Trusts better for property says TR Property manager

He believes the financial regulator should consider only allowing closed-end funds to invest in real estate.

"Open-end and real estate shouldn't be in the same sentence," he says. "The only reason these funds are considered lower volatility is because of their daily dealing but the valuations [of properties in their portfolios] take place only every month or every quarter. If I turned on my Bloomberg screen only four or 12 times a year I would have lower volatility too, it's a complete illusion."

As well as hidden volatility, he says liquidity can be a real problem for open-ended UK commercial property funds as the gating of investors both after the financial crisis and this year showed.

"Money was pouring into commercial property funds and they were keeping a load of it in cash because they said they needed that for redemptions but the market was rising, so you had a cash drag," he says. "Then around comes the Brexit vote and everyone goes for the exit which turns into a cat flap and they can't squeeze anyone through it, so they gate the fund and yet all that cash drag turned out not to be enough.

"[Investors] have been whipped on the way up and whipped on the way down."

The Financial Conduct Authority should look closely at making all funds that invest in property closed-end, he says. "But there are big, vested interests at play," he adds. "These big funds have collected over £25bn and there's millions and millions of pounds of fees in these structures, which they want to hold onto; so they're fighting a rear-guard action."

Despite arguing in favour of closed-ended property funds, Mr Phayre-Mudge also manages an open-ended product – F&C Property Growth & Income Fund (GB00BQWJ8794) – which invests jointly in European property securities and UK direct property. But he says he designed the fund to ensure sufficient liquidity for investors and since its launch in 2005, it has never had to gate investors in. He credits this to the fund being weighted towards equities (currently this stands at roughly 70 per cent of its holdings).

TR Property Investment Trust also primarily invests in equities, rather than physical buildings, with 64 per cent of the portfolio in continental European shares, 28 per cent in UK shares and only 7 per cent in UK direct property.

However, one criticism that has been levelled at investment property trusts is that their discount to Net Asset Values (NAV) can open to very wide levels in tough market conditions. After June's vote to leave the EU, TR Property's discount swung out to 18.18 per cent, accoding to data by the Association of Investment Companies. Since then, the discount has tightened to 12.9 per cent as at 31 October, but is still wider than its 12 month average discount of 9.9 per cent.

Mr Phayre-Mudge says the trust's wide discount represents an opportunity for investors looking to get income at value prices, especially given the low yields available in the bond market. Over the past one, three and five years the trust has outperformed its index and is currently yielding 2.8 per cent. It also has a 10 year dividend compound annual growth rate of 9.4 per cent.

He says: "The trust has an excellent compound growth rate, which I don't think the market has ever really focused on because the share price has gone up. But now we're in a period where growth is going to be harder to come by and income is going to be more important and our aim will be to continue the dividend with that kind of growth."

TRY's exposure to European property companies has also resulted in a boost to its earnings following the fall in Sterling he adds, as since the EU vote, its Euro earnings have been worth more in pounds.

But he admits there are concerns after the Brexit vote about whether asset values, particularly in London, will keep going up. TRY cut its exposure to the UK by a hefty 10 per cent in the past year, both before and after the vote. This included a lot of its exposure to London, which had previously been its largest overweight. The trust now has no exposure to high end residential property in London and the companies it does invest in the capital are not focused on the City of London, Mr Phayre-Mudge says. However the trust does still have some exposure to retail in the capital through Shaftesbury (SHB) and Great Portland Estates (GPOR).

Although question markets remain over London, Mr Phayre-Mudge is more bullish on the rest of the UK and parts of continental Europe.

"For us, the fundamentals of real estate remain very sound, with the lack of supply," he says. "In a lot of the country in industrial estates, logistics and distribution, rents are rising. [UK] regional offices are doing very well but this product is also pan European and there is property rental growth in Paris, the big six German cities, European shopping centres."

In particular he sees pockets of rental growth in areas such as UK student housing, German residential, Paris CBD offices, Stockholm and Oslo offices and continental budget hotels. The trust holds companies such as German real estate companies VIB Vermoegen AG (VIHX:GER) and Vonovia SE (VNAX.N:GER) and Swedish hotel group, Pandox AB (PNDX B:STO) to gain exposure to these areas.

But there are also some areas the trust is avoiding such as Italy due to worries about its banking system. The trust also has no exposure to Eastern Europe and Russia, because it is concerned about the influence of the Russian economy's dependence on oil.

Marcus Phayre-Mudge CV