October 2014

By | 16th November 2014

Equity markets across the globe performed a dramatic dive in values to the middle of the month followed by an equally dramatic recovery. Real estate equities which had already been weakening midway through September fell further to mid October and then staged an even stronger recovery than the broader market. The fund’s pan European benchmark, FTSE EPRA / NAREIT Developed Europe TR Net (in GBP) rose 7.9% from 15th October resulting in a total return of +3.2% for the month.

The UK names had a particularly strong rally in the second half of the month +9.7% and the UK component of the benchmark is now at a level last seen in May 2008. Investors appear to be appreciating that rental growth has spread well beyond Central London and that the lack of new construction is set to drive rents as the economy accelerates. The IPD Monthly Index had 0.8% rental growth in Q3 (dragged down by retail at only 0.3%). With the average initial yield on UK commercial property running at 5.6% the sector looks attractive to income investors who also see the prospect of additional capital gain as rental growth comes through. Post the recovery in share prices in the second half of the month the sector is trading at a modest 3% premium to our estimate of FY2014 NAVs.

On the Continent, the Nordics were the strongest performers. In Sweden (+4.0% in SEK) investors anticipated the Riksbank cutting the base rate. In the end the central bank exceeded expectation and cut the rate from 0.5% to zero. They have also successfully devalued the currency (boosting export competitiveness) with SEK having weakened against GBP by 11.1% YTD. In Norway the long awaited IPO of Entra, a large office portfolio of mainly government let property got off to a flying start with the stock up 14.6% by the month end. The Norwegian Government will have another chance to sell more shares (at a better price) as they still own 49.6%. The longer term prognosis for the Norwegian economy does suffer as the price of oil falls. The North Sea remains the most expensive enviroment from which to extract crude.

The rally in Eurozone property stocks, whilst more modest than the UK, was still substantial at 8.8% but reflected a different set of positive drivers. Here the weakening in economic data and confirmation that growth rates in core Western Europe are anemic has increased the expectation of further unorthodox monetary stimulus from the ECB. Leveraged assets would benefit from further reductions in the risk free rate.

The Trust’s interim results and dividend will be announced on 26th November.

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