While different sectors of the property market face a number of serious challenges, there are few signs that a global financial crisis-type crash is on the horizon, according to BMO Global Asset Management’s Marcus Phayre-Mudge.
Property funds have come under greater scrutiny since the global financial crisis and, more recently, the EU referendum in the UK as several open-ended funds were forced to impose gates on capital as investors sought to withdraw cash.
Performance of index over 10yrs
Source: FE Analytics
However, Phayre-Mudge, who manages the TR Property Investment Trust, said the backdrop was markedly different to the global financial crisis 10 years earlier.
“I have run an open-ended fund for a long time and in February 2007 it became the fastest selling,” he explained.
“I went to the head of sales and said ‘I don’t want to sell it anymore. There is something going on, it doesn’t feel right.’”
The manager said that while he called it right during the previous crisis for the property market, he doesn’t feel that another is incoming, noting the differences between this stage of the cycle and the global financial crisis.
“There are no dead canaries at the bottom of the tunnel,” he said. “Banks aren’t lending [but] there’s lots of capital out there because zero interest rates drive investors to find a home for their capital.
“But for me this is not as fundamental. There is a physical imbalance from a supply and demand.”
Phayre-Mudge added: “The thing that kills the real estate market is you get a period of phased investment and you get too much construction because the banks are too generous with lending money to developers who over-build.
“The great thing is we haven’t had any of that because post-global financial crisis banks effectively pulled out. Not entirely, they’re very happy to lend to certain investments, but if you try and go to bank you better have finance in place.”
He said London skyscrapers such as ‘Walkie-Talkie’, ‘Cheesegrater’ and ‘The Shard’ were examples of big projects that had been built without bank finance, depending on other sources of capital opening up opportunities for investment.
Phayre-Mudge (pictured) said his TR Property Investment Trust is able to move into markets across Europe where the cycle is moving in the right direction, such as Stockholm offices or the Berlin residential sector. 
The trust manager said many investors find themselves steered towards UK-only open-ended property funds, which may not be appropriate or offer them interesting opportunities.
Although the biggest geographical allocation of the trust is to the UK, which represents 43.1 per cent of the trust’s portfolio, it has significant allocations to other markets across Europe.
According to the latest factsheet, other important markets for the trust include Germany (25.2 per cent), France (17.8 per cent) and Sweden (10.2 per cent).
However, Phayre-Mudge is careful about which parts of the market he allocates to – noting that the predicted rise in London office valuations and yields as foreign capital has flooded into real estate sector has failed to materialise.
Given the ongoing Brexit negotiations, the manager said he is cautious about the prospects for the City’s status as an international financial centre.
Another area he is nervous about is the retail sector and the impact of technology, which has resulted in shopping centres becoming less popular with shoppers as they increasingly move online.
“The cracks have been appearing in the brickwork for a while now and it’s something we’re very nervous about,” he said. “What the government needs to be doing is levelling the playing field because at the moment online retailers don’t pay rent.
“The technology has gone so far ahead so quickly we need new regulation to catch up with it.”
As such, in terms of sectors the allocations are 32.4 per cent to residential, a further 31.7 per cent held in the offices sector, 25.9 per cent in retail and 15.2 per cent in industrials.
Phayre-Mudge said the property asset class can offer a compelling argument from a growth perspective but can often be discounted due to the perceived risks of property investing.
“It’s a little-known fact that we have delivered a compound annual growth rate of 10 per cent for the last 10 years,” said the manager. “People don’t tend to think of real estate as a growth trend but the fact that we have done that is quite interesting.”
Another positive for property managers has been the “insatiable” demand for income, said BMO’s Phayre-Mudge, with property an often-overlooked asset class among yield-oriented investors.
“Property still yields of 300 basis points more than any average BBB-rated corporate bonds than you care to mention,” he explained.
The manager said that property as an asset class is pro-cyclical in that it offers greater income protection in a rising rate environment as rents rise.
Phayre-Mudge has managed TR Property Investment Trust since October 2004, during which time it has generated a total return of 465.30 per cent compared with a 423.04 per cent gain for its average IT Property Securities peer and a 59.21 per cent return for the composite FTSE EPRA/NAREIT Developed Europe Capped benchmark index, as the below chart shows.
Performance of trust vs sector under manager
Source: FE Analytics
Over the past three years to 30 April, the trust has delivered a 43.22 per cent return compared with a 30.67 per cent gain for the composite benchmark.
The £1.3bn trust is currently trading at a discount to net asset value of 1.9 per cent, it is 14 per cent geared, has a yield of 2.8 per cent and has ongoing charges of 0.87 per cent.