August 2024

It was a positive month for real estate equities, with the benchmark returning +3.8% ahead of broader European equities (STOXX 600 +1.6%). The Trust's net asset value (NAV) total return exceeded the benchmark at 4.2%. The month was bookended by central bank messaging. Although anticipated, the Bank of England (BoE)'s 25 basis point cut at the beginning of the month was still taken positively, as were comments from US Federal Reserve Chairman Powell at the Jackson Hole symposium at the end of the month. The interest-rate cycle has turned. However, we are anticipating a maximum of two cuts before year-end from the BoE or European Central Bank. As we have reiterated in the annual report and at the AGM in July (presentation on the website), we do not anticipate a dramatic drop in base rates in 2025. Even without a large number of further cuts, real estate pricing will benefit from stability in the cost of medium-term debt (five-year swaps). The ongoing reduction in margins as bond markets reopen and banks become more competitive as they grow comfortable with underlying asset pricing stability (following almost two years of price adjustments) will be critical in reducing the overall cost of refinancing.

The month saw plenty of first-half 2024 results and it was a broadly positive picture across most sectors. Logistics demand remains strong, particularly new build, as referenced by both CTP and Montea's figures. Regulated residential (Germany) saw steady growth in inflation-linked topline and modest increases in transaction volumes (LEG, TAG and Grand City). Vonovia, the largest company in our sector, announced €480m of sales, bringing the year-to-date (YTD) total to €1.5bn, and reiterated the year-end target of €3bn. However, price discovery on these transactions has been hard to ascertain and independent valuers need to adjust values to market levels. Open market (as opposed to regulated) residential was much weaker, particularly in Finland, with poor results from Kojamo (expected following a profit warning in July) where oversupply hampers rental growth. Grainger (-0.6%) remains under pressure from concerns that the new Labour government may allow localised rent controls.

The sale of Hammerson's non-controlling stakes in various Value Retail outlet centres has resulted in balance sheet stability (net proceeds of £585m). However, the additional announcement of an expensive capital injection (€110m share) to solve the refinancing issue at Dundrum (Dublin), with the revised debt costing 5.5%, reminds us of the issues facing this business.

Assura (+2.6%) acquired a £500m portfolio of private hospitals with a part debt/part equity issuance to the vendor. In our view, the deal creates stock overhang (8% of issued shares now held by the vendor) and very modest accretion to earnings (+1% earnings per share) while increasing the loan-to-value to 48% (limit 50%).

Catena, one of our largest overweights, raised SEK 3.1bn (at a 3% discount to previous close but still a 40% premium to NAV) to fund the acquisition of a SEK 5bn asset in Denmark. It was a highly accretive deal on earnings and asset value, and we participated in the raise.

September looks set to be busy with corporate noise. Brookfield and Tritax EuroBox have extended the 'Put Up or Shut Up' (PUSU) for the third time into September, while Capital & Regional have given a new deadline of their PUSU (12 September) to potential bidders Praxis Capital and New River Retail. The board of BCPT (Balanced Commercial Property Trust) have also indicated that their strategic review will be concluded by the end of September. The share price (+19% YTD) has responded very strongly in anticipation.

Although this was a strong month for the Trust's asset value, the share price did not follow suit. The monthly total return was -1.5% and the discount had widened to over 8% by month-end. There was an unusual bifurcation of returns between the NAV and the share price given the large amount of positive news over the month.