TR Property: Three routes to ‘racier returns’ 

TR Property (TRY ) manager Marcus Phayre-Mudge argues there are three ways in which his trust looks ripe for returns this year. 

Phayre-Mudge co-manages the £1bn investment trust, which invests predominantly in pan-European listed property companies, with a 15% cap for additional direct investments in bricks and mortar. 

Annual results, released yesterday, covered a period when the trust slightly outperformed its benchmark. Although, negative net asset value (NAV) total returns for the year to end of March of 2.5% reflected a challenging second half ‘dominated by a seesaw of market responses to macro events.’ 

Since the start of April the trust’s share price has rebounded 13%.

Continued dealmaking

Speaking to Citywire, Phayre-Mudge was positive about continuing mergers and acquisitions (M&A) among real estate investment trusts (Reits), not least because his fund of funds approach – unique in the listed sector – stands to give ‘racier returns’ from this sort of activity than the average property trust. 

The manager shared hopes that private takeovers will be balanced with consolidation of listed vehicles. Yesterday, he once again backed NHS landlord Primary Health Properties’ play for fellow healthcare Reit Assura, even as the Assura board recommended a higher offer from private equity firms.

‘We believe that consolidation which leads to a small number of larger, more liquid companies with improved operating efficiencies is a large part of the solution for the sector,’ he said in the results. 

Phayre-Mudge told Citywire that sales resulting from M&A activity act as ‘public displays of proof that underlying assets are worth their market value’ which should help to ‘fuel investor sentiment’.

Rising rents 

Another positive in the sector right now, according to the manager, is that ‘rents are rising quite quickly for best-in-class space’. In terms of the bigger picture, he attributed this to lasting property shortages following the slowdown in ‘speculative lending’ post the 2008 global financial crisis, now coupled with the mass migration of people back into public spaces since the end of covid. 

TRY’s results, which cite JLL data, detailed that prime rents for retail buildings grew by 5.6% year-on-year through to the third quarter of 2024, while ‘the most expensive locations (e.g. Bond Street, Milan’s Vai Montenapoleone, Paris’ Avenue Montaigne) outstripped the average’.

This year Phayre-Mudge, who also runs several open-ended funds at Columbia Threadneedle, is particularly optimistic about rental growth in shopping centres.

Drawing on analysis from Landsec, he explained that ‘in major retail, the top 1% of all shopping destinations in the UK provide brands with access to 30% of all in-store retail spend’.

He also has big hopes for retail buildings in continental Europe, noting the shift to online shopping has been markedly slower in countries like France and Italy, where the likes of Amazon arrived much more recently, than in the UK. While online sales excluding food and fuel make up ‘roughly a third’ of UK sales, he said the figure is around half that in Italy. 

Shopping centre owner Eurocommercial is one stock he hopes will benefit. 

‘The icing on the cake’

The ‘icing on the cake’ for prospective Reit investors, Phayre-Mudge said, is the 8.8% discount at which the trust currently trades. 

‘This is a bit wider than normal, we’d expect to be trading at 4% or 5%,’ he explained, adding the trust is working on a brand and communications overhaul to bridge the gap. 

Phayre-Mudge’s own investment in the company, which he told Citywire was second in size only to his house, and TRY’s close to record level of 17% gearing are further evidence of his strong conviction in the trust. 

‘TRY has outperformed in NAV [total return] terms versus its index once again, building on a good long term track record, driven by security selection,’ said JPMorgan Cazenove analyst Christopher Brown, commenting on the results. 

In terms of longer term performance, TR Property’s shares returned 17% in the five years to end of April, including dividends reinvested. The underlying NAV total return was similar and well ahead of just 0.7% for its benchmark, the FTSE EPRA/NAREIT  Developed Europe Capped index, according to the latest factsheet. 

‘One of the key reasons many investors allocate to property is as a source of income and TRY has achieved an impressive long-term dividend growth record. But there is a significant yield gap between TRY’s yield of 4.7% and the dividend yields offered by the Reits that average 7.0% and TRY’s yield is now uncovered,’ said Brown.

However, JPMorgan Cazenove’s investment company research chief maintained an ‘overweight’ recommendation, despite also suggesting TRY ‘could become a cleaner structure by focusing exclusively on listed securities’.