Is that a bubble on the skyline?

No, says Marcus Phayre-Mudge of TR Property investment trust, the cranes all over London are not a sign that speculative building is back. Those rising office blocks already have tenants


Has the skyline of London ever been so littered with cranes? From my desk at The Guardian I overlook the huge expanse of development behind King’s Cross, where a mini-Docklands development is arising with admirable speed. As I cycle to work across the Thames, I see the Shard on one side and the “Walkie Talkie” and “Cheesegrater” on the other. 

Even across the West End, where so few development sites are available, the crane count is high. It’s the first question I put to Marcus Phayre-Mudge, manager of the £720m TR Property investment trust: Is commercial property, so recently a victim of the financial crisis, already moving into a speculative bubble? 

The trust has just reported its annual results, with an impressive 25.8% rise over the year to 31 March. Many of its London-focused stocks went up a lot more; Great Portland Estates, for example, was up 40%. 

So should we be worried about over-building in London? After all, the Pinnacle, the tallest office tower planned for the City, started construction then stopped, and the Shard is rumoured to be having problems finding tenants. But Phayre-Mudge is completely relaxed about the capital’s crane count. If only, he says, you could look up and colour in the cranes working on pre-let sites and then compare them with the ones that are speculatively financed, it would tell you that London is not in an over-building phase.  

“When you stop and look up, yes, it does feel like there are a large number of cranes on London’s skyline. But in King’s Cross much of it is for Google, while Aon has already agreed to occupy half of the Cheesegrater. A lot of the cranes you see aren’t for offices but actually for Crossrail. There is almost no speculative finance around, so almost no speculative development. The banks are just not lending.” 


The Shard, he reckons, is “unlikely going to make its Qatari owners any money over the short term. But you could look at it as exchanging gas in the Middle East for bricks and mortar in London. Again, it involved no speculative finance.” 

Phayre-Mudge likes London, but TR Property by no means confines itself to the City’s office market. It is a pan-European fund, currently 35% UK and 55% continental Europe, benchmarked to the superbly awkwardly named FTSE Epra/Nareit Developed Europe net total return (GBP) index. Its biggest holding (also the biggest stock in the index) is Unibail of France, the Continent’s biggest real estate company, with 76 shopping centres in 12 countries plus commercial offices in central Paris. Over the past year its share price has gone up from €140 to €180, despite concerns over the French economy and retail in general.  

The key to investing in European property is to stick to the main northern cities, says Phayre-Mudge, listing London, Paris and the “big six” German cities as his favoured destinations. “We have no direct holdings in Portugal, Ireland, Greece or Spain, although through Unibail we do have exposure to shopping centres in Madrid and Barcelona.” 

Are there property bargains now to be found in Spain and Italy? “Spain remains a very difficult place. People keep coming to us with very cheap ideas in Spain. The trouble is, they are not cheap enough.” 

That said, Northern Europe is not entirely out of the crisis. Rents in Brussels and Amsterdam have been falling, while La Défense in Paris, the French capital’s equivalent to Canary Wharf, is under pressure. “We have seen some big-ticket moves in La Défense, and they have had a huge amount of choice. So that’s a market we are avoiding in favour of the more central parts of Paris.” 

More than 90% of the trust is in property shares, although Phayre-Mudge likes to keep some of the portfolio in physical property. “We currently have 7.2% in physical property, while a range of 5% to 15% is in our remit.” 

But over the year TR Property actually lowered its exposure to physical property. Phayre-Mudge reckons that investors are waking up to the fact that if your holding period is more than a year, property shares behave like property real estate rather than equities – just with much better liquidity.  

The other thing that investors have been awakened to, if rudely, since the start of the financial crisis, is debt. Phayre-Mudge prefers stocks where the debt is low and the cost of financing that debt is falling. After a string of rights issues and restructuring, the sector now has a loan-to-value ratio in the mid-40s, “which is not an uncomfortable place to be”.  

Despite my initial concern about speculative development, should the real concern for property investors now be the lack of bank financing? Phayre-Mudge says that worries about the “funding gap” in the property market have eased. He points to a report from property services firm DTZ that suggested it may have disappeared altogether. In place of the banks, new sources of finance are emerging, such as the bond offering that St Modwen recently used to raise £80m.  

Meanwhile, TR Property’s own gearing is modest at 7.5% and its discount, which during the crisis widened to beyond 20%, has fallen to about 12%. With a great record on both dividend growth and capital growth, and almost the deepest liquidity in the property trust sector, this is a fund that is almost perfect for the post-RDR world, in which investment trusts should really start to prosper.


Patrick Collinson is the Guardian’s personal finance editor