Globally, all major property markets rose in local currency terms in December except for Japan, which ended the month slightly lower. New Zealand was the strongest property market in GBP terms, returning 9.0%, followed by the UK, which rose 8.2%. The FTSE EPRA/NAREIT Developed Index (TR) rose 1.5% in GBP terms.

Market review

Globally, all major property markets rose in local currency terms in December except for Japan, which ended the month slightly lower. New Zealand was the strongest property market in GBP terms, returning 9.0%, followed by the UK, which rose 8.2%. The FTSE EPRA/NAREIT Developed Index (TR) rose 1.5% in GBP terms.

The FTSE EPRA/NAREIT USA Index was largely flat in December in local currency terms. The US Federal Reserve’s Federal Open Market Committee raised interest rates, as expected, 25bps to 1.50% at its December meeting. Several positive economic indicators came out of the US this month. US real GDP for the September quarter expanded at an annualised rate of 3.2% – the first back-to-back 3% growth since 2014 - and manufacturing expanded in December at the fastest rate in three months, capping the strongest year since 2004.

The FTSE EPRA/NAREIT Australia Index returned +0.5% in AUD terms in December, underperforming the broader Australian S&P/ASX 200 Index (+1.8%). Within the property index, Retail A-REITs (Real Estate Investment Trusts) relatively outperformed, while Industrial A-REITs and Office A-REITs underperformed. Retail sales in October were up 0.5% month-on-month, after a run of what looked like overly weak monthly prints. Overall, however, retail trends remain quite soft. This month’s strong Retail A-REIT outperformance was primarily supported by Westfield’s stock price appreciation. The company received a full takeover proposal at almost an 18% premium to its last closing price.

In the UK, inflation rose to 3.1% in November, the fastest pace of price increases in nearly six years. This appeared to support the recent decision to raise interest rates in early November. European property equities also performed well, returning 2.8% in local currency terms. GDP growth in the September quarter was the strongest since the first quarter of 2011, supported by improving conditions in Germany and Italy. The European property market has recently been dominated by large takeover activity, including Hammerson’s bid for rival Intu Properties, Unibail-Rodamco’s bid for Westfield and Vonovia’s bid for Buwog.

The FTSE EPRA/NAREIT Japan Index was flat in December in local currency terms. The Bank of Japan kept interest rates on hold and made no material changes to economic policies at their December meeting. Japan’s inflation rate continues to trend upwards, with core Consumer Price Index (all items excluding fresh food) up 0.9% year-on-year in November. The Tokyo office market remains extremely tight, with Miki Shoji data for November showing a low vacancy rate in Tokyo’s five central wards of 3.03%. On the other hand, the condo market is somewhat weak, with the contract rate in Greater Tokyo at 67.9% in November, slightly below the 70% threshold that determines favourable versus sluggish performance. Despite slow sales, the average unit price per square meter for condos increased month-on-month in November.

The FTSE EPRA/NAREIT Singapore Index was up 2.2% in local terms, outperforming the global property market this month. Month-on-month growth in retail sales in October surprised, with a stronger than expected reading of 1.5% versus a forecast of 0.9%. This perhaps supported the Retail REIT sector, which performed better than Industrials REITs and Office REITs. The FTSE EPRA/NAREIT Hong Kong Index was up 2.7% in local terms. Hong Kong retail sales grew at a healthy 3.9% year-on-year, supported by improving tourist arrival numbers and stable domestic sentiment. Additionally, JLL September quarter data showed HK Grade “A” office spot rents rose by 0.8%.

Fund performance and activity

The Fund was up 1.44% in December¹, 5 basis points below its benchmark index, the FTSE EPRA/NAREIT Developed Index.

Our overweight to UNITE Group contributed the most to relative performance this month. UNITE Group is a residential REIT that develops and manages student accommodation in the UK. The stock appreciated on little news other than announcing a new development deal in Oxford. The new development is expected to provide 885 new beds and will be delivered for the 2019/2020 academic year.

The Fund’s overweight to Simon Property Group also contributed to performance. Simon Property Group enjoyed some broker upgrades as, consistent with our thesis, there is increasing belief that America’s largest mall REIT is best positioned against the tough industry headwinds facing brick-and-mortal retail stores. The Unibail-Rodamco takeover proposal of Westfield was seen as having positive implications for Grade “A” mall players in the US, and possibly puts more pressure on them to consider strategic alternatives to close the gap between their current valuation and net asset value.

Equinix, a global data centre company, fell in early December after making two announcements. The first announcement was the expansion of its Internet Exchange into nine new metro areas in the EMEA and Americas regions. The second announcement revealed the next phase in the evolution of its global platform through the direct physical and virtual connection of its International Business Exchange (IBX) data centres around the world. The stock saw heightened trade on the day and ultimately closed more than 5% lower. Our overweight to the stock detracted from relative performance.

The Fund’s overweights to National Storage REIT and Hudson Pacific Properties also took away from relative performance over the month. National Storage REIT fell over the month following its placement of 33.3 million shares at A$1.50. That said, the stock has had strong price action in the preceding month. The stock also traded ex-distribution (4.7 cps) towards the end of December. Hudson Pacific Properties, an office REIT, fell on no news, other than trading ex-distribution mid-month.

In December, we initiated a position in DiamondRock Hospitality, a Hotel REIT with ownership of 28 premium hotels and resorts, focused on “upper-upscale” hotel assets in key gateway cities and resorts. We think the company has better market exposure than some of its lodging REIT peers and is trading at attractive valuations. Additionally, we think DRH will benefit from the tailwinds from their renovation spend in 2017, their deliberate shift towards a more resort-oriented portfolio, and improved New York market share. Further, we think the Hotel REIT sector should benefit from an improving economic backdrop.

We took the opportunity of Hammerson being down post the announcement of its bid for Intu Properties, to increase our exposure to the company. Its share price fell quite dramatically in a short period of time after the announcement, with the market disliking the deal. However, we like the strategic rationale of the transaction and based on the company’s track record, believe they will be able to navigate the deal.

During the month, the Fund added to its position in Activia Properties by participating in a primary equity offer. Activia Properties focuses on urban retail and Tokyo office properties. We also participated in the equity offering of Globalworth, an AIM-listed company (the London Stock Exchange’s international market for smaller growing companies) with assets in Poland and Romania. We think the stock provides us with high yielding assets in a recovering market, as well as significant growth opportunities through future new developments.

To fund our purchases, we reduced our position in Hilton Worldwide, the global lodging company. The stock has increased by 23% since we bought it in June, with its recent moves appearing to price in much of the benefit from the new effective US tax rates. Despite reducing our position, we still find the company’s business model and valuation attractive and expect Hilton to benefit from the synchronised global economic expansion currently underway.

We sold out of our underweight position in Unibail-Rodamco prior to the announcement of a takeover proposal of Westfield. We consider the offer expensive as the offer is part cash, and reminds us of Unibail’s deal in 2007 when it acquired Rodamco which we also thought was expensive.

¹ Performance is based on OEIC B share class, net of fees, expressed in GBP.


Market outlook and Fund positioning

The strategy has exposure to high quality assets in high barrier to entry urban locations in the world’s most bustling cities.

Our US exposures are concentrated in what, in our opinion, are higher quality REITs with healthy but, in many cases, moderating fundamentals, well-regarded management teams, investment grade credit ratings, and generally attractive valuation metrics. More significant current sector exposures include: high-quality data centres, Central Business District office REITs, lodging companies, single family rentals (compared to multi-family such as apartment buildings), Class “A” regional malls and high-quality shopping centres which are anchored by grocery stores. More broadly, we prefer coastal-focused REITs and companies with lower balance sheet leverage.

The UK and Europe exposures are concentrated in student accommodation in the UK, office buildings in Madrid and Paris, and residential housing in Berlin and North Rhein Westfalen. The Madrid and Paris office markets are now experiencing low vacancies, with rent growth set to increase over the coming years. The Berlin housing market is experiencing strong price growth with rental housing vacancy rates at very low levels. Improving economic growth in Europe should benefit the strategy’s exposures.

In Australia, our strategy remains consistent with holding exposures to key sectors/markets via REITs with sound capital management metrics and a clearly articulated investment strategy. We have a concentrated exposure in self-storage facilities and shopping malls.

Our overall strategy in Asia is to have a balanced portfolio with a focus on quality defensive names, and some with strong growth potential. We maintain our positive view on a select few Hong Kong property names that are trading at fair valuation, have healthy balance sheets and investment grade portfolios with stable medium term earnings growth outlooks. The strategy has concentrated exposures in major “A” grade shopping malls in Hong Kong and China. In Japan, we believe the improving economic growth will likely continue to support the tight Tokyo office market. The strategy has concentrated exposures in Tokyo office buildings and logistics facilities.


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