Real estate stocks were not immune from the weakness in global equities as the new year got underway. The expectation of US Federal Reserve policy tightening has now become a reality. This news was coupled with firm indications that the world’s most important central bank is not concerned about short term (downward) adjustments to risk asset pricing; this is not their priority. This confirmation of market expectations impacted highly rated ‘growth’ stocks more than ‘value’ companies, and real estate (while a leveraged asset class) sits more in value than growth (with a handful of exceptions). As a result, the Trust’s benchmark fell ‘only’ -3.6% whilst Nasdaq was down – 9% in the month.
Although investors fret about rising interest rates, particularly on leveraged assets, we concern ourselves with the reasons for the central bank’s decisions. If rate rises are in response to broad reflation of the economy, then we must target those parts of the real estate market which will see genuine rental growth (tenant demand) as a result. Property shares continue to be a valuable source of index-linked income. Investors looking for income (of which there are many) will find little comfort in long duration, fixed income bonds (which fall in value due to higher rates). Meanwhile, the higher yielding inflation-proofed earnings found in real estate are unsurprisingly proving popular. The Trust’s net asset value fell by less than its benchmark (-2.6%). This reflects the portfolio’s large number of lower beta small cap stocks, which tend to reflect stock specific fundamentals rather than macro sentiment.
Within our sector, the most highly rated names suffered the most; logistics (WDP -9.6%, Segro -9.4%) and self-storage (Safestore -10.2% and Shurguard -11%) saw the sharpest corrections. Meanwhile, the most leveraged companies (such as the Swedish firms) suffered the most at the country level (SBB -16%, Sagax -11.8% and Castellum -10.6%). The flipside of this was the outperformance of the most discounted ‘value’ stocks, which are seen as having the weakest growth prospects. These companies, mostly in the retail, leisure and hospitality sectors suddenly looked too cheap, with very strong performance from European shopping centre owners (Eurocommercial +12.4%, Klepierre +12.5%, Mercialys +14.3% and Unibail +9.2%). The Trust was overweight in this group and underweight in Swedish companies, which aided our relative outperformance. UK retail and diversified companies also performed well, with Hammerson +18.2% (also aided by an announced upgrade to its earnings).
Offices continue to suffer from investor concerns around tenant demand and the need to improve energy efficiency and reposition ‘brown’ buildings, which require environmental improvements. This also presents developers with an opportunity, and we have seen pre-pandemic rental levels being achieved on best-in-class space such as Great Portland’s (+4.6%) Hanover Square development, which is now fully let ahead of completion.
Despite the market gyrations, companies continue to raise capital in the preferred sectors with LXI (index-linked income) and ASLI (logistics) both looking to raise financing.
Discrete rolling annual performance as at 31.10.2022 (%):
not be considered a guide to future performance. All fund performance data is net of all fees