May 2015

By | 16th June 2015

May saw further share price volatility and weakness across Continental Europe which started in mid-April. The fund’s benchmark index fell -2.1% with Europe ex UK falling -5.5% in sterling and -4.1% in euro. The UK had a much stronger month rising +2.7% on the back of the general election outcome and strong year end data from a number of property companies. As I wrote last month eurozone sovereign bonds have experienced renewed volatility as investors attempt to second guess the buying pressure from the European Central Bank (ECB) – the price setter. With yields so low (10 yr Bund yields got down to 0.05% in March) the impact of small movements in yields leads to dramatic capital value change. This volatility spilled over into weak sentiment towards leveraged assets such as real estate stocks. It is important to note that there has been no such weakness in the underlying asset class and we expect further yield compression in most submarkets if base rates remain this low into 2016 and potentially beyond.

The fund remains significantly overweight the UK and it was this geographical position which drove relative outperformance. The NAV fell -1.2% resulting in +87bps of relative outperformance in the month. The UK’s two largest property companies, Land Securities and British Land both reported full year results (to March 2015) with Land Securities’ figures significantly ahead of consensus driven by the delivery of development gains from its London assets as well as unexpectedly strong valuation gains from its retail assets. The retail portfolio has been restructured with highly profitable sales (eg. Livingstone, Bristol and Sunderland) and property swaps (Exeter for more exposure in Glasgow). Our holding is the fund’s largest single position.

On the Continent, the worst hit region was Scandinavia. In Sweden, the highly leveraged commercial property owners such as Hemfosa (-9.6%), Klovern (-10.3%) and even Wihlborgs (-11.3%) were hit hard as investors sought to reduce exposure to leverage. The two largest Finnish names were no better with Sponda (-8.6%) and Citycon (-8.9%). The latter announced a rights issue to fund a large (€1.5bn) acquisition of a Norwegian shopping centre owner / manager. We see this as an expensive transaction fuelled by cheap debt. In our core European markets of France and Germany we saw weakness across the sector with the German residential names predictably weak given their strong correlation with Bund pricing.The Fund announced its full year results on 27th May and the directors declared a final dividend of 4.75p bringing the full year to 7.7p, an increase of 3.4%. The preliminary statement is available on the fund’s website ( and hard copies of the Annual Report will be available at the end of the month.

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