July 2022

Global risk assets reversed some of their year-to-date negative performance. Bond yields fell over the month, with investors believing that central banks’ hawkish responses are likely to have a deflationary impact. Unsurprisingly, Pan European real estate equities had a very strong month, with the Trust’s benchmark returning + 9.5%. The same index, when viewed in euros, rose +12.4%.

The strongest performer was Sweden (+22.7% in Swedish krona), which was driven by the reversal of spreads on many of the issued bonds. In our view, the concerns around credit agency downgrades look well founded, but the agencies are moving cautiously. Moody’s downgraded Castellum to Baa3 (one notch above junk). Ratings for Entra and SBB were reaffirmed but the outlook was changed to negative. The market was not in the mood for bad news, however, and these three companies saw total returns of +23.5%, +9.1% and +10.8%, respectively. French stocks collectively returned +15.3%, as deeply discounted companies enjoyed a strong rebound; both office and shopping centre-focused companies performed well. Plenty of companies reported first-half results towards the end of the month. Klepierre (+17.9%) saw improved guidance and emphasised its strong conviction that it has no refinancing issues alongside confidence in revenue growth through indexation. Covivio (+16.4%), the conglomerate focused on Paris and Milan offices, German residential, and hotels, had a similar message; its hotel and residential portfolios performed better than expected. The Trust has large holdings in both these companies.

German residential collectively added approximately 10% in the month, which was less than expected given its perception as a bond proxy, but investors remain worried about energy costs sapping any rental growth. TAG (+3.9%) announced a deeply discounted rights issue to finance the bridging loan used to purchase a Polish developer. It is not the only company to have made acquisitions which look, at best, hubristic. Vonovia is rumoured to be marketing €6.7bn of disposals to begin the reduction of its vast portfolio after the all-paper purchase of Deutsche Wohnen in September 2021.

Hammerson (+31.7%) produced strong interim results at the end of the month, which drove the stock up 11% on the day. Potential sales and improved net revenue saw the company announce its last deeply diluting scrip dividend as it continues its rehabilitation with investors. Value Retail (premium outlets) was a bright spot in terms of revenue growth and mirrors the strong return of domestic tourism, which has been evidenced in the hotel sector. Pandox (+29.4%), our universe’s only pure hotel play, produced a solid beat on expectations as domestic and international tourism (as opposed to business travel) continues to exceed expectations. While top-line growth has been strong, we foresee autumnal headings from increases in energy and staffing costs.

The UK’s three largest property companies all produced good returns. This was led by Segro (+12.1%), which reported good interim figures. The company highlighted its development programmes across Europe alongside the strength of occupier demand, even as the market anticipates yields rising to reflect the increasing cost of capital.

We expect spreads to remain elevated as the macroeconomic headwinds around Ukraine, energy costs, inflation expectations and supply chain disruption (cost push) all contribute to higher costs of capital. However, it is encouraging that long dated fixed income yields have fallen from their elevated June levels, and this contributed to the positive performance in July.

The Trust’s net asset value rose 9.5% over the month, in line with the benchmark. The final dividend of 9.2p was paid on 2 August.

Discrete rolling annual performance as at 29.07.2022 (%):