October 2020

October was a difficult month for pan-European real estate equities, with the benchmark (FTSE EPRA Nareit Developed Europe Total Return Index, in sterling) falling -4.76%. The net asset value (NAV) dropped a little more, at -5.12%. The bright spot was the share-price performance at +1.0%, which saw the discount to net asset value tighten to 6% (from 10%).

Sentiment has weakened again as Europe grapples with a new set of lockdowns. Retail, hospitality and travel-related industries once again bore the brunt of these measures. Encouragingly, schools and universities have stayed open and employees can generally go to work (where they can’t work from home). From an economic perspective, these measures are far less draconian than those imposed in March and reflect the clear imperative to keep all economies running as normally as possible.

The month saw a raft of third-quarter reporting, mostly trading updates with some encouraging improvements (from the second to third quarter) from some of those companies most affected. However, the renewed lockdown measures will undoubtably lead to a reversal in the next quarterly data. Although retail remains the most affected sector, Unibail Rodamco was the second-best performer in the month (+10.8%), as investors responded to the intervention by an activist investor (Aermont) chaired by the ex Unibail CEO, Leon Bressler. Aermont and affiliates are arguing that now is the wrong time to raise capital at a deep discount to asset value. New River Retail (+28.7%) recovered much of its September loss as the stock overhang was removed. Elsewhere, though retail stocks were under pressure, we saw Shaftesbury announce a £300m capital raise at 400p (which reflects a 20% discount to the prior share price). We had sold our modest remaining holding at 545p in September, but viewed this as a good re-entry point. The issue for Shaftesbury was simply cashflow; the company needed to seek waivers from its lenders as it risked breaching interest cover ratios. We are carefully watching a number of other retail businesses which could fall foul of this problem as the new lockdown measures prevent retailers from operating.

Offices are a key battleground, with both cautious and pessimistic arguments having validity. Rent collection rates in these submarkets have been encouragingly high and office utilisation rates (excluding London and Paris) have averaged over 70%. London and Paris, even with lower levels of usage, have seen remarkable investment activity. Institutional investors (with long investment horizons) have looked beyond the short-term issues and clearly believe in the future of global cities. Capitalisation rates for prime, newly developed assets have hardly adjusted over the last six months, such is the weight of capital seeking non-retail real assets.

Swedish property companies were collectively a poor performer (-9.3% in Swedish krone terms), but this should be viewed in the context of the huge 20% rally in September. These figures do serve to remind investors of the heightened levels of volatility in our normally more placid sector.

The UK, somewhat surprisingly given Brexit uncertainty, was the relative outperformer at the country level, falling just -0.9% in the month. London office stocks mostly generated positive monthly returns, led by Workspace (+14.6%) and Helical Bar (+15.1%). Just Great Portland (-3.7%) showed a negative return, as investors fretted about the latter’s West End retail property exposure. Investors have begun to look beyond the short term and, where share prices have factored in 20%+ reductions in estimated rental values in office rents, we are seeing some support for valuations. That is not the case for retail property, where we are unable to ascertain what are the economically viable rental levels for retailers in a post-Covid world.

Interim results for the six months to 30 September, including the interim dividend, will be announced on 27 November.

Discrete rolling annual performance as at 30.10.2020 (%):