October 2016

By | 16th November 2016

Pan European real estate equities, as measured by the Trust’s benchmark fell -3.3% in the month with the Trust’s NAV down -3.9% generating 54bps of underperformance. The benchmark is denominated in GBP and therefore the fall in the market was cushioned by the further weakness in GBP versus all European currencies. Europe ex UK in EUR fell a substantial -6.3% in the month but just -2.7% when measured in GBP. Investors continued to rotate away from defensive, income plays towards cyclicals driven by the expectation of higher inflation (following rises in commodity and oil prices) coupled with the central bank rhetoric that further QE and monetary easing was now less likely. Bond yields rose and sub-markets such as German residential stocks which have become highly correlated to the 10 year Bund fell nearly 7% as the yield on the 10 year moved from -0.11% to +0.15%. The fund moved down close to a neutral position in German / Austrian residential in September and given our strong belief in the underlying fundamentals we would expect to move back overweight on further price weakness.

No markets were immune to the selloff but it has followed the traditional pattern of Belgium (-2.8%) and Switzerland (-3.6% in CHF but +0.5% in GBP) falling the least. The Trust remains underweight both markets due to our concerns about the prospects for rental growth in Brussels and Zurich.

Spain was the strongest regional performer, buoyed partially by hopes of political stabilisation and then at the corporate level by the surprise announcement that Colonial had acquired a 15% stake in Axiare, a small listed property company at a premium to the last published asset value. Axiare was the best performer in the month rising 10% whilst Colonial fell 0.6%. These price moves tallied with our views on this transaction.

Unite, the student housing REIT, was the UK’s weakest performer down -11.8% on concerns that ‘hard Brexit’ will reduce the number of overseas (particularly EU students). We remain confident in the market fundamentals and the company’s ability to use its scale to drive up margins and extract gains from its development pipeline.

In our physical portfolio, we completed the letting of two units in Gloucester to Infusion GB Limited who are already tenants on the estate. The two units came vacant at the end of July, we completed the dilapidation works and Infusion have taken new 10 year leases at a 16% premium to the previous passing rent. The rent achieved is in excess of both the valuers’ estimate of rental value and the level assumed at purchase in July 2015.

The share price weakened 5.2% in October, slightly more than the fall in the NAV and this led to a widening in the share price discount to net asset value to over 15%. The Trust bought 150,000 shares at a average discount of 15.8%. These shares were then cancelled.

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