January 2014

By | 16th February 2014

European real estate stocks rose modestly in the month. The fund’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return in GBP returned +0.74% whilst the NAV rose + 0.55%. The New Year started positively for equities as investor optimism about a broad economic recovery, driven from the US continued to take root alongside steadily improving sentiment about Europe. Markets appeared undeterred by fears of deflationary forces and continued to drive peripheral Eurozone sovereign bond yields lower. The feel good factor which had been driven by the Fed comments in mid December had resulted in developed world equities rising by 3.5% (S&P 500) and 4.7% (FTSE All Share) between 16th Dec and 16th January. However the increasing concerns (and performance) of many emerging markets has once again spread across the developing world and all equity markets have given up their New Year gains by the end of the month. In fact US and German treasury yields have tightened again (with 10yr Treasury yields down 50bps this year) such is the nervousness of investors. It is therefore interesting (and to an extent encouraging) to note the performance of both European and US real estate stocks against this backdrop. During January the All Share fell -3.1% whilst UK property stocks rose +3.7%. In the US, the pattern was repeated with the S&P 500 falling -3.5% and US Reits rose +3.5%. We think the reasons are a combination of investors preferring developed market exposure (property shares are invariably locally focused) and the natural support to earnings of static or further falls in the cost of debt. Draghi has made it clear that rates are not set to rise in Europe and Carney confirmed at Davos that he does not view the employment rate as a sure fire rate trigger in the UK.

The top performers in the month were the peripheral Eurozone stocks in Italy (+10.9%) and Greece (+10.8% but just one stock) and amongst the larger countries it was the UK (+3.7%) and Sweden (+5.3% in SEK) who were the top performers. In the case of the UK and Sweden this outperformance is a continuation of the relative gains made in 2013. Investors quite rightly continue to focus on markets experiencing both rental growth and where debt availability is encouraging buyers to capitalise on the spread between the cost of borrowing and income yields. We have not bought back into peripheral Eurozone property stocks which we believe will benefit later in the credit cycle than some are suggesting. Whilst debt availability may improve there remains a huge amount of bad debt attached to property in Italy, Spain, Greece and Central & Eastern Europe where the credit transmission now enjoyed in many parts of Western Europe has yet to manifest itself.

Within our physical property portfolio we have now submitted our planning application for the retail extension and refurbishment at The Colonnades in Bayswater, London W2.

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December 2013

By | 16th January 2014

Real estates equities in December followed the broader equity market pattern through the month. Essentially spending the first two weeks fretting about the likelihood of the Fed finally announcing tapering (after the deferral in October) and then the second half of the month rebounding as the announcement was entirely sensible – a reduction in the size of the monthly bond purchases but reassurance that further strength in the world’s largest economy would be required for tapering to accelerate. For our world of European property equities, the sector (in GBP) had fallen -2.6% by 17th December and then recovered virtually the same amount to end the month +0.2%. The Trust’s NAV rose +0.6% leading to 43 bps of relative outperformance.

Looking at the calendar year end numbers, the major theme for the year was the stunning outperformance of the UK (+23.8 % return in GBP) over Continental Europe (+4.1% in EUR). Within Continental Europe, Sweden stood out with a total return of +19.4% (when viewed in local currency) as the Riksbank continued to take a dovish approach cutting rates and allowing domestic house prices to continue to inflate strongly particularly in the larger urban areas.

The peripheral European nations also experienced strong performance as sovereign debt costs continued to fall with Italy returning +13.3%. For core Western Europe, the weakness in performance in the year was a function of either fundamental or technical issues. In the case of the Netherlands (+6.1%) and France (+5.5%) underlying weak economic growth and poor consumer confidence continued to hold back rental growth. However, Germany (-2.5%) was an entirely technical situation. Whilst real estate and economic fundamentals remain sound in Europe’s economic powerhouse, the listed property sector suffered from a large number of stock overhangs. The sector is dominated by several residential investment companies whose private equity owners have partially listed over the last 3 years. The market has anticipated further multiple placings of various stakes and this has weighed on share prices.

At the country level, the fund remains overweight the UK, Germany, Sweden and France. The French country call may surprise some investors but the focus is on Unibail (with shopping centres across 8 countries) together with a number of small, specialist companies with clearly defined strategic goals in particular sub-markets such as super prime Paris and logistics.

Physical property accounts for 7.5% of the net assets and our largest property, the Colonnades in Bayswater accounts for almost half of that value. We recently submitted our detailed planning application for an extension of 13,000 sq ft encompassing a doubling of the size of the existing Waitrose store.

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November 2013

By | 16th December 2013

European real estate stocks pulled back slightly in the month, in line with broader pan European equities. The Fund’s benchmark, FTSE EPRA/NAREIT Developed Europe Capped Net Total Return in GBP fell -1.74% whilst the NAV fell less at -0.96%, leading to relative performance of 78bps. The share price fell -2.4% in the month. There was little differential between the performance of the UK and Continental Europe in the month and the YTD performance gap between the two remains at, an astonishing 1300bps (21.8% v 8.6%). Pan European property stocks have now pulled back 5% from the October recovery point and 6.1% from the 2013 peak in mid May. However US Reits have fallen over 16% from their May highs and are down 8% from the more recent October recovery. We think that US stocks are being (overly) penalised for the continuing expectation of near term tighter monetary policy. Europe is in a very different position and whilst all risk assets ultimately price off the risk free rate (US long dated Treasuries generally) and are therefore exposed if Treasury yields rise – the impact is much more muted this side of the Atlantic. The ECB has cut inflation forecasts for the Eurozone and ultra loose monetary policy remains in place.

At the stock level, CA Immo, the Austrian developer/investor rose 9.4% in the month as investors responded to the partial sale of Tower 185 in Frankfurt. There are only two Austrian companies and the gulf in performance YTD could not be starker. CA Immo has returned 20.8% whilst Conwert (which the fund does not hold) has fallen -2.8% YTD. In Germany, Deutsche Wohnen rose 6.7% in the month as the acquisition of GSW went unconditional. The GSW shares have now converted into Wohnen stock but remain a separate class of share until after 28th May (when the original Wohnen shares receive the final dividend).

The worst performers in the month were Nieuwe Steen (-16.9%), the Dutch owner of mainly secondary offices and DIC Asset (-12.5%) in Germany. Both carried out what were effectively deeply discounted capital raisings (in order to de-gear their balance sheets) but veiled behind more complex corporate activity. The fund doesn’t hold Nieuwe Steen and has a de minimis holding in DIC.

We are also pleased to report that the Trust has won an award – the Investment Week Awards 2013, Investment Trust of the Year – Property. The judging panel commented on both performance and the successful re-merger of the two share classes as contributing factors. The Trust went ‘ex’ its interim dividend of 2.85p on 4th December.

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October 2013

By | 16th November 2013

Real estate stocks enjoyed a strong October with the (FTSE EPRA/NAREIT Developed Europe Capped Net Total Returnin GBP) rising +5.4% in the month. Once again performance was dominated by the UK (+6.6% in GBP) whilst the rest of Europe rose +3.4% (in EUR). On a global view, Europe was the strongest performing region with the US returning +4.5% (in USD). Concerns over the possibility of near term (earlier than Q2 2014) reduction in QE by the Fed have now diminished and 10 year US Treasury yields have moved back down towards 2.6% (from over 3%). The result has been a return of risk appetite for leveraged assets. The month also witnessed a renewed demand for European equities and the Euro (which gained 2% against GBP and USD intra month) particularly Southern Europe. IGD and Beni Stabili both returned more than 10% in the month and the fund sold stock into this buying interest. The only Greek stock in the index, Eurobank rose +21%. It is now up 84% YTD and that huge increase brings its 3 year performance just back into positive territory.

Our concern is that investors are getting ahead of themselves in believing that all parts of Europe can grow their way out of their deficits. The region is still suffering from a huge range of issues including rising unemployment (Spain and Italy) and falling house prices (where state intervention is on its way – the Netherlands). The weakening inflation numbers towards the end of the month (<1% pa) served as a strong reminder of the difficulties.

The Trust’s NAV rose 6.0% in the month, outperforming the benchmark by 60bps. Performance versus the benchmark was particularly driven by the long positions in the UK and our underweight in Switzerland. The Swiss companies(-0.9%) have continued to suffer as rental growth remains negative in the Zurich office markets and investors do not feel the need for the traditional safe haven of Swiss Franc backed assets. In the UK, stocks associated with the residential market (both directly and indirectly) did well. St Modwen (+15.9%) combines a residential land bank with a high yielding industrial portfolio whilst Safestore (+10.6%) is one of the two leading self storage operators and will benefit from rising turnover in the housing market. Grainger (+11.3%) is the only pure owner of standing residential stock.

In Scandinavia, the Swedish stocks collectively had a strong month rising +6.4% as investors priced in no move in the Riksbank base rate. It was the industrial players, Castellum (+8.5%), Wihlborgs (+8.5%) and Kungsladen (+11%) which performed the strongest. In Norway, we were once again disappointed by the management of NPRO and the stock slid -4.2% on numbers, bringing the YTD to -8%, the worst performer in the index year to date.

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