Recent years have been challenging for interest rate sensitive alternative investments, such as Real Estate Investment Trusts (REITs). The FTSE EPRA Nareit Developed Europe Capped Index, which tracks the performance of listed European real estate companies, registered a total return of -29.9% over the three years to December 2024. However, many trusts now trade on significant discounts to Net Asset Value (NAV), offering attractive yields and the potential for significant capital gains in a more constructive economic environment.
While some REITs are focused on a certain sector or theme, TR Property is one UK-listed trust which diversifies its exposures across the UK and European property market. Marcus Phayre-Mudge has run the fund since 2011, providing stable and experienced management with the trust’s NAV return outperforming the benchmark in twelve of the last thirteen financial years. It primarily invests in other listed investment companies, with top holdings including Vonovia, the German residential real estate company, Klépierre, Europe’s second-biggest listed mall operator, and LondonMetric, which focuses on UK large triple net leases across industrial, leisure, and food retailing. In addition to the diversified real estate equity exposure, the trust also has a small allocation to direct UK property, owning four multi-let industrial sites in London, Gloucester, Bicester, and Northampton.
Despite a turbulent property market, TR Property reported strong interim results for the six months to September 2024, with a NAV total return of 10.9% and share price return of 13.0% both in excess of the benchmark FTSE EPRA Nareit Developed Europe Capped Index at 9.3%. Earnings per share generated were 8.16p, 12% ahead of the same period in the year prior. While looking to maintain a diversified exposure, the manager will take a view on different companies and sectors with the aim of achieving better results than the benchmark.
For the reporting period, investments within European shopping centres, German residential, and UK diversified companies all contributed to outperformance. Valuations over the past year have also been supported by heightened levels of merger and acquisition activity in the portfolio. As interest rates have come down from their peak, the manager has shifted attention from defensive companies which can manage high debt, to companies with strong growth prospects and the financial position to take advantage of market opportunities. Despite the strong performance track record compared to the benchmark, TR Property trades at a discount of 5.47% to NAV reflecting investor sentiment around the REIT sector and poor absolute returns over the past three years.
The discount may offer interested investors an attractive entry point for a long-term holding, and the trust offers a 5.30% yield at the current £2.97 share price, with dividends distributed semi-annually in January and August.
One challenge facing the trust is revenue generation, as many of the portfolio companies had to pause dividend distributions in 2022 following interest rate hikes and climbing debt costs. In many cases, dividends have been resumed at a lower level, and some companies have yet to resume distributions at all. The investment trust vehicle allows TR Property to smooth revenue reserves, and over the last five financial years TR Property has grown the dividend by an average of 4.5% per annum despite lagging underlying earnings. Revenue reserves remain healthy at £55.8m following the final 2024 payment, however investors will keenly watch earnings recovery moving forward.
While analysts at CBRE started 2025 with the prediction that ‘UK real estate capital value look poised to rebound’, increased UK economic uncertainty in recent weeks has cast some doubt over the outlook. Climbing yields in the bond market, worsening growth forecasts, and rising inflation expectations have sparked fears of stagflation and dragged on interest rate sensitive companies, especially those exposed to changes in debt costs or less able to capture inflation in leases with long review periods. However, companies with high pricing power or leases linked to inflation will have a degree of protection, though may still suffer the effects of falling underlying property values. TR Property may be well placed to weather the storm, given the strong track record of management and blend of geography and sector exposures. While financial market participants are expecting a ‘higher for longer’ rate environment in the UK, cuts in Europe are expected to be quicker given cooling inflation and weak growth, which may be constructive for the real estate market. Given the discount and attractive yield, as well as the possibility of a growing income and capital, TR Property may see renewed interest from investors in 2025 despite macroeconomic unease weighing on sentiment.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.