March 2017

By | 22nd April 2017

Pan European real estate equities enjoyed another positive month, albeit not on the scale of February’s 4% move with the benchmark rising just 0.3%. However the Trust’s performance was considerably stronger with the NAV rising 1.07% and the share price pushing up 3.4%. The decent performance in the fourth quarter of the financial year – both relative and absolute – resulted in the Financial Year 2017 net asset value (total return) reaching 8.0%, 153bps ahead of the benchmark (post costs). Given the rollercoaster of global events in the last 12 months we are encouraged by the resilience of returns.

The results season drew to a close mid month and as I commented last month we have seen strong earnings performance across most of our companies. However macro influences continue to dominate. Property is a local business and many of our companies are seen as a pure domestic or pan European play. Hence the tone of the European political landscape is quickly reflected in prices of these locally focused stocks. Following the Dutch elections and the swing in the polls towards Macron in France we saw outperformance of both Dutch and French companies in the month. Unibail and Klepierre – the largest retail landlords – were both up 4%. Alongside the improving political sentiment we saw good employment and economic data which pushed bond yields higher on inflation expectations. This depressed German residential names, which still have a strong correlation with bond pricing, they collectively fell -1.7%.

The strongest European performance came from Hispania (+9.8%), which focuses on Spanish hotel investment and management. This externally managed business announced that it would liquidate over the next three years and whilst the share price performed strongly in late February it has continued to do so in March. Spain is enjoying the highest GDP growth rate in the Eurozone and we remain confident that Southern Europe will continue to benefit from tourists reluctant to travel to Turkey, Egypt or North Africa.

The Swedish stocks collectively fell -3.2% (in SEK) over the month as investors continued to worry about the impending announcement by the tax authorities of a white paper proposing changes to the capital gains tax and stamp duty regime for commercial property. Whilst it was published on 30th March, the proposals do require parliamentary approval and therefore may well be amended or diluted, but it remains a negative for liquidity at the very least.

The physical property portfolio was independently valued at 31st March and this resulted in a modest uplift of £0.6m in value. Following the successful opening of Waitrose at The Colonnades in Bayswater, our largest asset, we now await a further amendment to planning before proceeding with the remaining retail and restaurant lettings. We also note encouraging signs of rental growth, particularly in our light industrial and distribution assets and that sector continues to be our acquisition focus. We have also increased our equity exposure to this sector in both the UK and Europe and companies with exposure have been very strong so far in 2017 with Argan (16.6%) and VIB Vermoegen (8.9%). In the UK, London Metric raised £95m in a 10% placing at less than a 2% discount to the undisturbed price. We participated in the raising as the strategy continues to focus on logistics and away from retail.

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