May 2013

By | 16th June 2013

The reflationary trade which followed the Bank of Japan’s surprise announcements in April continued into May, providing further support to asset classes such as real estate which offer income yields comfortably ahead of fixed income/ bond yields, which are (in the main) inflation linked through annual indexation. The benchmark, FTSE EPRA/NAREIT Developed Europe Capped Index Total Return (in GBP) rose a staggering 7.8% from 1 May to 20 May, which brought the financial year-to-date (31 March to 20 May) to 13.7%. Too fast, too furious? From 21 May to the end of the month the index fell 5% as investors moved on from events in Tokyo to signs of real economic improvement in the US and began factoring in the impact of possible monetary tightening by the Fed.

Markets were led, firstly upwards in a continuous movement and then downwards in an equally straight line by macro events. What is happening on the ground in terms of European real estate values and underlying economic conditions appeared to matter little in these strongly momentum driven markets. Whilst the Fund outperformed the benchmark during the month by 70bps – it began to underperform in the last few days of the month as investors sold the best performers of the previous quarter – principally the London centric names and Unibail, Europe’s largest property company which stands on a significant premium valuation to the other pan-European shopping centre companies. Unibail was amongst the weakest performers(-2%) in the month.

Germany remains popular with investors with strong performance from the largest residential owner, Deutsche Wohnen which rose 9.5% in the month. The strongest performance was from Prime Office, a small owner of office property which has failed to deliver since its IPO and is now being courted by a large private equity shareholder, Oaktree. The stock rose 32% in the month. The Italian companies also performed well (+5.1% for Beni Stabili) which was surprising given the backdrop of rising sovereign bond yields. However, the stock still trades at a 40%+ discount to its NAV and we maintain our overweight position.

In the UK, those businesses with residential development exposure performed well as house price data and the UK government’s policy stimulus in this area fed through into pricing. Capital &Counties (site at Earls Court) rose 6.6%, Quintain (sites as at Wembley & Greeenwich) 15.8%, St Modwen (large land bank across the UK) 7.7% and the only pure residential investor Grainger rose 13.6%.

The Trust announced its preliminary results for the year to March 2013 on 24 May and a final dividend of 4.35p, bringing the total to 7.0p, a 6.1% increase on the previous year. The revenue outlook in the Chairman’s Statement highlighted our expectation that earnings would exceed 7.5p in the year to March 2014.

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