May 2018

By | 20th June 2018

Pan European real estate equities had a volatile month with the index initially continuing its April rally then retreated before finishing with a rally off the month low point with the FTSE/EPRA NAREIT Developed Europe Index (in GBP) returning 0.46%. Continental Europe and the UK returned near identical numbers. The Trust’s NAV was 0.49% in line with the benchmark. The share price however rose 2%.

The initial tailwinds for the sector continue to be a mixture of changes to the macroeconomic environment coupled with ongoing healthy earnings news augmented by corporate activity in several countries. This warm breeze of positive economic news was marred in the latter part of the month by the political instability in Italy and lead to volatile performance in the second half of the month. With Eurosceptic parties taking centre stage in Rome it is a timely reminder that the European economic recovery hasn’t fed through to many with unemployment in Southern Europe (in particular) still running much higher than the long term average. The Trust has zero direct Italian exposure but we are exposed to (mostly) Milan offices through Fonciere des Region’s 52% ownership of Beni Stabili as well as Northern Italian shopping centres through Eurocommercial (45% of their portfolio). Even given the political noise, Beni returned 4.2% in May.

It was a busy month with full year results from multiple companies with March year ends. This was particularly the case in the UK with results dominated by the two largest names Landsec and British Land. With very similar portfolio exposures – both stock are broadly 50% retail and 50% London offices – the differentiating feature was the message delivery and outlook with Landsec remaining more bearish about market prospects (the CEO has been very consistent with this view). The stock fell 6% in the month. The modest good news was that the self help of debt restructure and share consolidation resulted in strong earnings growth and both companies now have a similar dividend yield with Landsec likely to see slightly greater growth next year even without accretive acquisitions.

Capco announced that it is considering splitting into two parts – the Earls Court residential site and the Covent Garden retail estate. We think this will be a prelude to either or both elements being acquired by third parties. The stock has rallied 12% in the last 2 months (ahead of the benchmark) We remain bearish on the outlook for Central London residential and we don’t own the stock.

London Metric, one of our preferred logistics plays, recorded strong results with 12 month total return of 13.7% and growth in dividend of 5%. It has reduced its cost of debt even further and has a very attractive 1m sq ft development programme. We continue to be overweight logistics and retail distribution and underweight traditional retail. The holding in Hammerson reflects our expectation that the Board will engage in further merger discussions given that the key driver of the (aborted) deal to acquire Intu was a desire to scale the business.

One side effect of the political turmoil in Italy was to increase investor risk aversion with the yield on 10 year Bunds falling 20bps (55bps to 35bps) over the month. This helped drive our German residential exposure with the German EPRA index rising 1.6% in the month. The stand out German performance came from Aroundtown (total return of 7.5%).

While we had numerous UK stocks report FY March results, we also had a wide selection of Q1 figures across Europe and it was encouraging to see all companies reporting like for like increases in earnings and in most cases reiterating their full year 2018 guidance.

The top performer across the sector was D Carnegie (returned 9.4%), a Swedish residential business which is controlled by Blackstone and benefited from the read across from Victoria Park which is the subject of an agreed takeover by Vonovia (the Trust’s largest position).

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