November 2016

By | 16th December 2016

Pan European real estate equities (in GBP) fell a dramatic -6.3% with the Trust’s NAV falling an additional 56bps at -6.8%. The only sliver of a lining on this particularly dismal cloud was the share price performance which fell half as much at -3.4% resulting in the discount tightening to -12% (from -15% a month ago).

Market sentiment has moved dramatically since the summer from deflationary fears and concerns over “QE infinity” / negative interest rate policies to reflation hopes. Trump’s US presidential victory has only exacerbated this frantic sector rotation momentum with his election seen as a pro-cyclical, fiscal easing signal leading to further yield increases in global bond markets.

As a previous QE winner our sector underperformed general equities by -10% over the last 3 months (EPRA Dev. Europe, TR Euros) following 2 ½ years of stark outperformance. The overall stock market leadership shifting to cyclicals away from defensives has been being unequivocal. However, within the European listed real estate space, sub-sector and stock performance dispersions have, in our view, been much more disorderly than expected.

For instance the most “cyclical” property sub-sectors (self-storage, hotels) have not outperformed whilst the traditional non-cyclical defensive sectors such as Swiss and Belgian diversified have outperformed. Switzerland was the only country in positive territory (+0.9%) in the month. In addition large liquid stocks as well as previously strong performers have been hit hard which has been detrimental to the fund’s performance.

The fund’s gearing includes the physical portfolio (9.5% of assets) and therefore the gearing to equities is modest (4%) but it does reflect our belief in the fundamental stability of the asset class and this has been borne out by the modest movement in underlying values since the end of June with IPD All Property capital values down -3.7% in the 4 months to the end of October.

The UK (in GBP) fell just -0.7% whilst the Eurozone (in EUR) was down -4.1%. However the recovery in GBP resulted in a dramatic monthly return of -8.6% for the Continental European companies collectively when measured in GBP. The German residential businesses continued to weaken in the face of rising bond yields, however investors favoured those sub-markets with the best rental growth prospects. The two Berlin focused names Deutsche Wohnen fell just 2.2% and ADO Properties -3.6%. Whilst we hold ADO we also hold LEG which fell -6.9% in the month.

The Trust reported its Interim results (to end of September) on 25th together with the interim dividend of 4.1p, an increase of 30% on the same period last year. The full report is available on

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