TR Property Trust, managed by Marcus Phayre-Mudge (pictured), has announced its interim results for the half year ended 30 September 2015. During the period, the company’s NAV rose by 0.6% on a total return basis, ahead of the company’s benchmark , which fell 2.0%, whilst the share price fell by 4.1% and the discount to NAV increased rose from zero to 7.0%. The company says that its physical property saw an increase in value of £6.5m (+8.5%) and outperformed pan-European property equities over the period. An interim dividend of 3.15p is to be paid on 5 January 2016 to shareholders on the register on 4 December 2015. The shares will be quoted ex-dividend on 3 December 2015. The company had previously anticipated a fall in income for the 2015/2016, primarily due to the redevelopment of their largest property, the Colonnades in Bayswater, as well as due to some non-recurring receipts last year. However, the company says that the fall has been more modest than they expected, from 6.05p to 5.51p as property companies have continued to refinance debt at lower interest rates which has enabled stronger earnings growth. The company says however that the weakness of the euro over the period has had a modest impact on income. 60% of the company’s non-GBP denominated income is received between April and the end of July. Over that period the euro weakened by 4.7% against the pound. Since then it has risen by 6.1%, returning to levels seen at the start of the financial year.
In terms of outlook, the company says that their outlook for UK property remains positive, with rental growth in most markets, particularly office and industrial, while new supply remains restricted. They say that property companies, which have yet to refinance, should be able to enhance earnings by reducing their cost of debt. While economic growth seems supported by rising wage levels and employment it has been consumer-driven so far and a rise in investment spending would be a positive development. However, they believe that the strength of sterling could possibly deter some international investors from further UK property investment. The managers say that whilst Continental Europe has found economic growth harder to come by, they have seen an encouraging increase in bank lending to the corporate sector and it seems right to remain positive about continuing expansion. As in the UK they expect property companies to continue to reduce the cost of their debt. In their view pan-European property shares continue to offer attractive opportunities.
Taking a more granular perspective, the managers say that, with the UK and much of Europe running at very different economic speeds it is little surprise that we saw such variation in stock performances between the regions (the managers say the UK stocks collectively fared much better than their Continental cousins in the Spring and early Summer market weakness). The managers believe that the perception that the ECB’s initial QE programme had indeed warded off the risk of deflation resulted in the rise in sovereign bond yields, across the Eurozone, in the early summer, and this contributed to the weak performance of property stocks. In effect the improving economic environment, albeit from a low base, was perceived as bad for leveraged assets.
The managers say that increased asset allocation to real estate continued to drive demand at both the institutional and retail level. In the UK they saw numerous reports of open-ended property funds receiving monthly inflows reminiscent of previous cycles. They are therefore encouraged that the rate of total return from unleveraged commercial property, as measured by IPD, has begun to slow. They say that demand for provincial assets in the UK and the subsequent yield compression has been very strong, particularly in the industrial and logistics sector.
London offices continued to be the Trust’s largest individual market overweight in the period. The managers note the lack of new supply, accelerating take up (particularly pre-lets) and alternative use demand for existing space, which reinforces their view that large occupiers are agreeing deals in pre-emptive strikes given the lack of larger space availability
Dublin, whilst a small market in the context of the Trust’s exposure, is noteworthy, the managers say, for the speed of rental growth and a neat illustration of how fast rents can move when demand rallies and supply (in the short run) remains virtually fixed. They also say that the UK’s six biggest cities (after London) have seen significant improvement in take-up and rental growth with Birmingham a standout success.
With regards to retail property, the managers say that ‘structural seismic shifts’ in the retail landscape have, if anything, strengthened. Landlords have an increasingly difficult task – trying to maintain/increase rents from retailers who sell less than they have in the past (from the same size store) whilst also committing capital expenditure to keep their centres looking attractive.The managers say that the exception to this generally weak outlook is Central London where the happy mix of tourism, entertainment, full range of food offerings, large anchor stores (Oxford St, Regent St) and accessibility make it effectively the largest open air mall in Europe albeit in multiple ownership. Rising footfall and spend per capita continues to fuel rising rents.
With regards to distribution and industrial property, the managers say that online retailing has driven distribution, particularly last mile distribution (business to consumer) with record rents set in many of the best logistics locations in the UK. They comment that, for the right location, investors are happy to take lease risk with premier locations such as Magna Park, Lutterworth trading at yields close to 5% on 5 year leases.