March 2019

By | 15th April 2019

Pan European real estate equities enjoyed a strong performance in March with the benchmark index rising 4.8% which more than compensated for the weakness in February. Adding in the strength in January the sector enjoyed a Q1 total return of 9%, its fastest quarterly growth since Q1, 2015. The Trust also enjoyed a strong performance returning 5.4% in March and this brought the full year total return to 9.1% versus the benchmark of 5.6% and relative outperformance, net of fees, of 344bps for the year. The share price total return was 6.2% over the 12 months.

The March figures include the year end revaluation of the physical portfolio which rose 3% (£3.1m) to £103m (8% of net assets) net of capital receipts and costs. It was a busy month as we completed two major lettings.  At the Colonnades in Bayswater, Specsavers have taken a 10 year lease on the vacant retail units and this leaves just the double restaurant unit to be let.  This is an excellent result providing a quality retailer to anchor the end of the parade.  The second major letting was in Harlow where we have let 65% of the 11,000 sq ft vacant 1st floor at £15.00 psf on a new 10 year lease with 12 months rent free.  This sets a new market rent for the building at a 18% premium to the previous highest rent.

The month started with a very dovish message from the ECB signalling lower for longer forward rate guidance. The ECB also revived its TLTRO with the intention of encouraging banks to provide credit to businesses and customers. Draghi’s dovish message reflected the central bank’s pessimistic cut in economic outlook, the sharpest downgrade since the advent of its quantitative easing programme. The new growth forecast for 2019 is just 1.1%, down -0.6% from the forecast 3 months prior due to the risks around trade tensions, Chinese slowdown and Brexit uncertainties.

With this potential growth scare for the economy and ‘Japanification’ risks in Europe market expectations moved dramatically with the next rate hike now expected in 27 months time compared to 16 months as at the end of February.

This backdrop was certainly supportive for Defensives and Real Estate in particular was the best performing subsector as the hunt for yield theme showed no signs of abating. German residential names outperformed. LEG Immobilien (+11.5%) announced solid results (LFL rental growth +3.0% and NAV up +15% yoy) with a smooth leadership transition as CEO Thomas Hegel will be replaced by Lars von Lackum (ex COO). The stock continues to offer highly dependable cash flow by providing guidance throughout 2020 of c.6% annual earnings growth aided by steady top line growth above 3% but also EBITDA margin expansion of 2pp to 74%. It remains the Trust’s largest relative overweight position.

Swiss property companies were also strong (+5.0% TR in CHF) on the back of the SNB dovish message with unchanged rates at -0.75%, but with lower inflation forecast. Indeed the economy has cooled sharply and the Swiss Franc remains strong against the euro. Inflation is back below 1%. Our lack of exposure to Swiss names was a negative contributor to performance,

The UK (+0.1% in GBP) significantly underperformed the Continental names (+6.0% in EUR) due not only to the never-ending Brexit saga but also investor response to weak results and poor strategic direction from the challenged UK retail sector. Hammerson (-9.9%), INTU Properties (-7.4%) and Capital & Regional (-19.3%) also suffered from further retailer failures and CVAs amidst the ongoing Debenhams saga and press speculation over the Arcadia Group’s expected restructuring.

Scandinavian property shares were also strong with Sweden (+7.1% in SEK) and Norway (+8.5% in NOK). These companies are amongst the most leveraged in our European universe and also tend to operate with high levels of short term debt. The Riksbank have remained as dovish as the ECB and therefore these stocks have to have a high positive correlation to the expectation of rates remaining lower for longer.

Discrete rolling annual performance as at 29.03.2019 (%):

20152016201720182019
Fund28.318.228.0115.469.11
Benchmark23.345.396.4710.235.61
Share Price29.13-1.619.09
25.456.21