The lack of property construction in the past five years remains a cornerstone of a bullish outlook for the sector, TR Property’s Marcus Phayre-Mudge has claimed.
With tenant demand steadily returning across Europe, the investment trust has continued to focus on businesses and markets likely to enjoy a genuine disequilibrium in supply and demand.
In performance terms, TR Property produced a net asset value return of 22.4 per cent in the 12 months to end-March against the benchmark’s 14.9 per cent, according to the trust’s latest results.
This marks the second consecutive year of 20 per cent-plus net asset value growth, and share-price performance was even stronger at 37.7 per cent. This reflected the rise in asset value and narrowing of the discount, which is the percentage by which the shares trade below the net value of a trust’s assets.
Meanwhile, the trust also announced a dividend rise for the 20th year out of the past 21, only keeping the distribution the same in 2010.
Looking at the macro picture, Mr Phayre-Mudge said the difference in the broad outlook between the UK and much of the eurozone had never been so stark.
“The UK is experiencing one of the fastest economic recoveries among the world’s advanced economies, and growth of 3 per cent is predicted for 2014,” he added.
“We remain confident the increase in business activity and consumer confidence will translate into more demand for commercial property from tenants and investors.
“[The UK] remains our largest geographical overweight, although the concentration towards central London is less than it was 12 months ago – particularly our residential exposure, where we see the strength of sterling and political intervention (through greater taxation) as headwinds for overseas investors.”
For Mr Phayre-Mudge, most investors are aware the UK is likely to be the first European country to raise interest rates.
The key for TR Property is to position the portfolio to take advantage of rental growth – the fruit of the increase in economic activity that may lead to the rate-tightening cycle.
“We expect to position the UK component of the portfolio towards the development cycle – this will mean more operationally-geared businesses, but the corollary is that these generally have less financial gearing,” he added.
“This is a natural outturn of well-run businesses in a vibrant economic environment but one anticipating rising interest rates.”
Within Europe, he said Scandinavia, particularly Sweden, remained of great interest.
“The outperformance of Swedish property companies in the past 12 months confirms we are not alone in this view,” added Mr Phayre-Mudge.
“It benefits from a better economic outlook than much of the eurozone and the Riksbank has been determined in its efforts to keep the currency from strengthening too much. The commercial property market is liquid and valuation is transparent and we expect to remain overweight.”
While largely investing in property companies, the trust also has a direct portfolio in which two London holdings have posted growth of more than 50 per cent in the past year.
“Two large asset management initiatives came to fruition at Park Place, Vauxhall and The Colonnades, Bayswater,” added Mr Phayre-Mudge.
“For the Colonnades, the vast majority [of performance] was capital growth, a consequence of the granting of planning permission for an extended supermarket and revitalised retail space.”
