July 2015

By | 16th August 2015

European shares responded strongly to the deferral of a decision on the future of Greece within the single currency and real estate shares were no exception – particularly given that they are one of the best ways to achieve domestic European exposure. Following the -5.8% pullback in the previous month, the 30th June proved to be the lowpoint and the benchmark rose 6.8% in July and has added a further 2% so far in August (to 7th). The recovery has resulted in the sector almost returning to where it started the financial year (March 31st). Whilst market sentiment has gyrated with a Q1 intra-quarterly movement of 12% we have also seen a large number of corporate actions as well as new highs in the underlying commercial property investment markets. In other words, there is plenty of investor interest and positive data points in the underlying asset class – property is a popular asset class.

Whilst June saw a rash of capital raisings, July was quieter but not silent. Merlin, the Spanish investment vehicle announced the phased acquisition of Testa for EUR 1.8bn and will complete a 2 for 3 discounted rights issue in August, increasing its market cap by 60%. Citycon completed its EUR 600m rights issue to buy Sektor Gruppen, a Norwegian shopping centre owner and manager. This deal looks expensive but that is masked by the cheap debt available to acquire it. The fund participated in the IPO of ADO Properties a small residential business focused solely on Berlin, our favoured German market.

At the country level returns were remarkably consistent with returns between 6 and 8%, the exceptions were Greece (closed) and Norway (-2%). The latter is dominated by two stocks Norwegian Properties and Entra which remains 50% government owned but we expect that position to be placed in Q4 leading to a stock overhang ahead of the news.

The surprise event of the month was the announcement that LoneStar was making an agreed offer for Quintain at 131p. Whilst this was 22% premium to the prior share price, it is only 6% ahead of the NAV. The share price is currently 133p reflecting the market’s belief that other bids may now materialise. Given that the business is a development play on Wembley residential a cash bid reflects the amount of capital seeking exposure to the sector.

The fund’s NAV rose +7.23% leading to 46 bps of relative outperformance in the month. However, the share price did not keep up with the rally rising 3.1% in the month.

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