July 2021

The pan-European listed real estate sector (FTSE/EPRA Developed Europe, net, total return, in sterling) returned +5.8% in July, outperforming wider European equities, which returned +4.5% as measured by Stoxx600 (total return, in euros).

Declining bond yields – notably German 10-year bunds, which were down -25 basis points (bps) to 45bps, and UK 10-year gilts, which were down -15bps – drove real estate equities higher, while the hunt for yield intensified (yet again). The average yield on 10-year government bonds across the G10 is now 0.3%. The concerns over rising interest rates at the beginning of the year now feel like a distant memory and the amount of negative-yielding global bonds, at US$16 trillion, is not far from all-time highs.

Listed logistics players were up +10% in July (+31% year to date). Strong performance came from the smaller names such as Montea (+13.9%) and Catena (+12.8%), and larger companies such as WDP (+12.7%) and SEGRO (+11.2%). We have maintained our thematic sector focus of being overweight logistics and underweight retail (particularly UK). The reporting season validated our positioning. The take-up of logistics space remains exceptionally high, and we therefore favour companies with large land banks and strong development exposure to capture this demand. The top-eight European markets hit record levels of take-up over the first half of 2021. At more than 15m square metres of combined take-up, markets are on track to exceed the fiscal-year 2020 record of 27m square metres. For context, this is up from 15m square metres five years ago. This demand – driven by e-commerce penetration and the importance of resilient supply chains and reshoring – is starting to translate into pricing power for landlords and firmer rental growth. By contrast, earnings in the retail sector were slightly below expectations. We believe the surge in infections arising from the Delta Covid variant make further Covid-related restrictions more likely, creating headwinds for footfall and sales recovery.

Another sub-sector showing no signs of decelerating operational fundamentals was self-storage, with Safestore and Big Yellow both returning more than 11% each in the month. Safestore is now up +38% year to date. Our stance is driven by Safestore’s superior earnings growth potential on the back of significant occupancy gains, strong operational leverage, increased market awareness and external growth opportunities through bolt-on acquisitions in a fragmented market with high barriers to entry.

Merger & acquisition activity continued in the sector, with a raised bid (+2%) from Vonovia for Deutsche Wohnen. The first offer period ‘only’ attracted 47% acceptance; however, now that Vonovia has acquired 30% in the market, the 50% acceptance hurdle should be cleared, paving the way for the German residential mega-merger.

Sweden was the top-performing country in July (+12.3% in Swedish krona terms) on the back of strong company results (reassuringly improving demand from tenants) for office landlords and the ever-decreasing costs of debt. Against that backdrop, Castellum (an underweight) put forward an opportunistic bid for Kungsleden (a large overweight). We expect it to be successful given the 26% of Kungsleden shares committed. The pricing is at a 20% premium to net asset value (NAV), and a cash and share deal enables continued exposure to the Castellum/Kungsleden growth story. Following the change of control at Castellum, the leadership vacuum is solved as Kungsleden’s CEO and CFO will lead the new entity. While the overall Swedish office valuation has become fairly rich, we believe this deal makes sense, and offers attractive synergies and acquisition/development opportunities. Castellum and Kungsleden were up +10.7% and +12.2%, respectively, in July.

The listed healthcare real estate sector is becoming increasingly institutionalised. Icade (predominantly a French office landlord) unveiled its intention to spin off its clinic portfolio (representing circa 30% of total assets), with a c.€800m initial public offering and a limited secondary offering of Icade Santé by year-end creating c.15% of free float. Icade will retain control of its listed subsidiary. We think this is a shrewd move to capitalise on the lofty valuations of pure healthcare plyers in the UK and continent (40–70% NAV premia).

While we remain negative about the outlook for much of the retail sector, an exception is retail warehousing. The sub-sector has seen rents and values stabilise, with retailers attracted to the edge of town accessibility and general affordability as part of an omni-channel offering. We acquired 6% of Ediston Property Investment Company (market cap of £160m). The company is over 75% retail warehousing, with a strategy to move closer to 100% in a secondary placing at 67p (now 76p).

The AGM took place on 27 July 2021 and the manager’s presentation is available on our website (www.trproperty.com).

Discrete rolling annual performance as at 28.04.2023 (%):

	2023	2022	2021	2020	2019
Fund	-26.50	6.33	27.93	-9.56	3.54
Benchmark	-25.77	-1.70	22.14	-11.44	-0.02
Share Price	-29.00	7.24	32.00	-13.65	2.72