March 2022

By | 19th April 2022

For equities, this was a volatile month of two halves. Given escalation of the war in Ukraine, the property benchmark declined -8.2% in sterling terms through 7th March. The benchmark then rebounded by +11.4% over the following three weeks. The Trust’s net asset value (NAV) gained +2.9% and outperformed the benchmark by +0.66%.

Although equities have rallied back to pre-Ukraine-conflict levels, there remains significant macro uncertainty and the Trust reduced its net equity exposure to 103% at month-end.

Economic growth is still elevated among developed economies, with record low unemployment, but the Ukraine conflict has accelerated inflation. This has driven the need for global central banks to act by bringing forward rate hikes and quantitative tightening.

Despite this market volatility the M&A momentum in our sector continued unabated. Over the past five months, Brookfield has now taken three European Real Estate Investment Trusts private: Alstria (German offices), Befimmo (Belgian offices) and now Hibernia (Dublin offices), for a total aggregate consideration of €6bn NAV and €9.7bn portfolio value!

In our view, this speaks volumes about the appealing valuation of certain segments of the listed property sector, which are still trading at NAV discounts, for private equity players sitting on piles of uninvested capital. While shares were trading at significant discount, the Brookfield weighted average take-out price is broadly on par with NAV. The Trust had a 2.1% holding in Hibernia, which represents 3.7% of the company share capital. The +36% share price move contributed +0.50% of the Trust’s gross monthly outperformance.

The normalisation of monetary policy could create a performance dispersion within the listed property sector. One country that is particularly vulnerable to rising interest rates is Sweden. Listed property companies have enjoyed outsized returns during the monetary policy super cycle, thanks to higher leverage and strongly rising property values. But they are now more vulnerable due to above-average Loan-to-value ratios, high floating rate debt exposure and shorter debt duration. The trust remains underweight to Sweden (mostly through Swedish diversifieds) on the back of this deteriorating outlook.

We expect some landlords in the logistics, food retail, and healthcare sectors to maintain superior pricing power and be able to pass full consumer price inflation onto tenants. The Trust has a 5.6% overweight position to industrials and +2.1% to supermarkets. On the other hand, consumer-related property types such as retail and residential could suffer from the cost-of-living crisis impacting household incomes. In March, the Trust reduced its exposure to German residential by -1.5% (mostly through Vonovia), given the headwinds of rising financing costs and higher utility bills for underlying tenants.

On 31st March, the physical property portfolio was revalued by the independent valuer, Knight Frank LLP, at £97.16m. This reflects a 6.9% net capital increase over the past six months. There were no transactions during the period, and much of the valuation increase was delivered by our industrial estate in Wandsworth, SW18. Rental growth in the Central London industrial market has continued at pace, with an increasing number of occupiers chasing a scarce resource. In turn, there is a growing pool of investors looking to allocate capital to this market, which is generating further yield compression. While this dynamic is strongest in London, it is prevalent across the UK and is benefiting our industrial estate in Gloucester.

March 31st marked the Trust’s year-end, with a NAV total return of +21.4% over 12 months compared to +12.2% for the benchmark. The share price total return was +19.94%.

Over the last decade, the NAV total return has been 263.8%, while the benchmark returned 143.8%. The share price total return was +309.6%.

Discrete rolling annual performance as at 29.04.2022 (%):

20222021202020192018
NAV6.3227.93-9.563.5417.87
Benchmark-1.7022.14-11.44-0.0212.79
Share Price7.2432.00-13.652.7224.85

Past performance should not be seen as an indication of future performance