May was a strong month for pan-European real estate equities when viewed in sterling, with returns of 2.44%. The picture in euros was very different, however, with a negative performance of -0.38%. Essentially, both sterling and UK property companies were poor performers over the month. Sterling fell -2.7% against the euro and UK property companies were down -3.1%, driven by poor performance from major stocks; both Landsec and British Land fell more than 10% on the back of anaemic results for the 2019 financial year. There was also ongoing weakness in retail companies, both large and small. Even though Hammerson managed to fall -15.8%, it was not the worst retail performer, as Capital & Regional was down by -22.4%. With a high loan-to-value ratio, the collapse in the share price becomes self-fulfilling – an ‘equity cure’ is no longer an option, given the gulf between the net asset value (NAV) and the share price. The weakness in sterling reflects the ongoing political saga as the Conservative Party meanders through its convoluted hustings process as it elects a new leader and prime minister. The expected shortlist are all fervent Brexiteers and the range of outcomes must now include a greater risk of a no-deal Brexit at the end of October. The strongest performers in the UK were those with the greatest security of income, such as Assura which rose 7.6%. It owns primary health properties with leases underpinned by income from the NHS.
The good news in May was the announcement of an agreed takeover of A&J Mucklow by London Metric Properties (LMP). The Trust owns 5% of this family-run West Midlands industrial owner/developer and 3% of LMP. We will receive a mix of shares and cash, and look forward to maintaining exposure to this excellent portfolio. Mucklow’s shares rose 17% in May.
German residential companies were the weakest performer in April (-4.7%), given Berlin-focused concerns around a populist backlash against rising rents. This trend reversed in May, with the EPRA Germany index rising 6.1% as the fears of an initiative to expropriate died down. However, the real driver of returns was the renewed fall in the 10-year bund yield, which returned to negative territory. This drove stable income-producing assets such as residential property even higher. We remain concerned about the political situation in Berlin and are under-exposed to this market. Our largest holdings exposures are Vonovia (less than 10% exposed to Berlin) and LEG (all North Rhine Westphalia).
Sweden was very strong (returning 4.7% in local currency terms) as the dovish response from the Riksbank (mirroring the European Central Bank) fed through to the valuation of leveraged assets such as property. Swedish property companies are among the most leveraged in our universe. They also focus on short-term debt and are able to quickly take advantage of changes in the rate curve. Little surprise, then, that the weakest returns among the owners of commercial property came from the least leveraged business, Hufvudstaden (-1.8%). The outstanding performance in the region came from a residential company in neighbouring Finland. Kojamo (+14%) posted strong results, with first-quarter earnings per share up by 22% and an increase to full-year guidance (+2%). The specialist Finnish residential landlord was listed in 2018 and benefits from strong urbanisation trends across the Helsinki Metropolitan Area.
The Trust’s NAV return in May was 2.42%, virtually in line with the benchmark. The share price rose 2.2%.
Results for the year to 31 March were announced on 24 May. The NAV total return was 9.1%, exceeding the benchmark’s total return of 5.6%. The share price total return was 6.2%. The Board announced the final dividend of 8.6p, bringing the full-year dividend to 13.5p, an increase of 10.6% from the previous year. The results announcement is available on www.trproperty.com and the full Report & Accounts will be posted shortly.
Discrete rolling annual performance as at 31.05.2019 (%):
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Fund | 18.64 | 11.01 | 17.21 | 12.00 | 5.54 |
| Benchmark | 13.18 | 8.64 | 15.02 | 7.31 | 1.96 |
| Share Price | 20.02 | 0.43 | 19.21 | 21.73 | 2.48 |