July 2011

By | 15th August 2011

Writing the monthly commentary in the second week of August, the data feels very historic. For the record the NAV (with income) fell 4.8% and the benchmark fell 4.9% giving slight relative outperformance. The same benchmark denominated in EUR rather than GBP fell ‘only’ 1.9% as EUR weakened by 3% versus GBP over the month. Looking back, the resurgence of Eurozone sovereign debt issues began to boil up again during July but sentiment briefly improved following the decision to expand the European Financial Stability Fund (EFSF) as well as a new support package for Greece. However this improvement in outlook was short lived and as the month ended the risk of contagion to Italy and beyond was becoming a central theme. Investors voted with their feet and the price movements (and intra day volatility) of early August have been dramatic.

Whilst real estate equities fell in July, the falls were modest when viewed in local currency. Whilst early August has seen significant weakness, the sector has outperformed the broader marker on a relative basis.

Often viewed as an adjunct to the Financials group its performance versus BBG European Financials index is impressive. Between 1st July and 12th August that index is down 19.9% whilst EPRA (in EUR) is down 11.3%. Investors may well consider that the vast majority of listed property companies have balance sheets and access to debt far improved from the dark days of 2008. The recapitalizations and restructuring of 2009 have resulted in an average LTV of only 41%. Earnings are highly visible and relatively secure (with lease lengths of 7 years on average). Forecast earnings yields for 2001 are 6.5% whilst dividend yields are in excess of 5%.

Within the fund the overweight to the UK was beneficial as it fell 2.9% outperformed only by Norway and Switzerland. The other large components of the index, France and the Netherlands fell 3.8% and 6.1% when viewed in EUR (but -6.7% and -8.9% in GBP).

Whilst the fund had gearing of 8.5% by the month end, it also held 9% of its assets in physical property, hence it had no geared exposure to its underlying equity portfolio. The fund has made its first property acquisition since 2006, buying a multi-let office building in Vauxhall for £7.83m with a net initial yield of 6.75%. This increased the exposure of the fund to physical property from 8% to 9.2%.

The final dividend of 3.7p is payable on 2nd August.

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