TR Property 08 December 2022

TR Property (TRY) is one of the few ways that investors can get an actively-managed, diversified portfolio of pan-European property shares and is certainly the only way to do so in an investment trust structure. This gives investors the opportunity to participate in the property asset class without being tied to a single portfolio of real estate or property management team. And just like listed property REITs, TRY does not expose investors to the fund-gating issues which investors in some open-ended property funds have experienced in 2022.

Lead manager Marcus Phayre-Mudge, who has been part of the TRY Management team since 1997, believes that the big issue for property investors is that there is, after a long period of low interest rates and relatively low risk, a fundamental repricing of the cost of debt. This will have a direct effect on the pricing of assets, such as property. His view is that a large part of this repricing has happened already and that share prices of listed property companies are probably already discounting a greater fall in property values than is likely. The key question is how long it will take for the market to accept this premise. At the time of writing, there are early signs of this happening but Marcus cautions that calendar year end is a quiet time for the property industry and he does not rule out that cans are being kicked down the road, with valuations at the end of Q1 2023 being the ones to watch.

In the meantime, TRY’s excellent long-term track record of Dividend growth looks set to continue, with accrued income for the current financial year higher than for the same time last year.

Property is a classic interest rate-sensitive asset class, so it’s no surprise that TRY’s NAV and its benchmark index have fallen by one third since the end of March 2022. As Marcus notes, listed property companies are, on average, less geared than they were in the run up to the 2008 financial crisis, so it isn’t so much about levels of gearing as it is about the cost and timing of refinancing. If gearing costs more, then assets such as property will, inevitably, be valued to reflect that and this process is well underway already.

TRY’s own Discount has remained quite narrow despite the significant decline in NAV and is currently 4% , but underlying discounts on the portfolio are, on average, 25% to 30%. Those are, of course, discounts to property values which may yet still fall, so we view these as being indicative. But we think this is a good sign that value is emerging in the underlying assets.

Over the long term, TRY has delivered not only excellent capital returns, but also Dividend growth significantly above inflation and its current historical yield is 4.5%. Because TRY is exposed to underlying discounts as well as property values, in the short term we think that it has overshot the direct property companies on the downside and we would expect it to re-establish its long-term correlation with property values in due course. We think that TRY might appeal to investors with a higher risk appetite, looking towards a recovery in property companies’ share prices.