October 2018

By | November 15, 2018

Global equity markets suffered a significant correction in October. The weakness experienced across many emerging markets through September spread to developed markets, with the highly valued technology stocks in the S&P 500 Index (-6.8%) leading the way down. While real estate equity markets were certainly not immune, they were far less affected. The trust’s benchmark fell -3.5% versus the STOXX Europe 600 Index’s fall of -5.5%, as the latter was led down by weakness in technology and growth-orientated companies.

Within the real estate sector, we saw a similar phenomenon, with a reversal of the performance drivers of the previous six months. Investors rotated away from higher-value stocks with rental growth potential and instead favoured deeply discounted value names, particularly those with a retail focus. The trust’s portfolio suffered from our overweight positions in growth markets, such as student accommodation, South East UK offices, pan European industrial and logistics, Paris offices, German residential and Sweden.

The UK saw the first overtures of further merger and acquisition activity: a consortium comprising Peel Holdings (the largest shareholder of Intu Properties), Brookfield Property Group and Olayan (a Saudi investment group), announced a potential bid for Intu Properties at 210.4p – a 46% premium to the undisturbed price (dividend adjusted). The discussions with the Board continued and the Takeover Panel granted an extension to 15 November for the consortium to finalise their offer or withdraw. The trust hasn’t held shares for many years amid multiple concerns over the assets, leverage and strategic direction of the business in the face of huge structural issues in the sector. The share-price response to the bid was a large contributor to the underperformance in the month. Given that this potential transaction is effectively a ‘take private’ by the largest shareholder, there was little read across to our other large UK retail name, Hammerson, which was down -4%. In fact, both our smaller names, Capital & Regional and New River Retail, were up +1.9% and +0.2%, respectively, which reflected the trend in the month. During the sell-off, investors appeared reluctant to throw out high-yielding names, which were standing at large discounts to their (last) net asset value; the two small retail companies were a case in point. Across Europe, deeply discounted retail stocks, such as Vastned Retail (+6.7%), Wereldhave (+2.5%) and Eurocommercial (+3.7%) performed strongly. Unibail (-7.5%) was again the exception as investors continued to worry about the drag on returns from integrating the Westfield business.

Our largest Swedish names also suffered, as demonstrated in the performance spread between the stock with the greatest growth potential, Fabege (-5.0%), and the sleepiest, mostly lowly geared and underwhelming business, Hufvudstaden (+0.1%). Risk was off the table we found sanctuary among the tried and tested Swiss businesses, where PSP Swiss (+2.3%) outperformed its local rival Swiss Prime Site (-2.2%). The latter does have significant retail holdings, where we expect to see further falls in value.

Amid all the gloom, we were pleased to see – and participate in – the successful initial public offering (IPO) of Europe’s largest self-storage business, Shurgard, with a free float market cap of €500m. Placed at €23 per share, the company reached €26 mid-month before slipping back to close at €24.8 per share. Shurgard also announced the acquisition of ABC Selfstore, a small UK business, continuing on its path to industry consolidation.

We benefited back in July when Colonial acquired Axiare in an all-stock bid. The Axiare management team have re-emerged as Arima and raised €100m to invest in Madrid and Barcelona office re-positioning opportunities. We invested €9m at the IPO.

Our investment strategy of focusing on those sub-sectors most likely to experience rental growth – both large and small cap – was destined to suffer in a market that wanted to buy deep value and higher-yielding names. The sell-off offered us opportunities, particularly in some of our smaller, well-managed businesses, such as Sirius (German workspace) (-10.2%) and Terreis (prime Paris offices) (-11.4%).

The Board will announce the interim dividend alongside the publication of the Interim Report for the six months to 30 September on 22 November.

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Discrete performance as at 31.10.2018 (%):

2014 2015 2016 2017 2018
Fund 16.32% 25.41% 9.52% 13.50% 6.56%
Benchmark 10.00% 19.52% 8.87% 9.15% 3.10%
Share Price 17.42% 20.71% -2.04% 28.44% 11.03%

Source: BMO Global Asset Management, Lipper.