June 2016

By | 16th July 2016

Pan European property equities as measured by the benchmark, FTSE EPRA NAREIT Developed Europe Net TR in sterling rose +2.0% in the month. This was quite an astonishing performance in the light of the UK market’s predictably severe response to the decision to leave the European Union – which whilst binary – produced an unexpected result. From May 31st to June 23rd the benchmark rose +1.7% only to fall -5.4% in the two days post the referendum result followed by a +6.1% recovery in the final three days of the month. After banks, other financials and house builders, real estate was the next most affected subsector. Whilst we had continued to reduce UK exposure in the weeks running up to the referendum, the fund was fully invested (the limited gearing being offset by our physical property exposure) and this coupled with a modest overweight to London, on a see through basis, resulted in relative performance in the month of -0.35%. Whilst we expected 20%+ corrections in the event of a Leave vote in high quality London development names (Great Portland, Derwent London ), we were surprised at the severity of the response to the house builders (we own just one – Telford Homes which fell -17.3% in the month). This severe reaction extended to any stock with links to any part of the residential market, however modest, with land bank play St Modwen (-17.8%) and the owner of the Earls Court residential site, Capital & Counties (-13.2%). The self-storage operator, Safestore, however, rose +5.7% in the month. The fund has a holding in St Modwen and Safestore but not in Capital & Counties.

Continental European companies also shuddered in response to the surprising news but to a far smaller extent. Predictably those stocks exposed to the stronger economies performed best with Germany (+4.7%) dominated by large residential businesses and Sweden (+0.5%). The preferred safe haven of Switzerland +1.7% in Swiss francs (CHF) also did well even though the strengthening Swiss franc will make real economic growth going forward even harder.

The overriding factor in the last week of the month was the currency movements. Sterling fell -7.9% from €1.30 to €1.19. The fund’s foreign exchange strategy has been consistent for many years. All currency exposures are in line with the benchmark’s currency positioning regardless of the underlying stock exposure. This means that when European currencies are strengthening against sterling the asset value rises (but not the manager’s relative performance). The movement versus the Swiss franc was even stronger at -9.7%. Only 30.3% of the Trust’s net exposure is to sterling and the currency movement enabled the asset value to rise by 1.65% in the month. However, the share price has not kept pace with the asset value and at the month end the shares traded at a discount of 18%, a level only experienced in the period from June 2008 to March 2009.

Looking forward, we are in a period of heightened volatility as the political turmoil reverberates through the UK and across to Europe. The spread of potential economic outcomes as a consequence of this decision-making vacuum is as wide as it’s ever been. Rebuilding and reigniting business and consumer confidence will be critical in determining whether a recession is the outcome of this dangerously blunt tool of democracy. However the silver lining – for real estate at least – is that certain key fundamentals remain solid. The sector offers elevated levels of income (relative to fixed income), corporate balance sheets are not stretched and in many cases have significant firepower if opportunities arise and encouragingly there are very few markets which can be described as significantly overbuilt. Central London prime residential new build is an exception and the fund has minimal exposure to that market.

The Trust went ‘ex’ the final dividend of 5.2p on 23rd June. It is paid on 2nd August. Based on the 282p (30/6/16) price, the dividend yield is 3%. The dividend has been increased in 22 of the last 23 years (it was held flat in the year to March 2010) and the 10 year compound annual growth rate is 9.4%.

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