June 2014

By | 16th July 2014

Pan European property stocks fell -0.86% in June, pulling back the calendar YTD return to +10.2%. The Trust’s NAV fell -0.69%, resulting in a modest 16bps of relative outperformance. The steady upward climb of real estate stocks since the beginning of the year was interrupted with a sharp 5% correction mid month, followed by a dramatic recovery. The culprit was primarily the UK stocks which collectively had a mid month correction of -7.3% and completed the month down -2.6%, whilst the remainder of Europe rose 0.5%. Within the UK particular underperformers were those small and mid cap stocks with housing / residential land exposure following Governor Carney’s Mansion House speech where he commented that market expectations of potential rate rises were too far in the future (mid 2015).

St Modwen, one of our largest overweight positions had a peak to trough intra month move of -14.9%. We added to the position on this weakness just ahead of its H1 results at the end of June. Their results beat market expectations and the stock has since risen 14% from its low (24/6). A good example of company fundamentals restoring confidence with investors even in the face of mixed messages on broader interest rate policy.

France and the Netherlands were the strongest performers amongst the Eurozone countries as investors bought the most liquid property names in a continued acceleration of exposure to European income stocks. Whilst top line growth looks weak across many of these Continental companies, the ability to continue to reduce their cost of debt allied with the market’s enthusiasm for even looser monetary policy from the ECB drove positive investor sentiment. Bond markets remain very accommodating and Unibail raised €500m 7yr convertible with a zero coupon – yes investors will receive no income and the strike price was 37.5% ahead of the share price. Earnings are clearly enhanced.

Equity capital markets remain active with the €1.3bn IPO of Merlin, another Spanish (partial) cashbox with the aim of creating a €2.5bn portfolio through acquisitions. The initial seed portfolio is 880 banking properties let to BBVA across Spain.

Disappointingly, Liberty Living, a student housing IPO was pulled due to lack of appetite at the price range. This vehicle would have acquired the Brandeaux Student Fund and provided an exit to investors who currently find their investment gated (a ban on redemptions). Another reminder of the risks associated with illiquid assets in an open-ended structure. The Trust’s shares went ‘ex’ the final dividend of 4.6p on 25th June. Payment date is 5th August.

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