There is no point beating about the bush; quite simply, it was a brutal month for real estate equities. The FTSE Developed Europe (net, total returns, in sterling terms) fell -11.2% during the month and is now down -34% in the last 12 months. It is all about expectations of the future cost of money. Markets are focused on the renewed belief that central banks will need to remain hawkish for longer than expected as inflation is proving stubbornly persistent. However, the ‘risk free rate’ is only part of the cost of capital equation. At its simplest, the price of debt is a combination of that rate plus the additional cost of credit risk, as well as the margin required by the lender. The final piece of the debt jigsaw is the availability of credit. Concerns around these last two elements spooked the markets following the collapse of Silicon Valley Bank in the US and the fire sale of Credit Suisse in Europe. Real estate is a leveraged asset class and, when the outlook for the cost (and availability) of debt looks likely to weaken, the market impact can be dramatic.
At the micro level, we also saw the majority of companies reporting their FY22 results. Highly resilient top line revenue (driven by indexation and/or market rental growth) diluted by the increases in cost of debt remained the central theme. Some companies most at risk with higher loan-to-value ratios, lower earnings trajectories (lower yielding assets) or forthcoming debt refinancings announced cuts or suspensions of dividends. Investors took the news poorly. Europe’s largest property company, the residential behemoth Vonovia, fell -27.3% after announcing a halving of the dividend. LEG (-26.6%) and TAG (‑15.4%) had already suspended theirs. Aroundtown (-46.4%), with its opaque debt structuring, was the hardest hit and is now a heavily shorted stock experiencing volatile price swings. It owns 59% of Grand City (-32.4%), which was also hard hit. The Trust’s largest relative exposure to the German residential market is through Phoenix Spree Deutschland (-27.5%), which announced the suspension of its dividend. However, this relatively small portfolio (€775m) of prime Berlin property has deeply embedded value given the legal right (on over 70% of the portfolio) to sell individual units as they become vacant rather than relet. The external management contract has a continuation vote in 2025 and the shares trade at 50% of revised asset value. We fully expect shareholders to demand a liquidation. We will continue to hold our position.
Sweden boasts some of the most leveraged property companies and it again suffered, with stocks such as Corem (-19.3%), Balder (-18.3%) Nyfosa (-17.0%) and SBB (-16.9%) performing very poorly.
When we look for the bright spots, these were always in the businesses with the least amount of near-term debt refinancing and where asset values have already corrected significantly; the poster child for this is the UK. Relatively strong performance came from a diverse group: Segro (-4.6%), Unite (-2.4%), Tritax (-5.2%) and the self-storage names, Safestore and Big Yellow, which were down -4.2% and ‑3.7%, respectively. Those that have recently completed debt hedging with the commensurate earnings impact, such as Supermarket Income REIT (-5.2%), also performed relatively well.
The Trust’s net asset value (NAV) fell -13.0%, underperforming the benchmark, which returned ‑11.2%. The Trust’s month-end NAV included the second-half negative revaluation of the physical property portfolio (-£9.63m). The property value correction reflected the broader market, with yields moving outwards even as rental income rose from a mix of fixed increases and new lettings (in excess of estimated recovery value).
On the first trading day of the new financial year (3 April), Industrials REIT announced that it had received a potential cash offer from Blackstone at a 40% premium to the previous closing price. The Trust owns 11% of the company and it constitutes 3.5% of our NAV. This represents a good start to the new financial year after a challenging 12 months.
Discrete rolling annual performance as at 28.04.2023 (%):
Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of all fees and expenses.