TR Property: widening discount presents buying opportunity

Historically low interest rates have helped many different areas of the market, with one of the biggest beneficiaries being commercial property. Closed-ended funds that invest in property shares have risen by an average of 70.1% over the last five years, which makes it the fourth most profitable sector out of 46.

2015 was a lot more challenging, with the prospect of higher interest rates providing a real headwind, and there have been further losses during the recent equity market sell-off. In some cases the weakness seems to have been overdone, especially as interest rates are likely to remain lower for longer than originally anticipated.

A prime example is TR Property (TRY), an £870m London-listed closed-ended fund that trades under the ticker TRY. Over the last five years the shares have generated a total return of 94%, but in the last month they are down 9.5% with the discount to NAV widening from an average of 1.7% to 11%.

The fund is managed by Thames River and aims to maximise the total return by investing in international property shares and property. At the end of December the largest geographic exposure was the 43% weighting in the UK, with France making up a further 19% and Germany 17%. Retail and office space accounted for 33% and 29.8% respectively, with another 20% in residential and the remainder divided between industrials and diversified.

In total there are 77 separate holdings with the top ten making up 47% of the fund. The largest of these is the London-listed Real Estate Investment Trust (REIT) Land Securities at 10.4%, followed by the 9.3% exposure to Unibail-Rodamco, a pan-European REIT that invests in shopping centres in Europe’s capital cities, as well as convention and exhibition centres in Paris.

Investing in property shares is more liquid than buying the actual bricks and mortar and allows the managers to tweak the portfolio to take advantage of the best opportunities. The main downside is that it tends to make it more volatile than a physical property fund.

TR Property has 17% gearing to boost the potential returns and reasonable ongoing charges of 0.69%. Dividends are paid twice a year with the shares currently yielding 2.89%.

It is run by a specialist, well-resourced team who pick the holdings based on the underlying fundamentals and the strength of the managers. They have built up a good long-term track record and are upbeat about the prospects as they think that the lack of commercial property development over the last seven years will ensure that the demand from tenants will help drive rental growth.

The fund is one of the Winterflood Investment Trust team’s recommendations for 2016 and the recent sell-off appears to have created a decent long-term buying opportunity. It should pick up nicely once the markets start to stabilise.