Seeking value in real assets

Seeking value in real assets

Against the backdrop of surging inflation and rising interest rates, could now be the time for real assets to come into their own? As property investors, we at TR Property Investment Trust (TRPIT) are exposed to the very real assets that are often seen as a natural hedge against inflation.

However, Brexit, the global pandemic and wide-ranging economic uncertainties also have to be added to the mix – as well as the specific characteristics of individual sectors and geographies. So there is plenty to consider when it comes to finding value in real assets in general, and real estate in particular.

Our trust

At TRPIT, we manage a portfolio worth approximately £1.5bn, consisting of a combination of UK and European equities plus a smaller collection of UK physical property assets. We benchmark ourselves against a basket of pan-European equities and take a dynamic approach to investing with the aim of gaining exposure to rising rents, development potential, strong management teams and companies that are well financed, among other things.

With this in mind, we are overweight in sectors such as logistics, which we believe still have a strong structural tailwind behind them. And although we remain underweight in retail, we are starting to see value in some parts of the market, including retail warehousing in the UK and hypermarket anchored shopping centres in much of Continental Europe.

Pandemic effect

Parts of the European commercial property market, including in London and Paris, were particularly hard hit by the pandemic and the phenomenon of working from home. As restrictions were lifted and normality began to return, this has also brought with it the prospect of a new hybrid working model that could alter the whole dynamic of the office market.

If the battle is on to entice the workforce back to the office, then for us the key consideration is the quality of the working environment, so that people will want to return. This also brings in environmental, social and governance factors, such as the energy efficiency and sustainability of the workplace.

Going green

For this reason, we believe that we are probably in the early stages of a green-building super cycle. Indeed, we are already seeing record rents being paid in London’s West End for best-in-class buildings.

The trend will be reinforced by those companies that have pledged to be carbon neutral by 2050 or earlier; these businesses will need to ensure that the buildings that they occupy will enable them to meet their climate goals.

As investors, we think this presents us with opportunities among companies with a strong track record of refitting existing properties, such as Great Portland Estates, Derwent London and Helical Bar in the UK and, on the continent, Arima in Madrid, Spain, and VIB Vermogen in Germany.

Improving their properties in line with developing environmental standards is always going to be a journey for companies. What’s important for us is that they have started the process, and we can assess them as they make their progress.

Retail prospects

When it comes to the retail sector, there is a marked difference between the UK, where the anchor tenants in shopping centres have been department stores, and Europe, where they’ve been hypermarkets.

The department-store model is no longer viable in the UK, which was also a very early adopter of online shopping, putting further pressure on footfall.

Rents in Europe remain affordable, and the penetration of online shopping is still very low – below 5% of all non-food retail sales in Italy, for example, against almost 30% in the UK. So we believe that the region will recover more quickly and have been buying in.

We are more cautious about the UK, but we have, for example, started buying into retail warehousing, essentially because of the rising popularity of ‘click and collect’, which retailers like because it can often prompt customers into further ad hoc purchases.

Future prospects

Several attractive sectors offer returns that are not correlated with other markets, including self-storage and student accommodation, but we are particularly interested in healthcare.

This sector has lots of components, and, at the moment, we prefer primary healthcare, where the provider has a direct relationship with the NHS or the equivalent state-provided service in Europe.

Berkeley Group, the housebuilder, is also a very interesting business, which is now generating large amounts of cash and returning it to shareholders. And I included some European names, including Deutsche Börse, the exchanges operator, which should benefit from the derivatives business it writes as interest rates rise.

Sheltered housing and social housing also have their merits. And we think that co-living – a multi-family theme of living and working that is already embedded in the US – is an idea that is going to grow in other regions.

Find out more about TR Property Investment Trust

22 February 2022
Marcus Phayre-Mudge
Marcus Phayre-Mudge
Fund Manager
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Risk Disclaimer

The value of an investment is dependent on the supply and demand for the shares of the Investment Trust rather than its underlying assets. The value of an investment will not be the same as the value of the Investment Trust’s underlying assets.

The value of directly held property and property related securities reflect the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment. The use of gearing can enhance returns to investors in a rising market, but if the market falls the losses may be greater.

Views and opinions have been arrived at by Columbia Threadneedle Investments and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

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