March 2016

By | 16th April 2016

The rebound in prices of pan European property equities which commenced in mid February, evolved into a strong rally in March with the benchmark climbing 7.7%. The index (in GBP) was last at this level in June 2007.

Once again, Continental Europe outperformed the UK as the expectation of more unorthodox monetary easing was effectively confirmed by the ECB. Europe ex UK (in GBP) returned 8.9% in March bringing the YTD (Q1 2016) to 11.4%. What is noteworthy is how little response there was from broader European equities through March with the EuroStoxx600 Net TR Index up just 1.4% in the month. Investors are less convinced that central banks can engineer the growth required to drive an inflationary response. In the case of property where the average lease contract is multi-year, the benefit from falling debt costs coupled with stable top line revenue continues to look attractive, at least on a relative basis. Another surprise has been the strength of EUR (or ongoing weakness in GBP). When viewed in EUR the returns from Continental Europe are a more modest 7.1% in the month and just 3.6% YTD.

The negative sentiment towards the UK extends beyond the currency with the UK property stocks still collectively down -7.1% YTD, even after a robust 5.4% rise in March. Fears over the June referendum remain centre stage and the universal inability to measure the impact leads to the deferral of investment decision making. The UK commercial property market has recorded significantly lower quarterly transaction volumes than last year. Whilst the top performing UK companies in Q1 were the higher yielding names with no development risk such as Tritax Bigbox and the medical focused businesses; March saw strong performance from the largest stocks led by a 10% gain in Land Securities (the fund’s largest UK overweight position).

The strongest gains in Europe were the largest companies, particularly the German residential names with Vonovia (+10.1%), Deutsche Wohnen (+12.1%) and LEG (+9.5%). The Paris office names also did well with Gecina (+8.3%) and Fonciere des Regions (9.9%). Elsewhere in Europe, income remains a focus and the ex-growth high yielding names such as Befimmo (+9.7%) and NSI (+7.6%) also performed well.

Performance in March benefited from the semi-annual revaluation of the physical property portfolio (9% of assets) which rose a net £6.6m in the second half. The valuation gains were primarily a result of our asset management initiatives at the Colonnades in Bayswater (where all 5 of the new retail / restaurant units are let or under offer) and our light industrial estate in Wandsworth where a new rental level of £20 per ft has been set.

The Trust’s full year performance (to the end of March) saw the NAV (with income) return +8.2% versus a benchmark total return of 5.4%, resulting in outperformance, post fees, of 285bps.

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