TR Property goes bargain hunting in battered Europe

High volatility and shifting sentiment towards European equities was a prime reason for the high turnover of assets in the TR Property Investment Trust this year, says manager Marcus Phayre-Mudge.

Over the year to the end of March nearly a third of the investments in the Citywire Selection fund (29%) were turned over, with property not immune to fallout from the sovereign debt crisis. Phayre-Mudge described the year as a 'rollercoaster' for European property companies.

But despite the high volatility and turnover, the manager's views are unchanged from six months ago: ‘Our outlook comments made at the half year remain valid, namely maintaining our focus on good-quality, well-financed property companies exposed to, where possible, selected sub-markets across Europe with the best demand and supply fundamentals,’ he said.

Such is the situation in Europe that performance has become increasingly disparate, with returns varying wildly from city to city. Phayre-Mudge has been keen to avoid areas where he harbours concerns such as UK regions further from the capital, and parts of eastern Germany.

Still bullish on London and Berlin

The managers of the fund continue to be bullish on the prospect of rental yields in Greater London relative to the rest of the UK, but they are increasingly pessimistic on the prospects for traditional office spaces and retail sites outside the capital.

The same is true across the continent, and in particular in Germany. They remain bullish on residential properties in Berlin and across western and southern Germany cities, while avoiding what they call ‘depressed’ eastern Germany, which continues to suffer from depopulation.

Germany now accounts for 10% of the trust, having been increased this year after a holding in GSW was increased following the exit of its private equity investors in October of last year.

Picking up bargains

The managers have also used the volatility to add to holdings while prices are low. Italy-listed Beni Stabili, which derives 58% of its income from Telecom Italia, was among positions added to on recent weakness. The company endured a 28% fall in November despite having half its property book in prime locations in Milan, Rome and Turin.

Over the past five years the trust has fallen 28.5% while the FTSE EPRA/NAREIT Developed Europe index has fallen 34.6%.

Citywire Selection verdict:

The discount on this trust widened significantly towards the end of 2011 and remains attractive at 13%. The focus is on primary rental markets in core European cities, such as Paris, London, Stockholm, Oslo, Brussels and Berlin. More economically sensitive secondary and tertiary industries, such as manufacturing and supply chains, are avoided. In the UK it has a stake in British Land and a small holding in direct property, and the managers are confident of their market knowledge.