The steady recovery in real estate equity prices from mid-August to mid-September was aided by the collective growing belief that we were in the final stages of the interest rate-rising cycle for US and European central banks. Inflation numbers were slowing which indicated a slowdown in consumer spending. This was all very encouraging for an asset class such as real estate whose performance is heavily influenced by the cost of borrowing. However, in the last two weeks of September and continuing into October, the backdrop shifted again. The oil price has risen (pushed up by cuts in production) and bond yields have climbed once again as prices fell. They reached levels not seen since before the global financial crisis in 2008. It is not surprising that our benchmark (the FTSE EPRA Nareit Developed Europe Total Return (in sterling terms)) has fallen -7% between 14 September and 3 October.
Over the month, the net asset value (NAV) fell -2.7%, slightly underperforming the benchmark, which fell -2.4%. The share-price performance was slightly better at -1.6%. All of this negative performance occurred in the last 10 days of the month. Given the backdrop, it was no surprise that Sweden (-7%) was the worst-performing country due to its domestic property companies having higher exposure to borrowing. Equally, the best region was the traditional safe haven of Switzerland, where the inflation data was encouragingly subdued. At the heart of this negativity is a concern that, even if rates have peaked they will stay higher for longer. The issue for many (but not all) property companies is that their cost of debt will rise as they refinance their debt obligations from much lower levels. These higher interest bills will impact earnings that the businesses are able to generate if their ability to grow the rents they generate on properties they own is not maintained. And this is a key point for more cautiously minded investors. We are consistently hearing that, operationally, businesses are sound, with little default from their tenants in terms of paying rent, steady renewals on expiring leases and little expansion in buildings becoming empty. In fact, in the case of industrials, logistics, student accommodation and high quality and well located (new) Central Business District (CBD) offices, rents are rising. However, there are clearly some markets where tenants are under pressure and are cutting costs where possible. We have seen weakness in business customer levels at the major self-storage operators, with Big Yellow falling -12.7% and Safestore down -14.9% during the month. These are dramatic price movements, but it should be noted that these are names that had previously enjoyed being priced at a premium and effectively, they have given some of that back. For the vast majority of listed property companies, their shares continue to trade at historically wide discounts to the underlying value of their assets, and this forms a key part of our investment thesis.
Lower quality offices and older buildings requiring significant capital expenditure to ensure they comply with energy-efficiency regulations continue to be under (justifiably) huge pressure. Regional REIT (never owned by the Trust) fell -34.1% during the month as it announced another cut in the dividend. Its leverage (exposure to borrowing) remains unsustainably high and there is pressure to make sales of properties it owns (into a weak market). This is a concerning negative feedback loop and investors rushed for the exit.
Ediston, the retail warehouse specialist where the Trust owns 16% of the equity, completed the sale of its entire portfolio to Realty Income (a $36bn US REIT), and we expect the cash to be returned in January following the formality of the sale process. In the meantime, the dividend of 7% will continue to be paid monthly.
The Trust’s physical property portfolio is independently valued six monthly, and the interim September valuation was £72.45m, a decline of -4% over six months. This equates to 7.5% of net assets of the Trust. The Trust’s overall interim performance figures (31 March to 30 September) saw a NAV total return of +3.3% against a benchmark of -0.8% and a share-price total return of 4.5%.
Discrete rolling annual performance as at 31.10.2023 (%):
| 2023 | 2022 | 2021 | 2020 | 2019 | |
| Fund | -3.7 | -32.5 | 33.9 | -12.2 | 15.8 |
| Benchmark | -5.4 | -34.6 | 27.5 | -16.1 | 11.4 |
| Share Price | -9.5 | -33.6 | 44.4 | -18.6 | 15.5 |
Performance data is in GBP £ terms. Investors should be aware that past performance should not be considered a guide to future performance. All fund performance data is net of all fees and expenses.