July 2014

By | 16th August 2014

Pan European property stocks fell a modest -0.7% in July. The intra month movement was less dramatic than in June with a peak/trough spread of just 2.6%. The Trust’s NAV fell just -0.1%, resulting in 52bps of relative outperformance. Our overweight position in the UK was beneficial as UK stocks rose +1.6% over the month. June’s best performers were July’s weakest with France (-5.1%) and the Netherlands (-4.5%) falling as broad market sentiment turned from seeking increased real asset exposure (on the back of falling bond yields) to concerns that weaker production and sales data confirmed that the Eurozone continues to flirt with deflation.

Additional geopolitical unrest in Ukraine and sanctions against Russia threatens to aggravate the fragile economic environment even within the strongest performer – Germany. Renewed poor economic data from the peripheral nations contributed to weakness in the Italian (-11.8%) and Spanish (-6.5%) names. The Trust had invested in the €1.3bn IPO of Merlin, a Spanish (partial) cashbox which aims to create a €2.5bn portfolio through acquisitions. Given the 5% gain in the first week of trading, the position was sold. Since then the stock has fallen to 8% below its issue price allowing us to add once again to the holding. This was the last major IPO of H1 2014 and a number of subsequent potential issues (particularly in the UK) have been postponed or cancelled.

Whilst this sounds disappointing, it is good to see that markets are keeping irrational exuberance in check particularly when looking at new management teams. Existing listed companies have been more successful in tap issues with raisings in the last quarter from Picton Property, Schroder REIT and Capital & Regional. The latter raised £33m to enable it to buy out Aviva’s interest in the Mall Fund. Investor demand for commercial property remains strong and by way of illustration, Max Property received an all cash offer from Blackstone for its entire £760m portfolio at 14% premium to the June 2014 valuation. The Trust has a £20m position (2.4% of NAV) and we will receive proceeds at the end of August.

The other major corporate news is the recommended all paper takeover of Corio by Klepierre. The valuation pricing parity (1.14 Klepierre shares for each Corio share) reflects both a bid premium for the weaker lower valued Corio but also the expectation of potential synergies (€60m estimate) in combining their Continental European shopping centre portfolios. Corio rose 10% on the day of the announcement whilst Klepierre fell slightly reflecting the nervousness from Klepierre shareholders of the scale of the turnaround required in much of the undermanaged Corio portfolio.

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