September 2021

By | 13th October 2021

The Trust’s net asset value (NAV) fell -7.5% in September, the first negative monthly performance in this financial year (31st March year-end). The benchmark, pan-European real estate securities (EPRA Developed Europe, Net total returns) returned an even poorer -8.3% in sterling terms. It was the second-worst performing Global Industry Classification Standard sector (only utilities fared worse) on the back of increasing inflation fears and rising bond yields. Over the month, 10-year government yields soared by around 20-30bps across Europe and the UK.

With a labour shortage and record energy and shipping prices (particularly in the UK), investors re-evaluated the transitory versus sticky inflation debate. This led to a reversal in equity leadership in favour of cyclical and value stocks at the expense of growth and quality stocks. The portfolio’s current strategy is focused on higher growth sectors and index linked income, which performed well in the last six months but suffered in the rotation as premium priced assets experienced a sell-off. Nevertheless, we maintain a high degree of conviction in our top long-positions in pan European industrials, self-storage, European healthcare, and supermarkets based on their ability to grow earnings in fragmented markets with high barriers to entry.

Although we expect higher volatility in quarter four, peaking growth and rising inflation do not have to be negatives for real estate stocks. Relative to other equity sectors, the sector may be at less risk of earnings expectation revisions in a slowing growth environment. The consumer price index linked nature of rental streams provides a solid inflation hedge, and the yield gap between property cap rates and funding costs remain elevated. If the construction cost inflation persists, it will also underpin the current asset values held by property companies versus rising replacement costs.

The largest subsector, German regulated residential, dominated sector-related news over September. Market participants tried to assess how the German election and non-binding Berlin expropriation referendum might impact markets. On a positive note, there was clear market evidence of capital value growth from a mega portfolio transaction at record prices.

We had reduced exposure to the sector as downside risk increased given the recent polls, the risk of a German-wide rent freeze supported by Die Linke, and the potential for more stringent measures on rent growth or returns on modernisation investments. On balance, the outcome looks relatively positive for German landlords as the coalition between the SPD, the Greens and the Left, which brought the risk of rent-limiting housing regulations, was ruled out. It now seems likely that the formation of the coalition will take some time and hard-line stances will likely be diluted in negotiations.

Through a referendum, 56% of Berliners voted in favour of expropriation but this is non-binding. Estimated compensation costs of €29-39 billion, according to the Berlin senate’s own calculations, make it difficult to implement, to say the least. This, of course, wouldn’t solve the core issue of an acute housing supply shortage. We do not consider this a risk.

Akelius sold a €5.3 billion German residential portfolio (80% of its value in Berlin, 20% in Hamburg) to Heimstaden at a 2.2% blended yield; this is +22% above its June valuation. The net asset value of Phoenix Spree Deutschland, our +1.8% pure Berlin landlord long holding, should benefit from this strong transactional evidence. Akelius confirmed that there were “numerous” credible bids from North America, Germany and Scandinavia.

Sweden was the worst performing region (-12.2%). Having had a very strong quarter, many stocks were trading at significant premiums to asset value, and we saw substantial pullbacks across the board. The UK, saw very mixed performances as it hosts a wide range of companies, from the deepest value(trap) Hammerson, trading at a 65% discount to NAV through, to large premiums in industrial and self-storage names. Tritax Bigbox (-10.3%) and Primary Health Properties (-10.5%) were good examples of the growth/high-value pullback. Meanwhile, NewRiver Retail, a deep value name, bucked the trend by gaining +6.8%.

The weakest performer was Civitas Social Housing, which fell 17% on negative PR around one of its regulated tenants and news that a high-profile hedge fund had opened a public short position. We do not own the name. Our top performers included Sirius (+4.8%), which owns German workspace but is listed in London, and the half year revaluation of our physical portfolio which rose +8% on the back of new lettings and rising estimated recovery values in our industrial assets in Wandsworth and Gloucester.

The Trust’s interim figures (unaudited) for the half year to 30 September saw the NAV rise +15.8%, the benchmark return +11.0%, and the share price total return reach +22.1% as the discount to NAV broadly evaporated. A recent webinar reviewing the year to date is available on

Discrete rolling annual performance as at 29.07.2022 (%):

Share Price-12.4543.24-15.632.6524.02

Past performance should not be seen as an indication of future performance