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TR Property takes profits as real estate investment trusts remain on Brexit alert

29 November 2019

Half-year results from TR Property boosted by rally in London-listed developers in August. Trust sits on the cash as it and other Reits such as LXi, Schroder Real Estate and Regional remain defensive.

TR Property (TRY) has sold down large cap UK real estate stocks and reduced exposure to London as manager Marcus Phayre-Mudge warns he has held off reinvesting profits due to Brexit uncertainty. 

The £1.4 billion trust, which is unique in the investment trust universe as it invests in both physical property and pan-European real estate equities, outperformed its benchmark in the six months to 30 September. It delivered a net asset value (NAV) total return of 8.5% against a 6.7% gain on the FTSE EPRA/NAREIT Developed Europe Capped index. 

Phayre-Mudge managed to outpace the benchmark despite admitting that politics in the UK was putting the portfolio under pressure. 

He said he has ‘been taking profits in UK larger cap names’ following the dramatic rally in August and reducing exposure to London as ‘share prices return to pre-[EU] referendum levels’.

However, he has held off reinvesting the cash ‘given the uncertain political outlook’ as the UK tries and fails to agree a Brexit deal with the EU. Brexit uncertainty is having an impact not just on stock markets but on the pound, and Phayre-Mudge said ‘the fortunes of sterling remain a significant unknown with the potential for change in either direction’.

‘Although 68% of our projected non-sterling income has already been collected, foreign exchange movements could still have a significant impact on the revenue account,’ he said. 

‘Another material factor will be the positioning of the portfolio through the second half as we take into account political events. This may also lead to a change in the gearing levels which will have an impact upon the revenue account.’ 

Logistics assets have been a contributor to performance over the past six months but Phayre-Mudge said he has reduced exposure to UK logistics as ‘share prices moved to premiums’.

‘I remain positive about the prospects for the sector, particularly those with development programmes in densely populated markets,’ he said. 

Property trust peer LondonMetric (LMP) provided a boost to TR Property with its takeover of A&J Mucklow, the specialist Midlands industrial owner and developer, as Phayre-Mudge owned 5% of Mucklow.

‘We opted for shares, rather than cash, in LondonMetric as we are firm advocates of the management team and the opportunities afforded in the merged vehicle,’ said Phayre-Mudge. 

LondonMetric also reported its half-year results to 30 September, with a total property return of 3.5%, outperforming its IPD All Property benchmark by 2.7%. It delivered EPRA NAV per share of 174.9p, flat on the previous six month after costs from the Mucklow acquisition of 2.5p per share were factored in.

The £2 billion trust’s acquisition means it now has an urban logistics portfolio valued at £826 million, which chief executive of London Metric Andrew Jones said was a ‘significant milestone’.  

Jones said urban logistics was providing rising rents that ‘reflect growing consumer demand for quicker and more efficient deliveries’.

‘We call it the Amazon race,’ he said.

With retail remaining in the doldrums and London office space out of favour, it is no wonder industrial and logistics assets have been so popular with fund managers. 

Duncan Owen, who as head of Schroder real estate oversees the Schroders Real Estate (SREI) investment trust, said UK real estate capital values have fallen 3% from their peak in October 2018. However, within this, shopping centre values have dropped 21.5% while industrial values have increased 17.3%.  

However, industrial rental growth has ‘eased’ to 3% this year from 5% last year and prompted Owen to sell ‘low-yielding industrial assets’.

The tough property environment has seen returns on the £279 million SREI portfolio fall. In the six months to 30 September it reported a NAV total return, including dividends paid, of 1.3%, down from 3% the year before. The fund currently trades on a discount of 16.1% but does offer a yield of 5.8%

Owen expects opportunities to arise, however, and is sitting on a £90 million cash pile after selling a number of unfavourable assets. He plans to ‘selectively deploy’ the money into ‘winning cities at higher yields’. 

LXi (LXI), the two-year old, long-lease real estate trust, has positioned itself defensively in the face of a difficult property market. In the six months to 30 September, the NAV total return was 6.8%, down from a gain of 8.1% in the same period last year. 

Simon Lee, director of the £665 million portfolio, said he has ‘strategically sought exposure to defensive sectors and uses that tend to outperform in times of economic downturn and uncertainty’.

This includes budget hotels, that make up 24% of the portfolio, discount food stores, industrial assets, and healthcare properties. 

Lee said that despite a slowdown in growth in the UK economy, inflation has outpaced rent rises and the fund has benefited by ‘linking the vast majority of our rental uplifts to inflation’. 

Regional Reit (RGL), a specialist investor in offices and industrial estates outside the M25 London orbital road, has also seen rents rise. In a lettings update the high 7% yielding trust announced successful lettings amounting to £486,691 a year. 

Stephen Inglis, chief executive of London & Scottish Property, which runs the trust, said some of the lets were 5.5% ahead of the expected rental value.

It also signed a deal with insurer Aviva for a £775,000 a year on a property in Hampshire, 15.7% ahead of the previous rent. 

Inglis said demand ‘continues to be strong for our assets’ and the trust is continuing to see rental growth. 

‘The diversity of our income continues to grow as we expand our asset base and further enhance the quality and quantity of our income and expand our tenant base,’ he said. 

Another property specialist making progress is Residential Secure Income (RESI). Shares in the £162 million social housing investment trust trade on a discount of 12% below net asset value (NAV) that grew 3.3% to 108.6p in the year to 30 September. Including dividends, this represents total NAV growth of 18% since launch two years ago, putting it ahead of its 8% annual return target. 

Jonathan Slater, chief executive of RESI Capital Management, said the results were underpinned by inflation-linked rental increase and ‘asset management initiatives’, including ‘establishing our shared ownership portfolio, which will, once fully occupied, produce high-quality and sustainable income’ as well as delivering social value. 

Slater said the case for ‘raising equity-like capital within the social housing sector’ has increased since launch as the government calls for the supply of housing to be increased. The trust invests in properties that can be let back to local authorities, a portfolio of retirement homes, and shared ownership properties. 

Investment company news brought to you by Citywire Financial Publishers Limited.

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