Four opportunities in real estate investing

Hello, I’m Chris Salih, investment research analyst at FundCalibre, and today I’m delighted to be joined by Marcus Phayre-Mudge, manager of the Elite Rated TR Property Investment Trust. Marcus, as always, thank you for joining us today.

Well, thanks Chris. Nice to be here.

Let’s go into the portfolio in a bit more detail. It’s obviously quite diverse, for some of the viewers who are perhaps not as sort of in the know about REITs, for example, you’ve got a self-storage REIT, a warehouse REIT, one investing in the edge of town business space in the UK, then you’ve got another sort of in shopping malls in your top 10 as another example. Could you maybe perhaps give us a brief roundup of these areas and you know, the one or two perhaps that jump out as of most interest at the moment?

Yeah, absolutely. And, I think the first point to make is TR Property Investment Trust is very much a pan-European REIT investor. So, first of all, we are investing in lots of countries – we’re not [investors] in Central and Eastern Europe, just to be clear – it’s very much Western Europe and then the UK as well. And then of course, we are sector-diverse and I think that’s something that often comes as a surprise to investors who may have thought about a traditional UK property fund being only offices, retail and a little bit of industrial. We are much more diverse, and you highlight a number of specialist sub-sectors – self-storage, student accommodation, these are areas that we’re really quite positive about. 

Self-storage is very interesting really because of the resilience and its ability to carry on pushing rents upwards. The other great thing about self-storage is it’s really a ‘mom and pop’ business across Europe, but with a few players who are getting bigger. And those players, such as Big Yellow self-storage [Big Yellow Group Plc] and Safestore [Safestore Holdings Plc] Shurgard [Shurgard Self Storage Ltd], ones our viewers may have heard of. What’s so attractive about those business models is they capture a huge amount of internet traffic. So, if you are looking to take out a self-storage unit, the chances are, you’ll type in self-storage and your postcode, and you’ll almost find it impossible to avoid getting a quote from one of those three or four major companies – so, what we call an eyeball oligopoly! So, that’s a very interesting business model from where we’re sitting.

Student accommodation: if there is a mild recession or even a deeper recession, that tends to leave youngsters leaving school and tending to focus on going into higher education rather than necessarily stepping straight into the workforce. And increasingly, people want to live in purpose-built accommodation, not the sort of student accommodation that you and I lived in, back in the day. Europe, it’s actually a lot cheaper. And we have a big investment in a business called Xior [Xior Student Housing NV] which owns student accommodation in Belgium, the Netherlands, and Spain. 

Moving on to logistics, you mentioned about industrial storage and logistics. We are much more focused on what we call ‘last mile, urban logistics’ as opposed to big boxes. The ‘big box’ phenomenon is something we’ve been long investors in, but we feel there’s more rental growth in that last mile, particularly because there’s such a shortage of sites. And this applies all over Europe, as well as the UK. And we have investments in five or six names across Europe.

On the shopping centre side – which would not necessarily sit naturally if we were heavily into logistics, which has always been the tailwind and the beneficiary of the fact that we’ve the online omni-channel way we all shop these days – but actually, shopping centres, we’ve seen their values more than halve, particularly in continental Europe, we think the rents that are now being paid, are highly sustainable, if not growing, and we’ve had very positive results from businesses like Klepierre [Klepierre SA] , Eurocommercial Merciales [Eurocommercial Properties N.V.] that we’re invested in. 

And why do we prefer shopping in Europe as opposed to the UK? Quite simply, the UK, we’re far more advanced in terms of our desire to buy online. You know, roughly, one third of all goods sold – excluding food and fuel – is online in the UK, whereas in Italy it’s less than 10% ie. people are still going to their local shopping centres. And we think that’s likely to persist, because actually the reason that we can all get our goods, you know, from Amazon Prime next day, etc. or within the hour if you live in a big conurbation, it is all to do with that infrastructure. And that infrastructure suits a very densely populated country such as ours, and that’s not so applicable to something that’s long and thin like Italy. Just to sort of give you an example

Let’s talk on one specific international market – you mentioned it earlier – which is the Swedish residential housing market. It’s been sort of – again, more pessimism – one of the hardest hit in recent months, with property prices falling sort of the, by the largest amount in the world or up there anyway. You still hold some companies in the country. Could you talk us through your stock picking approach and why you’re comfortable doing that?

Yeah, absolutely. So, the data that you are referring to is exactly that of those two residential markets [I mentioned earlier]. That’s the Owner Occupier market, and that’s driven entirely by mortgage rates. And what we’ve seen that the [Sveriges] Riksbank [Sweden’s central bank] always do very much follow the ECB. You tend to have … Sweden does… whilst there’s a lot of job security, people do have, you know, really quite high levels of personal debt. And we’ve seen prices come off and that’s just reflecting the fact that mortgage rates have gone up. But for the more stable properties that are rented – so, the private residential sector and where rents are controlled – so, a tenant has gone into a building and is essentially able to remain, the landlord cannot remove them, and the rents are set collectively within the sort of communal market place. Then we see very little adjustment in the valuation of those assets because essentially, they’re just a function of the income stream, not of the underlying, you know, they don’t have the same volatility as an Owner Occupied building.

We talked earlier about self-storage warehouses, but just – are you targeting the companies that are perhaps the consolidators in those areas or the potential to be the consolidators in those areas in the future?

Yeah, that’s a very good question. Because actually we saw in 2021 a lot of, not only consolidation, but also M&A activity where listed companies were trading at discounts and private equity came in and using very cheap debt took them private. Now, we don’t expect more of that at the moment, because debt obviously isn’t that cheap, but in terms of the consolidation, absolutely we expect it, because you know, lots of people want to invest in real estate as an asset class. The problem is, traditionally, they’ve been directed towards open-ended, daily dealing, physical property funds, which don’t make any sense at all because they’re not daily dealing and they’re not liquid because when you want your money back, the manager has to sell a building and that takes months, not hours. That’s why you’ll come into a closed-ended vehicle or you’ll buy into REITs. So, actually, I think as a sector there’s every reason to feel that yeah, there’s a reason to own it, but also we therefore need these companies to be bigger. So, we were absolutely, strong proponents of M&A and we were large shareholders in things like Mckay Securities [Plc] that was acquired by Workspace [Workspace Group Plc], Mucklow [A&J Mucklow Plc] was acquired by LondonMetric [LondonMetric Property Plc]. You know, these are businesses … we were very happy to see those businesses merge, and, more importantly, for the assets to stay in the listed sector, I think that’s the important thing. So, I think we’ve got some positions where we’re hopeful that that the boards are beginning to understand that they need to be bigger because that will control costs and create more value for shareholders, but most importantly maintain liquidity.

And then Chris, the last point I’d like to make in terms of the ‘where is TR Props trading today?’ We’re on about an eight [per cent] discount to our asset value. And then our asset value, of course is on a 25 [per cent] discount to the underlying investments. And we’re yielding about 4.6% on last year’s dividend. So, you know and as I said, our earnings – and it’s no secret, the chairman was quite open about it in the interim report – we’re reasonably confident about our earnings returning to those pre-pandemic levels. So, that’s another point of encouragement.

Marcus, as always, thank you very much for your time.

Thanks Chris.

And if you’d like to learn more about the TR Property Investment Trust, please visit FundCalibre.com