Investors burnt by commercial property funds should take another look at the sector says Marcus Phayre-Mudge.
Interview from www.telegraph.co.uk:
After more than two decades in the sector, Marcus Phayre-Mudge knows a thing or two about investing in property. But instead of bricks and mortar, his TR Property Trust invests in property equities, making it more liquid than the average commercial property fund.
“Property equities – as opposed to physical property – let us focus on particular target sub-markets as well as particular corporate structures which we believe will outperform their peers,” he said.
“The key is to focus on businesses which have the capability of making purchases that boost earnings in this environment. Investors must avoid businesses with inappropriate balance sheet structures and those invested in markets which are ex-growth.”
To this end, the trust invests in Europe – but avoids those countries most affected by the eurozone crisis. Instead, the fund focuses on the core markets of London, Paris, Germany and Sweden.
Property shares have had a good year so far. From the end of March until the end of September the sector saw share prices increase by 5.1pc, compared with a fall of 0.5pc in the wider European equity market.
Pan-European property shares rose strongly with the benchmark, FTSE EPRA/NAREIT Developed Europe TR Net Index (in GBP) up 5.5%. Financial stocks, including property performed well compared to the broader European equity market. The commitment to unfettered bond buying by the ECB – for those who asked – appears to have calmed those most bearish on the Eurozone. From a macro perspective it appeared that the market spent the month focused on the economic consequences of the alternative US presidential election outcomes.
At the country level, France was the strongest performer +9.7%, powered by Unibail, Europe’s largest listed property company which rose 12.1%. It continued to tap the bond market announcing a €500m 5-year bond at a fixed coupon of 1.625%, a record low for the group. Italian property stocks collectively rose 7.5%, these companies have developed a high correlation with the performance of Italian sovereign debt. Their performance has been dictated by investor sentiment towards the Eurozone generally rather than anything to do with local property markets – hence their strong performance in the period. As if mirroring the ‘risk-on’ response by the market, Swiss stocks rose just 0.3%.They continue to have ‘safe haven’ status, particularly amongst domestic investors but to fundamental investors (such as ourselves) they remain expensive. Sweden was notably weak, primarily driven by one stock, Kungsladen which announced the suspension of dividends in the light of further negative tax rulings. The Swedish tax authorities continue to investigate whether tax avoidance techniques used in earlier decades amounted to evasion.
The NAV rose 5.8% delivering 25bps of outperformance. This was fuelled by our overweight to French and Italian stocks and underweight to Switzerland. Our significant overweight to the UK did not help particularly, collectively rising +3.9%. However, within the group we saw strong performance from one London midcap Workspace (+13.7%), as well as our ‘alternatives’ student housing, Unite (+7.4%) and self storage with Big Yellow (8.9%).
In September, the TRPIT Board announced a proposal to convert Sigma shares into Ordinary shares, to create a larger, more liquid Trust. The offer reflects a discount to Sigma’s net asset value after costs and the Board recommends that holders of both share classes vote in favour at the EGM (14 December). The Circular and proxy forms will be circulated on 22 November.
In this interview with the Financial Times, Marcus Phayre-Mudge, head of property investment at Thames River Capital and fund manager of TR Property Investment Trust, says investors in office and retail space should stick to the world’s top cities for another year or so because the quality end of the market offers the best prospects for rental growth. Rather than direct investment he would recommend vehicles that own listed securities. On an ungeared basis investors might expect returns of 8-10 per cent for good quality commercial real estate.
Whilst pan European property shares fell modestly over the month (-0.2%) it was (in GBP terms) a game of two halves. From the beginning of the month to the mid point (14th) the sector and the broader equity market rose strongly on the back of the ECB’s announcement of the offer of unlimited (but conditional) bond buying – the so called Outright Monetary Transactions – to any Eurozone sovereign which requests it. Alongside the improvement in equity markets, EUR also strengthened 2.1% against GBP in those first two weeks as investors took comfort from this commitment by the central bank. However, whilst this strategy is to be welcomed it doesn’t solve the core issue of whether debtor nations within the single currency will continue imposing the austerity requirements and whether the creditor nations will accept larger write downs. The second half of the month saw concerns remerge coupled with global markets also rolling off their September 14th highs. The US electioneering is also well underway and concerns around the impact of the ‘fiscal cliff’ and a political impasse also began to weigh on markets.
At the country level, it was the peripheral nations which outperformed with the Italian property companies up +10.2%. The Fund holds both Beni Stabili and IGD. Norway’s single stock, Norwegian Property, also performed well rising +4.5% whilst the remainder of Europe saw modest movement of -1% to +1.7%. Once again it was the macro considerations which drove the market. At the individual company level we saw further evidence of successful capital raising both equity (Capital & Counties) and debt (convertibles from British Land and Capital Shopping Centres). Interestingly smaller companies were also able to tap the retail bond market with Workspace raising £57m and CLS £75m such is the demand for income.
The interim property revaluation produced an uplift of £0.47m at the month end. The six month NAV with income increase was therefore 4.9% and the share class outperformed its benchmark in the first half by 160bps.
On 26th September, the Board of TRPIT announced a proposal to convert Sigma shares into Ordinary shares. This will create a larger, more liquid Investment Trust with a single share class. The offer reflects a discount to Sigma’s net asset value after costs and the Board recommends that holders of both share classes vote in favour at the EGM which will be held in December. Any investor requiring more information please contact their TRC sales contact or the Trust’s management team directly.
Pan-European property shares rose modestly over what is traditionally the quietest month of the year. However, the shape of the month’s performance was more telling. The first week saw the continuation of the positive reaction (from 23 July) of investors to comments from Mario Draghi that the ECB would take steps to help peripheral sovereign bond markets. There then followed the lull in news through the rest of the month with share prices deflating on inactivity resulting in a total return of +0.44%. The Fund’s NAV rose +0.77% in the month and the share price rose 1.9%. Performance was driven by our overweights in the UK and France. These two countries, along with Norway (just one stock) were the only parts of Europe to register a positive return in the month.
As if to prove that markets remain driven by macro based sentiment, the announcement by the ECB on 6 September of their ‘unlimited’ bond buying (for those sovereigns willing to sign up to the attached conditions) ignited markets which had been drifting downwards for the previous three weeks. Our view is that such commitment by the central bank is clearly a positive, the real test will be whether there is the political will to subscribe to the required fiscal budgeting.
We remain focused on companies with high quality assets and appropriate gearing. Listed property companies, particularly the better resourced, continue to enjoy access to capital markets. British Land raised £400m of 2017 convertible bonds at a rate of 1.5%. The conversion premium was 31%. A great deal for the company and reflects their long duration income streams on quality assets. The marginal cost of debt continues to fall as property companies lock into lower rates.
Central London remains a rarity in European real estate, showing good rental growth across all subsectors. Derwent London’s results produced 2.8% rental growth in the first half and values rose 3.3%. Outstanding performances also came from Unite, the student housing specialist (+15.5%), St Modwen (+11.9%) and Quintain (+10.5%) all overweight positions in the Fund. Our underweight to the Swiss stocks, on valuation grounds, also helped with SPS falling -3.9% in the month. If the ECB’s strategy bears fruit we would expect to see these overpriced ‘defensive’ stocks weaken further.