Listed property companies are trading at significant discounts to their net asset values (NAVs) as the sector emerges from a challenging period. Future growth is now underpinned by supply constraints driving rental increases, lower interest rates easing financing costs, and an active M&A environment.
In a world obsessed with positive thinking, stoic philosophers advocate a contrarian route to resilience via ‘negative visualisation’. The principle is simple: begin the day by imagining everything that could go wrong. Your phone is lost, your train is missed, an important meeting goes disastrously, and a disagreement with a loved one looms. This mental rehearsal of adversity doesn’t invite misfortune—it prepares you for it. When obstacles arise, they are expected rather than shocking, manageable rather than overwhelming. More often, the day unfolds with few difficulties, fostering a newfound appreciation for life’s uneventful prosperity.
We also practice a degree of negative visualisation with our investment approach at TR Property—selecting investee companies that prosper not only during periods of growth, but those which can weather storms. The past two years have put this approach to the test. In 2022, European property equities faced an annus horribilis, shedding a third of their value as borrowing costs soared.
Fears were further fuelled by worries over the future of physical spaces—offices, retail, and hospitality—amid shifting work and consumer habits. We were prepared for this and maintained our focus on companies operating in supply-constrained sectors that had few near-term refinancing requirements, manageable loan-to-value ratios, and, as inflation spiked, the ability to grow their top line earnings through indexation.
Now, as borrowing costs stabilise and supply-demand dynamics reestablish themselves, listed property companies are trading at generous discounts. This creates a rare buying opportunity for investors, with future growth potential underpinned by a series of discrete factors.
Debt dread recedes
No-one would argue that the European economy is ushering in 2025 in the rudest health. But a paradox of property investing is that a dose of economic malaise can be beneficial. While widespread job losses and business closures are of course undesirable, the voice of a cautious central banker can be music to listed property investors’ ears. Concerns over economic growth leads to interest rate cuts—creating a more benign environment for leveraged real estate.
Meanwhile, bond spreads are narrowing, banks are lending more competitively, and refinancing opportunities are improving. The once-feared spectre of leveraged property is losing its menace. Meanwhile, the ratings of lots of listed companies are improving as they lower their debt volumes, and their loan-to-value ratios stabilise.
Strong fundamentals endure
As the cost of capital eases, there are signs that even the most scorned real estate segment—the office sector—is edging back from mainstream irrelevance. Though this is a sector to which we have only extremely select exposure, the point stands that a wider rethink of post-pandemic prejudices is underway.
Still, concerns about interest rates tapering rather than tumbling do remain. Here, we find comfort in the fact that the supply of top-quality assets remains constrained, due to an almost total dearth of development post-pandemic.
The biggest winners? MSCI data shows that retail warehousing delivered a total return of 12.5 percent in 2024, followed by shopping centres (10.5 percent), and industrial properties (9.1 percent). Meanwhile, emerging sectors like data centres are attracting growing investment, as evidenced by Tritax Big Box announcing plans to develop one of the UK’s largest data centres.
Conversely, offices have struggled with the sector producing a small negative total return (-0.3 percent according to MSCI), alongside a larger capital valuation decline of 5.7 percent. Crucially, not all office buildings are suffering. Prime locations—such as London’s West End and prime central Paris—boast rock bottom vacancy rates and rising rents, while older buildings in peripheral locations like London’s Docklands face vacancies exceeding 15 percent.
Commercial tenants of all types are increasingly prioritising high-quality, energy-efficient spaces aligned with corporate sustainability goals, reinforcing the divide between winners and losers. Sustainability is no longer optional – with pressure for greener, more energy-efficient buildings piling on from investors, tenants, and regulators alike.
All this means that strong economic growth is not a precondition for rental growth. It is the lack of supply that emerges as our antihero driving performance.
Consolidation continues
Further good news emerges via an ongoing wave of mergers and acquisitions, driven by two forces: public-to-private transactions and consolidation. Discounted listed property companies have become favoured targets for private equity, as evidenced by Starwood’s acquisition of Balanced Commercial Property Trust (BCPT) and Brookfield’s purchase of Tritax Eurobox.
Wealth managers make up a large portion of REITs’ share registers – and they too have been consolidating. The resultant large wealth firms ideally want smaller positions in larger companies, rather than large positions in small companies. This in turn piles pressure on REITs to consolidate, as evidenced by mergers including LXI’s acquisition by LMP and Capital & Regional being acquired by NewRiver Retail.
We expect more of this to come – with M&A serving as a crucial driver of returns in recent years.
Governance improvements drive value
Governance improvements across REIT land remain an interesting, if more indirect, supporter of M&A and other forms of value creation, with companies including PRS REIT, Supermarket Income REIT, and Warehouse REIT taking bold steps to improve alignment between shareholders and managers over the past year.
This issue is crucial because when boards issue management contracts that are overly-long, the payout required acts as a poison pill for a potential acquirer. Meanwhile, managers who take their fee based on net asset value (NAV) are disincentivised from actions like share buybacks, which can be in the interests of shareholders—especially when companies are trading at large discounts to NAV.
We continue to push for our three pillars of good governance: fees based on market cap, a lead manager who takes part of their fee in shares, and one-year rolling management contracts. These ensure a strong level of alignment between managers and shareholders.
Resilient real estate
Property investments suffer when faced with two major threats: an oversupply of real estate or a surge in the cost of borrowing. Having endured both rising debt costs and deep uncertainty over tenant demand, the market has weathered its storm. Today, the worst-case scenarios that once loomed large are receding. For investors willing to act, this moment offers not just recovery, but opportunity.
About TR Property Investment Trust
TR Property Investment Trust is listed on the London Stock Exchange (ticker: TRY). The trust was set up as an investment trust in 1905 and has focused solely on the property sector since 1984. It offers diverse exposure to the UK and European property market, primarily through real estate equities and via a small proportion of UK physical assets, seeking long-term capital growth and a growing dividend. TR Property’s core management team has worked together for more than 20 years, led by fund manager Marcus Phayre-Mudge.
Capital at risk. TR Property Investment Trust PLC is an investment trust and its Ordinary Shares are traded on the main market of the London Stock Exchange. The Investor Disclosure Document, Key Information Document (KID), latest annual or interim reports and the applicable terms & conditions are available from Columbia Threadneedle Investments at Cannon Place, 78 Cannon Street, London EC4N 6AG, your financial advisor and/or on our website www.columbiathreadneedle.com. Please read the Investor Disclosure Document before taking any investment decision. The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, on 13/02/25 which is authorised and regulated by the Financial Conduct Authority.
