There seems no doubt valuations in the European commercial property sector have stopped falling and in some cases have been rising in recent months, but the recovery is uneven with demand for higher-quality assets outstripping that for lesser-quality ones.
However, allocating part of your portfolio to property by stock picking or even choosing a REIT (real estate investment trust) can be time-consuming especially if you don’t have the expertise.
Investors looking for broad exposure to high-quality UK and continental European assets to play this recovery should therefore take a look at investment trust TR Property (TRY).
QUALITY ASSETS
Managed by Thames River Capital, a joint venture with Columbia Threadneedle, the company owns a small amount of UK property directly but the majority of its investments are in quoted shares of property companies, property-related businesses and REITs.
When choosing where to invest, the trust generally prioritises future growth and capital appreciation over yield or discounts to NAV (net asset value), but with many holdings offering a relatively high payouts the shares offer a current yield of around 5.2%, which is fairly attractive.
Interestingly, when we introduced the company to readers a little over a year ago, the UK represented 36% of the portfolio and just two UK stocks made the list of top 10 holdings – today the UK, including directly-owned properties, accounts for just 22% of the portfolio but there are three UK stocks in the top 10 holdings.
The largest weightings, as of January this year, are in industrial property, including Segro (SGRO), German residential, European shopping centres and UK ‘diversified’ companies such as Land Securities (LAND) and LondonMetric (LMP).
POSITIVE HALF-YEAR RESULTS
For the six months to September, which marked the first half of its financial year, the company reported an 11.6% increase in earnings per share, from 7.31p to 8.16p, an 8% increase in NAV per share to 378.6p and a 9.4% increase in its share price to 355p.
As a leveraged asset class, the price of debt is a critical driver in the early stages of a valuation recovery, and the decline in interest rates – particularly in continental Europe – not just during the first half to September but just as important in the five months since then, has created a competitive lending environment allowing many companies to refinance at lower interest rates.
Therefore, the trust’s focus has shifted from scrutinising firms’ balance sheets to fundamentals, which is the next phase of price recovery, and to portfolio quality as there is a growing mismatch between increasing demand and lack of supply of high-grade property assets.
Most of the returns over the six-month period came from European shopping centres and UK diversified REITs.
Klepierre (LI:EPA) in France delivered a 27% return thanks to a stronger earnings outlook and credit upgrades, while Picton Property Income (PCTN) sold its largest office asset for conversion into a residential property, reducing the perceived ‘overhang’ in office space and reducing debt in one go.
Where it has found value the firm has invested in capital raisings, and as merger activity has spread, leading to a smaller number of larger, more liquid companies with better operating efficiencies, it has supported deals such as the takeover of Capital & Regional by New River Retail (NRR).
RECENT PERFORMANCE
After a tough December, European equities shone in January and the ‘value corner’ of real estate stocks even beat the return on the S&P 500 over the month with a 3.9% gain.
The trust’s overweight towards European shopping centres paid off once again as investors sought out high yield and income stability, while French offices surprised to the upside due to the lack of best-in-class space available to rent in Paris (recent estimates put the vacancy rate as low as 4%).
The small share buyback at Picton also helped sentiment towards UK property stocks, even if it was a ‘baby step’ in the scheme of things.
Marcus Phayre-Mudge, lead manager of the trust since 2011, observes: ‘If the board believes in the asset valuation, then nothing is cheaper than their own portfolio at a 30%-plus discount. Buybacks at these discounts are highly accretive. Investors will soon get the message that the non-executives have not abandoned them and are determined to do something about it. It becomes self-reinforcing.’
Phayre-Mudge also sees more M&A to come in the UK: ‘The market wants larger, more liquid names with greater cost efficiencies – just look at the performance of London Metric, an active consolidator. In this environment your share price is a currency and trading at large discounts (to asset value) leaves you in a more vulnerable negotiating position.’
The trust trades at a 9% discount of roughly to NAV, and ongoing charges are 0.82%, in line with the AIC’s Europe peer group, while dividends are paid semi-annually, typically in January and August.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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