March 2018

By | 25th April 2018

Pan European real estate equities had a strong month with the benchmark (FTSE EPRA/NAREIT Developed Europe Net TR in GBP) rising 2.55% on the back of the mix of a strong finish to the results season (particularly in Germany and Spain) coupled with the hint of further corporate activity in the UK.

The fund’s March year end included the six monthly property revaluation which saw the property portfolio increase by £8.2m (9% on a like for like basis). This coupled with strong stock selection resulted in the full year NAV total return of 15.52% which exceeded the benchmark return of 10.23 %  by 529bps. The share price total return was 25.4% reflecting both the NAV growth and a tightening in the discount of the share price to the published NAV.

German residential remains the largest individual subsector in our universe and March saw the remaining major companies reporting strong growth. Deutsche Wohnen (+11.6%) led the charge with like-for-like rental growth averaging 4.4% with Berlin at +5.3%.LEG (+6.7%) published NAV growth of 24.8% as yields continued to tighten particularly in B locations with like for like growth across the portfolio of +3.3%. ADO Properties (+6.9%) the only pure Berlin player reported rental growth of 4.8%. All the residential names saw strong returns in the month and the drift downwards in the 10 year Bund yield also helped as these businesses are often viewed as ‘ bond proxies’ given their income security. Vovonia’s bid for Buwog went unconditional (as expected) and the behemoth now manages in excess of 350,000 flats across Germany and Austria. However its highly regarded CFO announced his retirement in May.

Spanish property companies were the other strong regional performer with investors buying into the sustained improvement in the economic outlook translating into rental and capital growth particularly in offices, industrial/logistics, residential and hotels. The fund has a large exposure to the latter through Hispania which rose 8.4%. Their share price has also continued to rise in the early days of April fuelled by press speculation that they have sold their office portfolio.

Swiss stocks were also strong following Swiss Prime Site (+4.6%) announcing an increased dividend even though earnings were slightly down resulting in a payout ratio of 117%. The fund does not hold SPS. Our Swiss exposure is through PSP which rose 3.8% in the month.

In the UK news was dominated by the newspaper report (19th March) that Klepierre (Europe’s second largest listed a shopping centre owner) had approached Hammerson’s board with a cash and share offer of 615p (a 40% premium to the undisturbed share price. The Hammerson board rejected it out right and the Takeover Panel has given Klepierre the standard one month period to formalise a bid or withdraw. The situation is complicated as Hammerson had already agreed to merge with Intu and that transaction was due to be voted on by the respective shareholders in late April. No surprises that Hammerson was the top performer in March returning 23.4%.

The physical portfolio year end valuation added 64bps to performance. The majority of the gains were at Ferrier Street, Wandsworth where this industrial estate has been redesignated mixed use and we will progress a planning application for redevelopment in the autumn. Elsewhere our industrial assets at Gloucester and Bristol saw rental growth and the Colonnades, Bayswater increased modestly in value now that our restaurant operator intends to commence fitting out and 1 Rebel, the boutique fitness studio opened for business last month.

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