across Europe has been slow to progress, stock markets continue to focus on the ‘sunny uplands’ of a post-vaccine world. Consequently, the fear of interest rates potentially rising, as economies reinvigorate after the vaccine, drove interest-rate sensitive stocks (residential, healthcare) down over the month. Our world is dominated by German residential (c 22% of our benchmark), where the largest stocks (Vonovia (-7.7%), Deutsche Wohnen (-6.4%) and LEG (-6.8%)) were weak. In the UK, the healthcare stocks were among the worst performing subsector with Assura (-5.6%) and Primary Health Properties (-4.0%) both lower.

Although the total return from the sector was negative this month, we have good reason to be optimistic. The sector continues to offer good earnings and a healthy dividend from the vast majority of companies, which either never stopped paying or have reinitiated dividends. With so much of our income index-linked (c40%), we have a solid platform for growing earnings. Within our physical portfolio (7% of assets), we can report good news. At the Colonnades in Bayswater, we completed what will undoubtably be one of very few Central London restaurant lettings. Happy Lamb Hot Pot have taken a 20-year lease at £140,000 per annum, completing our successful letting programme of the five units alongside Waitrose.  At Almondsbury (close to the M4/M5 motorway intersection), we have received unsolicited approaches for our urban logistics unit outside Bristol, well ahead of the valuation. It is always useful to have live, real-time evidence of the price inflation which is being reported by our logistics and light-industrial focused companies.

Discrete rolling annual performance as at 29.01.2021 (%):

	2017	2018	2019	2020	2021
Fund	9.67	22.82	4.81	19.56	-6.84
Benchmark	8.90	17.42	1.71	14.12	-9.93
Share Price	3.77	39.69	2.31	27.63	-16.37