While our benchmark returned a modestly positive figure for the month of +1.4%, behind this was a rollercoaster of performance. The sector fell over 9% in the first two weeks of October amid a continuation of the pegging down that commenced in mid-August, just ahead of the Jackson Hole symposium and the acceleration of central banks’ hawkish responses. The sector correction from 13 August to 13 October was a severe -30%. However, the sector then rallied +11.5% into month-end. This resurgence looks set to continue into November as investors attempt to guess the point at which central banks will ‘pivot’, slowing their aggressive policy responses to rampant inflation.
We believe that now is not the time for stock picking. Property fundamentals are taking a backseat and price action is being dominated by the relative security of any given stock’s balance sheet. Those with the greatest leverage and sensitivity to interest rates are suffering (or enjoying) the greatest volatility. Swedish property companies, which had fallen -36% from the August highs, saw a sharp 15% rally in the last two weeks. The poster child for volatility remains the Swedish social infrastructure owner, SBB, with a published loan-to-value ratio of 46% (but much higher, circa 62%, when hybrids and other exotic instruments are taken into account). Its 27% rally from the October low has continued into November; it is the most shorted stock in our universe and these bear squeezes are very aggressive. Our underweight position in Sweden (which aided relative performance during September) delivered negative alpha in the October rally. While the Trust has gearing (circa 12%), the impact of this needs to consider our physical property portfolio (circa 8% of net assets) to correctly reflect the effective gearing in the equity portfolio. Investors may be surprised to see that we have any gearing (after adjusting for the physical portfolio), but this provides some compensation given our large number of lower beta small cap companies that tend to be left behind in the initial stages of any sustained rally in share prices. In fact, our net asset value total return in October of +1.0% lagged the benchmark (+1.4%), despite the additional (modest) gearing. The relatively poor performance of our good quality small caps such as Phoenix Spree Deutschland illustrates the situation. This specialist owner of Berlin residential (market cap £242m) fell -9% in the month. In Spain, Arima (market cap £214m), the Madrid office developer, fell -3%. In the UK, our longstanding multi let industrial specialist, Industrials REIT, fell -4%, and our newest small cap, a deep value UK diversified name, CT Property Trust (market cap £168m), fell -10%. These four companies have below average leverage, and none have material debt refinancing requirements.
Our standout performer was Klepierre (+13.7%), which, alongside Eurocommercial (+9.3%), comprises the bulk of our Continental European retail exposure. Given the higher starting yields (when compared to logistics or CBD offices), these shopping centre owners are expected to have smaller capital value adjustments. They are also among a very small handful of property companies that have had a positive total return over the year to date.
We continue to pay close attention to the pricing of listed property companies’ bonds. Not only does this help us to assess the likely cost of refinancing, but it is also a useful indicator of sentiment towards balance sheet strength across multiple jurisdictions. Our central case remains rooted in the expectation that central banks are not changing their hawkish stances in the short term. The need to reduce inflationary pressures is overwhelming. However, our sector remains highly correlated, with sentiment around a change in the rate curve, and we will need to respond quickly to any sustained change in market expectation.
The Trust’s interim results for the six months to 30 September will be published on 5 December and will include the interim dividend.
Discrete rolling annual performance as at 28.04.2023 (%):
Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of all fees and expenses.