October 2015

By | 16th November 2015

Pan European property shares had their strongest monthly return so far this year rising +7.9% (in euros) and 4.7% (in sterling). The broader equity market (Stoxx index in TR) saw its best monthly performance since July 2009 at +8.1%. Stocks rallied strongly in the second half of the month after the European Central Bank (ECB) hinted it could expand its stimulus at their next meeting on 3rd December. The euro weakened sharply resulting in the poorer performance of the sector in sterling terms.

Due to the frail economic recovery in Europe but also mounting concerns over the Chinese slowdown, market expectations for rate lift-offs keep getting postponed. In the UK whilst the first rate hike was expected in 7 months time back in August, by October this has moved out to 12 months to Q4 2016. In the eurozone this figure is now 38 months away. In Sweden the Riksbank recently pushed back the first hike guidance by 6 months to Q1 2017 citing “substantial uncertainty linked to the global economy”.

The ultra-low or negative corporate and sovereign bond yield environment for an extended period continues to exert an unprecedented hunt for yield. Evidently this has been positive for property shares which have outperformed the broader European equity market by 11.4% year to date.

The Trust’s NAV rose 4.46% underperforming the benchmark by 21bps in the month. This was primarily due to the relative underperformance of the UK (+4.4%), our largest country overweight versus strong returns in local currency from the largest eurozone countries France (+7.9%), Germany (+5.8%) and the Netherlands (+10.2%). The most leveraged companies in the European property sector are to be found in Sweden. The Riksbank’s dovish commentary, pushing back the commencement of a rate rising cycle, saw share prices respond accordingly rising +10.1%. Residential and Stockholm focused businesses continue to be the strongest performers but the standout performance this month came from Pandox, the recently listed hotel owner /operator which rose 14.7% in the month and is up 32% from its June IPO.

The portfolio continues to have gearing of close to 15% but I remind investors that our physical portfolio is now 9% of assets and that element of the portfolio has no separate debt attached to it. We remain focused on markets and stocks where we see rental growth or are confident that tenant demand will lead to rents appreciating in the near term.

The interim results will be published on 25th November together with the announcement of the Interim dividend. The share price has underperformed the recent strength in the underlying portfolio and at the end of October should at close to 7% discount to the net asset value (including income).

All fund returns are quoted in sterling using net performance.

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