TR Property Investment Trust : November 2023

It was a strong month for all risk assets (like equities) as it looked increasingly likely that we are at or near a peak for interest rates with cuts likely in 2024. Real estate equities had a particularly good month, with the FTSE EPRA Nareit Developed Europe TR (in sterling terms) returning +12.7%. The Trust's net asset value (NAV) was slightly behind, rising +12.5%, but, encouragingly, the share price returned +14.4%. The broader European equity landscape, as referenced by the Stoxx 600, returned +6.6%.

The best-performing sector was residential (+18%), driven by German companies (Vonovia (+17.6%), LEG (+19.2%) and TAG (+22.1%), while our largest relative position (Phoenix Spree Deutschland) fell -2.6%. Other highly geared (high borrowing levels) residential names, such as Kojamo (+26.7%), performed incredibly strongly after a very weak September and October.

Unsurprisingly, Sweden was the strongest country performer given its high correlation to changes in the expectations for the path of interest rates. Balder (+31.1%) is our largest exposure to residential markets in Sweden and has continued to perform into December (+6% to 6 December). Our other large holdings in Sweden are Wihlborgs (+18.0%) and Sagax (+18.1%); the latter carried out a SEK2bn capital raise at SEK212 per share. We participated, investing £15m, and the holding is now our largest in Sweden. The share price at month-end was SEK237.9, marking a gain of 12.2% in less than two weeks.

Several other names also took advantage of improving investor sentiment and raised equity capital (by issuing new shares). WDP, Continental Europe's largest listed warehouse/logistics investor and developer, raised €300m (5.8% of existing shares) at €24.76 per share. The issue price was at a discount of just 3% to the last price and 26% premium to the NAV. Another Belgian logistics name, Montea, raised €126m (9.9% of existing shares) at a 4% discount to the last share price. Shurgard raised €300m through an ABB at a 7% discount to the closing price and a 13% discount to the NAV. All raises are for new acquisitions and the market reacted positively in each instance, seeing the opportunity to seize acquisition opportunities.

There were numerous companies reporting third-quarter and first-half (for March year-ends) figures. In most instances, the results reinforced our view that a mix of positive market fundamentals (leasing activity; market rental growth) coupled with indexation (ability to increase rents with inflation) provided top-line earnings growth. There continues to be valuation reductions, as we expected, with British Land recording values down -2.5% in the first half. London Metric (+10.3%) recorded like-for-like rental growth of 2.9% in the first half, and Workspace (+9.5%) saw earnings per share (EPS) grow +5%, backed by like-for-like rental growth +6.3%, even as values slipped -6.6%. The pattern of positive rental growth but valuation corrections was mirrored across our universe. The encouraging point is that the yield expansion (resulting in falling values) is a function of the rising cost of capital (higher borrowing costs). As we reach peak interest rates during this cycle, the prognosis for property values - given the stable underlying conditions - is indeed positive.

Discrete rolling annual performance as at 30.11.2023 (%):