Matthew Norris and James Peel recently hosted an investor update webinar for the TM Gravis UK Listed Property (PAIF) Fund. Below is a summary of the points they covered and their answers to investor questions

The full webinar can be viewed here.

The TM Gravis UK Listed Property Fund is an OEIC with PAIF status. It invests solely in UK listed securities that own physical properties. This means it provides daily liquidity without the risk of gating that direct property funds have experienced in the past.

There is no leverage at Fund level and no FX risk. Nor is there is any double discount risk. The ongoing charge is capped to the annual management charge and there is no performance fee.

The portfolio offers exposure to more than 5,000 underlying properties with over 100,000 tenants through its holdings. Crucially, the Fund focuses on delivering a reliable and growing income.

We've identified four mega trends for the UK property sector.

1. Aging population. The UK population is ageing, which means more healthcare spending. This will benefit GP surgeries, primary health care, and care homes.
2. Digitalisation. This is the move to e-commerce. Nearly 30% of what we buy in the UK, we buy online. Supply chains are also increasingly complicated and that benefits the owners of logistics assets. It’s also the increased demand for data centres which, according to McKinsey, could increase three-fold, driven both by AI and regular computing.
3. Generation rent. This is another demographics mega trend and where we see some of the fastest rental growth. As the number of 18-year-olds grows, so too does demand for purpose-built student accommodation.
4. Urbanisation. The centre of London, especially the West End, is probably the hottest office market in the UK, as the ‘return to the office’ trend continues, along with demand for high amenity office space. Green is also the new ‘prime’. The most sustainable buildings can charge the highest rent and command top level valuations.

After a period of underperformance, UK REITs are really starting to perform well. M&A has clearly played a part and is taking place across all the mega trends in the portfolio. In fact, four of the top five performers recently have benefited from M&A activity. But stock picking really matters. At Gravis, we are fundamental investors, not traders. We're research-intensive and our stock picking is yielding decent results for investors.

When you look at the bottom five performers year to date, they actually give us really good encouragement for the second half of the year. This is the potential in the portfolio. Workspace, for example, has had negative year-to-date performance, but recently published a strategic review. They've got a great portfolio of flexible workspaces in and around London and we think there's a lot of hidden value. If they can execute their strategy, and deliver that value creation, it would be good news for shareholders.

The Fund has delivered a low positive correlation to both equities and bonds over the last few years. Year to date, that correlation has fallen further versus the MSCI World Index from about 0.17 to 0.10, as global markets have been hit by a series of macro events and we’ve witnessed sector-specific developments in the form of M&A.

In addition to the diversification benefits, there are income benefits. The portfolio is made up of the next generation of real estate which is producing growth income, not fixed income and, importantly, is exceeding the rate of inflation. The current yield is around 5% with, we believe, 3% to 4% upside growth in that dividend distribution over the course of this year.

The list of M&A within the Fund is really evidence of stock-picking at work. And, as shareholders, we've worked hard to extract maximum value our investors. More recently, it's been a challenge because we've been unhappy with the value that has been offered to us. We judge each takeover bid on its individual merits. If buyers want to pay us what we think it's worth, brilliant. If not, then we're not just going to roll over.

We’ve added a couple of new positions to the portfolio this year. One is Schroder REIT, which has a formal brown to green investment objective to take on assets that are not fit for purpose in the modern world and upgrading them in order to charge higher rents.

The second is Sirius Real Estate, which is not dissimilar to the Schroder REIT in terms of investment objective. It forms part of our multi-themed basket – holdings that span more than one of our mega trends - and the majority of its portfolio, like Schroders, is weighted towards industrial and warehouse facilities.

Now we are in an easing cycle, it’s good news for the type of businesses that we invest in, because they have leverage. If interest rates are coming down, their cost of financing is also reducing. And if rental growth is higher than the cost of debt, that in turn is good news for future dividend growth.

What’s more, while higher interest rates have been a headwind, it was the speed of the increase that did the most damage. It made it more difficult for management teams to make capital asset allocation decisions. A period of lower, more stable rates is ultimately a positive for our sector.

While rates may be more stable, the environment is definitely not. However, while trade policy has taken its toll on global markets, UK real estate has been more sanguine as it generally doesn't trade across borders.

Yes. If you look at the European Public Real Estate Association data, you can see the last reported market discount is 25.5% versus a 10-year average of 17.8%. Great quality businesses are trading at discounts to what we think they are worth. And they don't even have to recover to net asset value - just going back to the long term average would make investors’ money.

Private equity has seen this opportunity - hence all the M&A activity. Encouragingly, there's an increasing number of investors that are now sharing that view. Because historically, if you buy UK REITs at a significant discount to the net asset value, it has generated good returns for investors over the next one and two years.

Clearly, a big concern is climate change, which presents both risks and opportunities for the built environment. In the UK, Energy Performance Certificates (EPCs) are becoming very important. These are a report card of sorts (which goes from A to G) that measures the energy efficiency of a building – similar to the charts you see on washing machines.

The government is due to announce new rules on minimum energy efficiency standards later this year and we expect that commercial real estate will need to be around about the B rating level by 2030. If that’s the case, only 16% of commercial real estate in England and Wales is currently fit for purpose and there is a real risk that if it’s too costly to renovate them, and tenants want better amenity values, that there will be a raft of stranded assets. The good news for our investors is that circa 60% of the portfolio is already exposed to EPC-rated buildings.

On the M&A front, there is also the risk that we continue to lose really high quality REITS too cheaply. We'll do our best to extract maximum value for investors in these situations.

Important Information

The information contained in this article is issued by Gravis Advisory Limited (“GAL” or the “Firm”)), which is authorised and regulated by the Financial Conduct Authority. GAL’s registered office address is 24 Savile Row, London, United Kingdom, W1S 2ES.  The company is registered in England and Wales under registration number 09910124.

TM Gravis UK Listed Property (PAIF) Fund (the “Fund”) is a sub-fund of TM Gravis Real Assets ICVC, which is a non-UCITS retail scheme and an umbrella company for the purposes of the OEIC Regulations. The Fund is a Property Authorised Investment Fund (“PAIF”).  Thesis Unit Trust Management Limited is the Authorised Corporate Director of TM Gravis Real Assets ICVC and GAL is the investment manager of the Fund.

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