July 2020

The Trust’s net asset value (NAV) with income rose +1.39% versus a return of +0.07% for the benchmark, while the share price returned +2.55%. The discount still stands at an attractive -13%.

European property companies, measured by the FTSE EPRA Developed Europe Index, generated total returns of +1.2% in euros, outperforming general equities (measured by the EuroStoxx 600 Index, total returns, in euros), which returned -0.9% in July. They were helped by depressed bond yields (the 10-year German bund fell -7 basis points (bps) in the month, ending at -52bp) and the spread of negative real interest rates across several major economies.

Although subdued summer trading volumes, the fluid COVID-19 situation and China-US sabre rattling will continue to fuel volatility, markets are well supported by low real (inflation-adjusted) rates, the TINA (‘there is no alternative’) mindset and unprecedented central bank and government stimulus.

The COVID-19 crisis has led to a clear acceleration of pre-existing trends, most notably ecommerce (logistics and industrials) stocks faring better than retail.

This was evidenced by the first-half reporting season, which revealed strong operating numbers from industrial landlords. These were collectively the top-performing sector (+8% in July), moving back to pre-COVID-19 share-price levels. The bottom ten sector performers in July were almost exclusively retail, with individual stock performance ranging from -8.5% to -20% after a weak set of results.

Neither results nor conference calls have been too informative due to muddy, unaudited accounting vagaries of rent collection (“reprofiling”). The operational fundamentals of shopping centres, not just occupancy but also retailers’ rent affordability, are under immense pressure. Tenant negotiations over rent concessions are still ongoing and prove challenging when even profitable, well-capitalised tenants such as Apple are demanding a 50% reduction in the UK, for example. Management teams, especially on the Continent, appear slightly in denial when it comes to balance-sheet weakness and the need to take bolder recapitalisation actions. Unfortunately, reducing debt piles through disposals is currently arduous as the shopping centre investment market has largely dried out.

It’s not just shopping centres: Central London retail appears particularly vulnerable given its reliance to daily office workers (low traffic due to home working) and tourists. Indeed, domestic and international tourists make up 20% and 40% Capital & Counties’ Covent Garden estate footfall, respectively. Forward-looking indicators (six-month forward hotel and flight bookings) point to a painfully slow recovery in London.

European office landlords reported relatively solid results given the context, with resilience in occupancy and stronger rent collection stats than their UK counterparts. Nevertheless, the market is still trying to calibrate the medium- to longer-term downside risk from work-from-home trends, and so most Continental European offices stocks are trading at a 30–40% discount to net asset value (NAV).

Discrete rolling annual performance as at 31.07.2020 (%):

	2016	2017	2018	2019	2020
Fund	20.22	7.66	15.61	2.87	-3.68
Benchmark	18.41	5.30	10.36	-0.83	-7.85
Share Price	2.10	21.94	24.02	2.65	-15.63