May 2017

By | 22nd June 2017

A really strong month for pan European equities and property was no exception with the benchmark index rising 5.6% and the net asset value (NAV) slightly exceeding that with a return of 5.7%. The combination of a reduction in political risk following Macron’s victory was coupled with the “hard data” evidence of growth acceleration in Europe, in terms of earnings per share growth. This has finally begun to permeate through to the corporate sector which registered the best earnings season in almost seven years. This in turn prompted a reversal of the €100bn equity outflows seen in 2016.

Germany (+7.9%) and Sweden (+7.1%) were the top performing countries with returns dominated by their respective residential businesses. In Germany, this was particularly the case for the Berlin focused companies. The so-called Mietspiegel (rent reference index) for Berlin was announced during the month and came in stronger than anticipated at 9.4% versus the 5-6% that was widely expected. While the precise impact on future rental growth for our companies under coverage remains uncertain for now, the higher than anticipated adjustment should positively impact the number. The prospect of higher rental growth acted as a catalyst for both ADO Properties and Deutsche Wohnen, with both stocks outperforming the EPRA index by 9.5% and 6.0% respectively. The fund is overweight ADO but has an underweight position in Deutsche Wohnen. In Sweden, the charge was led by D Carnegie (+16%) the residential owner / developer which is now controlled by Blackstone and where the free float is small. Our largest overweight position is in Balder (+10.1%) which has recovered strongly from a poor performance in Q1 and continues to drive value from both its Swedish and Finnish residential assets.

In France, we participated in the €124m clean-up trade placing in the housebuilder Kaufmann & Broad. The shares from a private equity legacy shareholder were placed at a discount and returned over 7% in the month. We remain positive about residential pricing across much of Europe although the tremendous growth in prices in some large cities are causing concern.

In the German office segment TLG Immobilien made a takeover offer for WCM, an owner of mediocre quality office and retail assets with no specific geographical focus. During its presentation, TLG acknowledged the deal was around 5% NAV dilutive and funds from operation (FFO) neutral despite a significant increase in leverage. This is a disappointing transaction and appears to be a case of ‘growth for growth’s sake’ and results in a dilution of TLG’s Berlin office exposure which was a key plank to our investment rationale. We have therefore reduced the position to a neutral holding.

In the UK, we had FY17 results from the two majors, Land Securities and British Land. Both failed to inspire investors with Land Securities remaining bearish with record low gearing, whilst British Land is expected to experience a drop in earnings as it has reduced leverage through sales and will also see a drop in income at its Broadgate estate as it prepares vacant buildings for refurbishment. The stocks fell – 3.2% and -3.4% respectively in the month. The only positive performer amongst the seven largest companies in the UK was Segro (+3.6%) which continues to benefit from investor demand for logistics exposure. It was also expected to join the FTSE100 which was duly announced on June 1st.

May saw the first IPO of a REIT specialising in the family housing niche of the private rented sector. PRS REIT (market cap £266m) saw its shares rise 6% at launch and the fund participated given our aim to increase exposure to this growing sub-sector.

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