September 2018

By | 12th October 2018

The steady climb in European property shares this year came to an abrupt halt in September. The Trust’s benchmark, FTSE EPRA Nareit Developed Europe Net TR (in GBP) fell -3.5% in the month and this was the first material monthly fall since the Jan / February correction. Investors returned from their summer holidays to be confronted by a long list of macro woes ranging from the risks surrounding a US/China full scale trade war and Brexit through to the impact of a strong USD on emerging markets. The Euro also weakened against Sterling returning to pre summer levels as investors focused on concerns of a Brussels / Rome rift over the Italian’s desire to spend beyond their means and breach EU budget deficit restrictions.

The consequence of this ‘risk off’ sentiment was that at the country level there were no overall positive performers with the vast majority of names showing share price declines. However, there were some individual exceptions. The notable winners were Xior, the small Belgium listed student accommodation developer/investor (+5%) and in Germany, Sirius Real Estate, the UK listed owner of workspace property across Germany rallied 7.2% on the back of investor interest generated at their capital markets day in Berlin in early September. We hold the stock and were equally encouraged by what we heard and saw.

London focused property companies suffered poorly as the long shadow of the Brexit negotiations coupled with the internecine warfare within the governing Conservative party raised the risk profile of all domestic stocks of which property companies are virtually the purest play. Workspace (-7.7%) Great Portland (-7.3%) and Derwent London (-5.5%) all fell sharply even though these management teams have degeared. In the case of the latter two through sales and that is to be applauded, whilst Workspace raised more equity at £11 per share as recently as June and investors are nursing 12% losses from the equity placing in June 2018.

A number of the diversified, regional property companies also suffered with Picton (-4.6%), Standard Life Investment (-4.8%) and Schroder REIT down a staggering -9%. All these businesses have some retail exposure and had held up well so far this year. Given the huge value destruction which is ongoing in much of the retail sector such catch up is not unexpected. The Trust has a small position in Picton but doesn’t hold the other two.

Across Europe, retail property owners continue to fare poorly with Unibail down -4.3% and the share price is now reaching levels last seen in Q3 2013. Eurocommercial also performed poorly (-5.1%) but we were pleased to see that the anachronistic Priority Shares (effectively a takeover prevention mechanism) will be abolished if shareholders vote in favour of that resolution in the forthcoming AGM.

Germany (along with Austria) have been the strongest region YTD with performance dominated by the residential stocks. However the group have been seen as a ‘bond proxy’ with heightened short term correlation with the 10-year

Bund which rose 15bps over the month from a yield of 0.32% to 0.47%. German property stocks fell -4.1% in the month.

The Trust’s physical portfolio had its half year external valuation which was virtually unchanged (-0.1%) over the six months. The overall performance of the Trust’s Net Asset Value (NAV) over the first half of the financial year, and including the property revaluation was +7.4% versus a benchmark return of 5.4%. The share price total return was 8.6% due to a slight narrowing in the discount of the share price to the NAV.

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