While it was founded over a century ago as a general investment trust, since 1984 TR Property (TRY) has focused exclusively on analysing the UK and European property sectors looking for the most profitable and attractive companies.

The FTSE 250 company currently has exposure to 12 European countries, including the UK, through holdings in over 60 stocks and funds as well as a small number of direct property investments.

Marcus Phayre-Mudge, who has managed TR Property since 2011, was formerly an investment surveyor at Knight Frank and qualified as a Chartered Surveyor over 30 years ago, giving him an unequalled insight into the UK property market alongside his skills as an investment manager.

After the property sector across Europe struggled in 2022 and 2023 due to the steep rise in interest rates, Phayre-Mudge is convinced 2024 will see it return to favour, for several reasons. Shares sat down with him to hear why.

INTEREST-RATE SENSITIVITY

‘Listed real estate has acted as the ghost of Christmas future, pricing in higher interest rates early and ruthlessly – ultimately leading to overselling of the sector as a whole,’ says the manager.

Not only have institutional investors been running scared of property stocks, hedge funds and other sources of ‘fast money’ have come into the market and shorted the sector since the pandemic, he believes, with the result that European listed real estate has rarely traded at such large discounts.

‘Historical data shows that as discounts widen, average future returns for listed real estate tend to rise. An even more crucial consideration for 2024 is that when interest rates peak, property equities recover much more sharply than the wider stock market.

‘The missing piece of the puzzle is that we don’t know exactly when this peak will come, with the game of “will they, won’t they” surrounding central bankers truly alive and well. But the past 18 months have proven once again just how sensitive listed property is to interest rates, and now comfort for this rate-induced scare is appearing in the near distance.’

Judging by the upward move in markets over the year-end, investors may have got ahead of themselves somewhat in discounting the speed and timing of rate cuts.

December’s higher-than expected UK inflation hasn’t helped sentiment, but the consensus seems to agree higher prices for some goods were the result of one-off factors and the ‘direction of travel’ for both inflation and interest rates remains downward.

SECTOR IS BETTER CAPITALISED

Going into the great financial crisis a decade and a half ago, it’s fair to say there was an excess of leverage across the global economy.

The cycle which took place following the crisis ‘was characterized by large deleveraging of banks, governments, consumers and firms all at the same time, which was hugely disinflationary’, with the effects of this felt throughout the following decade says Felipe Villaroel, partner of fixed income boutique manager TwentyFour.

Today, ‘banks are in good shape, governments are running very large deficits and consumers and firms have solid balance sheets for the most part,’ adds Villaroel.

It’s tempting to say no sector felt the unwanted effects of having to deleverage more than real estate.

‘Valuable lessons were learned in the global financial crisis and excessive leverage is now largely avoided in the listed sector, especially in the UK,’ confirms Phayre-Mudge.

Therefore, ‘as an additional safety net, investors can hunt for businesses that have balance sheets which can withstand interest rates remaining at current levels’ says the manager.

MAXIMUM BANG FOR HIS BUCK

The trust is currently tilted towards Continental European property shares, which make up 72% of the £1.15 billion portfolio, while UK shares make up just under 36% and 6% is invested directly in UK assets.

Eagle-eyed readers will have spotted that the percentages above come to 114% - this is because for the first time in many moons Phayre-Mudge is himself using debt to leverage the trust’s returns.

‘We have the ability to run up to 20% of the fund in cash, and at the other extreme to use as much as 20% leverage,’ explains the manager.

‘Before the great financial crisis we had the maximum amount of cash, whereas today we’re using leverage, which tells you which way we think markets are going.’

The trust’s biggest exposure is to European industrial property, shopping centres and residential assets, with limited exposure either to offices or the retail sector.

Of the top 10 holdings by NAV (net asset value), just two are in the UK – Land Securities (LAND) and Picton Property Income (PCTN).

While he doesn’t expect interest rates to fall sharply this year, the fact they are not rising, combined with rising rents and stable margins thanks to strong demand and lack of supply in key markets, means the sector is set for a revival says the manager.

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