July 2017

By | 22nd August 2017

Pan European property equities were flat (-0.3% in Euros) broadly in line with general equities (-0.4% for the EuroStoxx 600). A stronger Euro helped the Trust’s GBP benchmark to return 1.47% whilst the Trust’s net asset value rose 1.77%. The share price rose an encouraging 3.32% narrowing the discount to sub 8%.

The European strengthening economic recovery has become broad-based across countries and sectors; nevertheless this is yet to translate into stronger inflation. As expected, the ECB made no changes to policy interest rates and forward guidance in the July meeting and German 10-year bunds were up a modest 8bp in the month as a result.

Against this backdrop the reporting season acted as the main share price catalyst. The top performing region was Southern Europe with Spanish stocks +4.3% and Italian names +6.9%, which benefited from accelerating growth both on capital values (yield compression) and rents.

Hispania, a 3.6% holding in the Trust and 3% overweight generated +21bp of relative performance after the Spanish hotel landlord released consensus-beating numbers, in particular the 15% NAV progression over H1 17.

The sector performance was dragged down particularly by French and Dutch stocks with the retail names being the poorest performers, namely Unibail-Rodamco (-1.9%), Klepierre (-4.2%), Wereldhave (-2.9%) and Eurocommercial (-2.3%).

Whilst the UK sector was positive overall (+1.6%) helped by income and industrial-focused names, the retail majors were under pressure. Intu’s H1 results, showing LFL net rent guidance reduced to 0% for 2017, were taken poorly prompting a -8.2% subsequent share price reaction.

The valuation disconnect between London-exposed property equities and the London property investment market was unambiguously demonstrated with the sale of 20 Fenchurch St by Land Securities.

The building aka Walkie Talkie was sold to Hong Kong LKK for £1.3bn, a net initial yield of 3.4%, in the UK’s largest ever office transaction. This strong pricing was 13% above Land Sec’s March 17 book value whilst the shares are trading on a -28% discount to NAV and -22% discount to unlevered asset base.This disposal of this mature asset at record pricing and the resultant £475m capital return to shareholders makes sense. Nevertheless the share price response was fairly muted. Brexit uncertainty remains and catalysts for re-rating may be limited to a large scale debt restructuring in an effort to accelerate recurring earnings growth by reducing the above-average cost of debt.

The Trust participated in the IPO of Supermarket Income REIT, which raised £100m and aims to pay an inflation-linked dividend yield in excess of 5%. The company is under exclusivity or advanced discussions for 5 assets, all let to major supermarket operators on long-dated inflation-linked leases.

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