Richard is joined by Marcus Phayre-Mudge, fund manager of the TR Property Investment Trust, to discuss investing in physical property, removing liquidity concerns, how the trust has managed during the last 12 months, and the changing environment.
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April was a strong month for pan-European property shares, with the benchmark rising +7.2%. The Trust’s net asset value (NAV) rose +8.2% and the share price +8.5%, so a good month all round. While currencies do not impact relative performance (as all exposure is in line with the benchmark), they do clearly affect absolute returns. The Trust’s non-sterling exposure is c75%, and therefore a weaker sterling provides additional valuation gains. During the first quarter of the year, sterling strengthened against all European currencies by over 5%; this was partially reversed in April. As a consequence, the benchmark when measured in euros returned only +4.9% versus +7.2% in sterling. So, while this was a good month for real estate equities, an important component was currencies, as opposed to organic growth.
A positive month for equities across the board with real estate equities performing broadly in line when measured in local currency. EPRA (ex UK) when measured in EUR returned a respectable +3.2% but in GBP just +1.3% given the continued strengthening of GBP over the last quarter. GBP has now risen over 5% versus EUR since the beginning of the year. This has an impact on our NAV given that the base currency of the fund is GBP. The month’s NAV movement was +1.4% whilst the benchmark rose +1.5%.
Real estate equities had a difficult month, as rising bond rates and fears of reflation pushed investors away. Our view remains firm: for sectors where there is little oversupply, then the demand created by economic reflation is most welcome. Simply put, not all real estate is equal, and we remain focused on asset types that will enjoy rental and capital growth as economic conditions improve. We remain overweight fundamentally sound markets, such as German residential, industrial/logistics across Europe and the UK, smaller office markets (e.g. German and Nordic cities) and self-storage. We favour index-linked income, where earnings will grow if inflation does appear. The vast majority of our companies have taken advantage of very low interest rates, managing to extend duration while also reducing their overall cost of debt. These businesses are eager for the government stimulus to feed through into real economic growth.
January 2021 has been described by one real estate equity broker as ‘a long year’ and that neatly sums up what has been a tumultuous month. The net asset value (NAV) movement at -3.1% and the benchmark fall of -3.7% belies a huge amount of activity which led to very high levels of volatility and significant price changes (both positive and negative) in individual stocks.
No followers of financial markets could have missed the dramatic ‘short squeezes’ created by an army of retail investors coordinating their buying power into a small group of heavily shorted stocks, principally in the US. There was spill-over into Europe in the large Continental shopping centre owners Unibail and Klepierre, which saw prices squeezed up +32% and +34% (peak to trough) over the month and returned +7.6% and +8%, respectively, over January.