Pan European property equities continued to travel in the tight (10%) trading range seen since March. Market fundamentals remain robust in many of our sub-sectors, and indexation (rents rising with interest rates) continues to assist in driving top-line growth, energising those with a more positive outlook on prospects from here. However, the macroeconomic overlay successfully supresses this operational soundness with continuing concerns around the possibility of further central bank hawkish behaviour (such as indicating that they will keep interest rates higher for longer). Mid-October saw a bout of pessimism compounded by geopolitics and another conflict (with the oil price pushing upwards). This was followed by more dovish (accommodative) commentary from the US Federal Reserve (Fed). The mid-month low point of -7% (1 October to 25 October) was followed by a dramatic recovery that has continued into November. The monthly statistics were, therefore, -3.0% for the net asset value (NAV) and -3.1% for the benchmark, with the share price slightly weaker at -4.8%.
Switzerland’s property companies were the top performers, with the two largest (PSP Swiss (+3.2%)) and Swiss Prime Site (+0.5%)) reminding investors that inflation remains very subdued. The expectation following the Fed and the Bank of England’s October commentaries is that, while we may well be close to this cycle’s ‘peak rate’, rates are predicted to remain broadly at current levels for some time. The weakest performance was generally among those companies continuing to have challenging balance sheets, with investors now focussing on refinancings required out in 2025 and beyond. Stock performance was, therefore, bottom-up driven, with a large range of moves in each jurisdiction.
In the UK, the worst performers were all small caps across several sectors. In offices, CLS (-27%), which owns assets in the southeast of the UK, Germany, and France, had a torrid time. The founding family control over 50% and have been adding to their position. In European logistics, Eurobox (-10.4%) and Aberdeen European Logistics Income (-18.5%) both suffered. While they are both externally managed, Abrdn owns 60% of Tritax, which manages Eurobox, so it would make commercial sense to amalgamate and offer shareholders the benefit of scale through lower fees. Life Science REIT (-11.8%) has struggled to convince investors that enough of its assets can warrant a premium rent. Leasing at its flagship Oxford Technology Park will be a useful indicator. Meanwhile, those with the best balance sheets (i.e. the least debt), such as UK Commercial Property (-0.75%) and NewRiver Retail (-2.4%), were much steadier performers. Picton (-4.8%) is our preferred ‘best-in-class balance sheet’ name, with a lower-than-average loan-to-value and mostly fixed until 2031. It announced the successful change of use from office to residential of its largest asset. In our view, this is a game changer for the valuation of this portfolio given the negative sentiment towards offices requiring significant future capital expenditure.
Self-storage was a classic example of a broad range of returns, with performance entirely stock focussed. Safestore (-7.1%) revealed slowing performance metrics alongside the announcement of the retirement of the well-regarded Chief Financial Officer. Meanwhile, Big Yellow (+1.8%) took the opportunity to raise £108m (at a small discount to the undisturbed share price) to complete the next wave of developments and enjoyed a much stronger month.
In Sweden, monthly returns ranged from SBB (-19.1%) to Corem (+18.7%); the latter announced a series of large portfolio sales that were taken positively given the scale of the company’s indebtedness and the highly discounted price. SBB, on the other hand, is still seen as having very little net equity. The third-quarter reporting season added to our conviction that those names with little near-term refinancings will continue to deliver earnings growth, given the indexation applied to existing lease contracts. We have added to our holdings in Castellum and Balder.
In Germany, LEG (-10%) had a poor month, while TEG (+3.5%) enjoyed the news that Moody’s has maintained its Baa1 rating with a stable outlook. We are overweight in TEG and underweight in LEG. Our preferred holding, Phoenix Spree Deutschland (owner of high-quality Berlin residential), has steadily increased the number of apartments for sale. Given that the shares are trading at more than a 60% discount to the NAV, there is considerable room for management to sell assets below book value while still being accretive to shareholders.
At our industrial estate in Gloucester, we have entered into a new lease with Infusion GB, a tea-packaging business and existing tenant on the estate, for unit 2. The company is taking a new eight year lease at a rent 34% ahead of the previous passing rent. This clearly provides positive support for future rental growth.
The Trust’s interim report and dividend for the six months to 30 September will be published on 23 November.
Discrete rolling annual performance as at 31.10.2023 (%):
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.