March 2014

By | 16th April 2014

European real estate stocks suffered their first collective negative month of 2014, with the Trust’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return (in GBP) falling -2%. This was greater than broader European equities which fell -0.7% as measured by the Stoxx 600 Index. The pullback was driven by the UK stocks which until this month had enjoyed outperformance of their ‘Continental cousins’, a situation which had persisted throughout 2013 and into the new year. Even after the fall of -3.5% in March, the UK property stocks had returned +6.6% YTD still ahead of the remainder of Europe (ex UK) which was +4.2%.

The Trust’s NAV was virtually flat in the month, falling just-0.1% and outperforming the benchmark by 189bps. The majority of this performance (+160 bps) was from the revaluation of the property assets. The direct assets account for just under 8% of the net assets and are independently valued in September and March. The valuation increase of £14.8m was largely driven by valuation increases at The Colonnades, W2 (following the granting of planning permission to extend the supermarket and create new retail units) and Vauxhall, SW8 (now under offer for sale to a residential developer). However we also added relative performance in the equity portfolio through our nil holdings in Capital & Counties (-7% in the month) and Intu (-13.1%). Intu’s performance reflected their announcement of a deeply discounted rights issue (raising £488m at a 53% discount to the December 2013 NAV), they have agreed to buy 2 shopping centres in the West Midlands and a retail park in Northern Ireland from Westfield for £868m.

Equity investors were clearly spooked by Russia’s involvement in the Ukraine and the subsequent annexation of the Crimea. The Stoxx 600 dropped -4.5% in the first two weeks of March only to recover almost all of that loss in the last two weeks as investors reflected on the damage to Russia’s economy from the perceived land grab. Finnish property stocks with assets in Russia and the Baltic States performed poorly with Sponda (-8.1%) and Technopolis (-7.1%).

Beyond the issues surrounding the eastern edges of Europe, the remainder of it continues to benefit from investor appetite for exposure just as other parts of the globe look less attractive with US equities looking expensive and many emerging markets looking vulnerable to a Chinese slowdown and rising US Treasury yields. Sovereign bond yields in peripheral Europe continue to fall with IGD, an Italian shopping centre owner +13.8% and Eurobank Properties in Greece +13.7% the top performers in the month. The appetite for assets in these perceived recovering economies remains undiminished and we have seen three ‘cashbox’ IPOs from Grupo Lar, Hispania and Kennedy Wilson Europe in the last 2 months with the first two focused on Spain and the latter on Ireland, the UK and Spain. We expect more, and early in April, Green REIT announced a further €400m raise to invest in Ireland.

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