September 2019

By | 17th October 2019

The return to work following the summer holiday period has seen a continuation of the strong recovery (from the mid August lows) of UK property companies share prices. Whilst the overall pan European benchmark returned 2.29% (in GBP terms), the UK contributed 6.88%. This dramatic recovery means that the UK names have almost matched the performance of their Continental counterparts over the first six months of the Trust’s financial year (March -September) when viewed in local currency terms.

The UK performance was – for the first time in a long time – driven by the two largest diversified businesses, Landsec (+11.9%) and British Land (+14.7%) who both benefited from the global rotation from ‘growth’ to ‘value’ coupled with a strong recovery in UK domestic stocks. The latter driver feels at best, counter intuitive, given the continued lack of clarity in the meandering political process. Alongside these large cap names, we saw strong bounces in the deeply discounted retail stocks with Hammerson (+24.9%), New River Retail (+19.1%), Capital & Counties (+14.8%) and Capital & Regional (+37.9%). The latter announced that they have received confirmation of interest from Growthpoint Properties, South Africa’s largest listed property company. Growthpoint have one month to make a formal offer under Takeover Panel rules. Even given this strong month’s performance all of these retail landlords remain in negative performance territory, year to date. London offices names had a good month with the smaller names Helical (+10.5%), Workspace (+13.2%) outperforming Great Portland (+7.7%) and Derwent London (+6.5%). The share prices of the larger two are back to pre-Referendum levels reflecting the continuing demand for London offices even in the face of a more uncertain future. We don’t share the stock market’s optimism.

In Europe, the newsflow was dominated by complex corporate activity amongst a number of German property companies. In summary, TLG (-8.6%) announced that it had acquired 10% (with a further 5% under option) in Aroundtown (-0.8%) from the founder at €8.3 per share, a 12% premium to the prevailing share price. Aroundtown’s market cap is three times that of TLG, so an unusual case of smaller acquiring larger. Our concerns revolve around the financing (a partial vendor loan from the founder, Yakir Gabay), the premium paid and the sudden change of strategic direction by TLG’s new management team who until recently had told investors they would be focused on their organic development programme. Elsewhere, Adler (market cap €0.8bn) acquired ADO Group, an Israeli listed vehicle which in turn owns 38% of ADO Properties (a Berlin residential business). ADO Properties, independently of the shareholder musical chairs, successfully sold a large residential portfolio (c€900m) to Gewobag, a Berlin municipal housing company at a 10% premium. A very encouraging datapoint for Berlin investors.

The takeover newsflow continued elsewhere with Vonovia (+2.8%) acquiring 61.2% of Hembla (Swedish residential) for €1.14bn, an 11% premium to the undisturbed share price. This triggers a squeeze out of the remaining investors. We sold our holding post the announcement. Blackstone made a bid to acquire Dream Global, a Canadian listed company which owns European commercial property. The bid reflects a 9% premium to the latest NAV. The message is now clear, if the public markets don’t want to value these real estate assets at fair value, the private market which is awash with equity and cheap debt will step in.

The Trust’s direct property portfolio had its interim valuation as at 30th September and the portfolio saw a small reduction in value (-0.7%) due to negative movements in the retail and residential elements at the Colonnades in Bayswater. Just prior to the half year the Trust sold its interest in Field House, Harlow for a net price of £10.28m which reflected a 3% premium over the March 2019 valuation allowing for all transaction costs.  The sale concluded a successful period of asset management at the building ending with the letting of the 1st floor at a new record rent for the property.

Including this valuation, the NAV of the Trust over the first six months of the financial year was +8.6%, ahead of the benchmark of +6.7%. The share price total return was +9.7% reflecting a slight tightening of the discount to the net asset value.

Discrete rolling annual performance as at 30.09.2019 (%):

20152016201720182019
Fund23.5219.027.7612.3410.29
Benchmark17.8917.884.907.487.00
Share price18.259.8019.8615.877.31