Pan European real estate equities experienced a broad range of returns in October. Macro forces again dominated. The UK Parliament finally managed to agree on one thing – the date for the General Election. Currency markets took the reduced likelihood of a ‘no-deal’ Brexit positively and GBP strengthened 2.9% versus EUR over the month. GBP has now strengthened over 8% from the mid August lows.
The Trust maintains the currency exposure in line with that of the benchmark, regardless of the portfolio’s geographic composition. As the fund is denominated in GBP, strengthening GBP reduces the value of our non GBP assets. Over the last 3 years ( post the Referendum) this exposure across a range of European currencies has been beneficial as GBP weakened. The post summer rally has merely returned the GBP/EUR rate to where it was a year ago. However, this explanation helps explain the impact on returns of GBP strengthening in the last couple of months. The Trust’s NAV rose 0.8% in October and its benchmark (in GBP) just 0.5%. However in local currency the returns from much of the sector were strong, UK property stocks collectively returned +4.9%, France (+6.4%) and Spain (+4.5%) the latter two driven by strong demand for the office owning companies. Office rental values keep rising across Europe as solid demand meets limited supply. The poorest performer in the month was Sweden driven by a more hawkish tone from the Riksbank. Highly leveraged property companies with lots of development exposure such as Fabege (-11%) fared poorly. Collectively Swedish stocks have been very strong performers this year and there would have been a profit taking motive compounding the selling momentum. German commercial names outperformed their residential counterparts as the latter are seen as sensitive to changes in Bund pricing. The 10 year Bund yield troughed at a negative yield to redemption of -0.7%in late August. By the end of October it had tightened to -0.4% and continues to close up from there. For those in the real world, even if the Bund returned to positive territory, the income return would still be de minimis. We remain confident that (with the exception of Berlin) the rest of Germany will continue to experience positive rental growth given lack of supply and wage growth underpinning rents. The German commercial names were buoyed by a further chapter in the Aroundtown / TLG saga. In Series 1 of this box set featuring plenty of opaque dealings between various controlling shareholder entities we saw TLG buy c.2/3 of Yakir Gabay’s (the founder of Aroundtown) holding at a significant premium to the shareprice. Attached to this deal, TLG announced a potential merger with Aroundtown but that would require significant capital given they are the much smaller cousin. In Series 2 viewers ( minority institutional shareholders) are astonished to hear that the deal has reversed with Aroundtown now acquiring TLG and it doesn’t require an EGM so minority shareholders can’t reach for the red button on their remotes.
The UK names have seen a very strong rally from the August lows – a mixture of Brexit relief and a rotation into value of which there are plenty of candidates in the real estate sector. Landsec (+9.7%) and British Land (+7.5%) saw strong rallies as they are both participants in domestic focused Brexit baskets. Capital & Counties (+8.4%) responded to more noise about potential bidders for Earls Court. We think the Candy ‘interest’ is hot air and the contest is between Delancey (favourite) and Canary Wharf Group. Both are seasoned developers not known for overpaying and CapCo have little option but to trade the site. We took profits in a range of UK names during late October – particularly retail (we bought Hammerson in mid August at 218p) and large caps. London office names also performed well as investors see London office space as beneficiaries of an agreed Brexit deal. Derwent London rose (+5.3%), Great Portland (+5.0%) and Workspace (+5.5%). Overseas investors remain much in evidence and appear to see Brexit as a short term issue to be looked past. Prime office yields remain higher than in many Asian capital cities.
November will be busy with interim results from Landsec and British Land and Q3 trading update from Intu on 6th Nov. TR Property’s Interims will be published on 28th November and the Board will announce the interim dividend for the six months to the end of September.
Discrete rolling annual performance as at 31.10.2019 (%):