June 2015

By | 16th July 2015

Real estate equity markets across Europe were weak in June with the benchmark falling -5.8%, its single weakest month since August 2013. No coincidence that the primary driver of the market sell off back in that summer was an earlier Greek crisis. However the blame for the market weakness cannot be laid entirely at Athens’ door. The beginning of the month saw the German 10 yr Bund yield rise from 0.5% to almost 1% in a matter of days. This was a continuation of the theme of rising yields (albeit from a very low base) which has been evident since late April as investors sense that deflation is unlikely given the weakness of the Euro and the drop in oil prices helping household budgets and hence consumer confidence. German residential businesses have enjoyed a high correlation with their domestic bond market and this drove German property share prices upwards (+35%) between October 2014 and March 2015. However this correlation resulted in a strong correction through May and June which coincided with Deutsche Annington announcing both a major portfolio acquisition and a capital raise of €2.2bn (in effect a thinly veiled degearing exercise). The stock fell 12.2% in the month and is down 22.8% since the end of February.

Amidst a tempestuous month for property shares, the sector had its highest number of significant corporate actions in any one month period. There were additional capital raisings from New River, Intervest, Wereldhave, Hamborner, Aedifica, LEG and Citycon as well the IPO of Pandox in Sweden and the announcement of a cash offer for Deutsche Office from Alstria. In Sweden, Pandox saw 50% of the B shares listed providing a partial exit for the private family office who delisted the company in 2004. The A shares (and control) remains with them. The fund participated in the IPO (at SEK 106 per share). The effective merger of Deutsche Office and Alstria will create the largest listed office business in Germany but also result in an increased exposure to Frankfurt (the weakest market amongst the big 6 cities).

The UK property companies outperformed their Continental European counterparts in the month as the Greek situation continues to shine a light on the complexities within the Eurozone monetary union. The fund remains overweight the UK versus Continental Europe.

Pan European property shares have now corrected -8.9% since 31st March (the fund’s year end). However, market fundamentals (particularly the lack of new supply of office, industrial and logistics) in many of our preferred submarkets remain robust and we see this correction as a potential buying opportunity – subject to some form of agreement between the European political elite and the people of Greece.

The fund’s relative performance in June was a modest +12bps and the share price went ex the final dividend of 4.75p on 25th June, payable on 4th August. The AGM will be held on 21st July at the RAC, Pall Mall at 12 noon.

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