September 2016

By | 16th October 2016

Pan European real estate equities fell -0.71% in the month with the Trust’s NAV down -0.37% generating 35bps of outperformance. The September NAV includes the six monthly independent valuation of the physical portfolio. This was the inaugural valuation by Knight Frank LLP who have replaced Deloitte LLP as the Trust’s independent valuer. The property portfolio suffered a net fall of £1.5m, this is a 1.4% fall in the value of the property portfolio, adjusted for capital expenditure incurred in the period. The modest correction reflects the exposure of the fund to London industrial (Wandsworth) and retail (The Colonnades in Bayswater) which remain popular sub-sectors amongst investors.

Continental European property companies collectively fell -2.0% in EUR, however the continuing weakness in GBP mitigated this correction with the performance in GBP just -0.27%. The FX exposure of the Trust is maintained in line with the benchmark, broadly 30% GBP, 70% EUR and other European currencies. This currency exposure has been a major shock absorber and since 24th June the NAV has risen 12.5%, significantly aided by the depreciation of GBP. However the share price to net asset value discount has stubbornly remained in the region of 13-15%.

Central banks in Europe, UK, Japan and US kept their policy rates unchanged. However concerns around central bank withdrawal, in particular outside of the US, have emerged and prompted a sell-off in yield equities, including real estate stocks (FTSE/EPRA Developed Europe TR down -2.4% in Euros) but the full extent will depend on the pace of further yield increase and tapering fears.

As we wrote in July 2016 we take no comfort in collapsing interest rates as it also manifests signs of increased central bank policy ineffectiveness. Furthermore the risks surrounding the “QE Infinity” trap are significant. Arguably the CSPP bond purchase program (Corporate QE) which started in June has further cemented the markets dependence on central bank action and complicate even more normalisation exit strategy. We still consider pan-European property shares to be one of the least “toxic” yielding asset classes trading on a 4.9% cash recurring earnings yield and a progressive 3.6% dividend yield.

In September numerous Pan-European property companies took the opportunity to grow while trading at premiums to NAV and capital is available. SEGRO announced a £340m capital increase, ADO €200m, Balder SEK690m, Befimmo €127m, Hamborner €166m and Tritax announced £150m. In addition we saw large shareholders taking advantage of strong share performance to place their stakes: the Norwegian state placed €270m, i.e 33% of their stake in the Norwegian office company ENTRA and Oaktree sold their remaining holding in German office landlord Alstria.

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