Real estate equities were the second worse GICS sector in June, with macroeconomic concerns once again weighing heavily on the asset class. The UK led the way down, with the 50 basis point (bp) increase in the base rate driven by another stubbornly high core inflation print (8.7% year-on-year versus 8.4% estimated). Having rallied in the first few days of the month after a difficult May, we then saw concerted downward pressure followed by a sharp upward move towards month-end (which has continued into July). The benchmark fell -1.6% in the month, while the Trust’s net asset value (NAV) fell slightly less at -1.4%.
Until early June, the Trust’s relative performance in the first quarter of the financial year had been substantially aided by our overweight position to the UK. However, the fallout from the Bank of England’s 50bp base rate move saw investors worried about the sticky inflation narrative, and this pushed yields upwards across risk assets. The UK is now viewed as one of Europe’s more problematic economies, with low growth and higher rates. From 5 June to month-end, the UK property names collectively underperformed Continental European names by 7.3%.
Over the last year, the worst performing sub-sector was German residential, with collective declines of over -40%. June saw a strong reversal, with EPRA Germany +5.6% as the 10yr Bund stabilised and the new Mietspeigel (rent table) offered reassuring headline rental growth of circa 5%. While Vonovia returned +4.3%, the smaller, more nimble names, LEG (8.5%) and TAG (15.6%), rose strongly. Our largest relative exposure in Germany is our 3% holding in Phoenix Spree Deutschland, which is trading at circa 57% discount of its last published asset value. At the AGM, shareholders voted in favour of various amendments to the external management contract, which reduces the overall fee (improving earnings) while also incentivising the manager to sell assets and return capital (probably via buybacks, which will be accretive). We welcome this board initiative, for which a number of shareholders, including ourselves, had lobbied.
A positive return, albeit more modest (+2.6%), was observed in Sweden after many months of poor performance. The most indebted, SBB (+19%), saw a strong recovery after announcing a string of sales. However, the share price is down 70% over the quarter and is now extremely volatile. It was interesting to see Pandox, the only pure hotel stock in our universe, continuing to recover +12.6% during the month.
In Belgium, Aedifica announced a discounted rights issue. The stock has been under huge pressure, falling this year from €100 per share to €60, with the rights priced at €52. The take-up was 82% and the rump was placed, enabling a return of +4.6% during the month as the stock recovered following the raise. The fund has been underweight healthcare names across both the UK and Continental Europe, but we have started to close some of those underweights as M&A activity may return to the sector given the depressed share ratings.
The other opportunistic capital raise was in Sagax (an ABB of SEK 2bn, 3% of market cap), the only large Swedish-listed property company trading at a premium to its asset value. This premium is a huge 100% to NAV. The CEO (and large shareholder) is held in high regard by investors. We think the raise was mostly about proving to the rating agencies that investor capital is still available (for the fortunate few).
The final dividend of 9.85p went ‘ex’ on 29 June. The full-year dividend of 15.5p equates to a current dividend yield of 5.75%.
The Trust’s AGM will be held on Thursday 20th July 2023 at 2.30pm at The Royal Automobile Club, London SW1Y 5HS. Shareholders who are not able or do not wish to attend in person (please note industrial action may affect National Rail services that day) will be able to watch a live webcast of the meeting through the following link: https://secure.emincote.com/client/trproperty/agm2023
The webcast will not enable shareholders to participate in the Meeting or vote, however, shareholders are invited to submit questions to email@example.com by 12.00 noon on 18th July 2023. Questions of a very similar nature may be grouped together to ensure the orderly running of the AGM.
Discrete rolling annual performance as at 31.08.2023 (%):
Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of all fees and expenses.