Jonathan Miller: Hello, we're at the Morningstar Investment Conference in London, and I'm joined by Marcus Phayre-Mudge, Head of Real Estate Securities at BMO Asset Management. Marcus, thanks for joining us.
So, real estate equities, what does that mean compared to people thinking about investing in bricks and mortar buildings, for example?
Marcus Phayre-Mudge: Quite simply, real estate equities are listed companies, which invest in bricks and mortar, both owning a long-term portfolios but also development. The attraction about the real estate – listed real estate sector is that for number of years, it's been tax efficient. So, they are all called REITs, real estate investment trusts, which allows – there is no taxation, no income or capital gains tax inside the vehicle. It's only – the taxation is only at the dividend level in the hands of investors. This is to enable that we have a level playing field between owning it through equities or through physical property.
Miller: Okay, so the nature of these businesses, then I assume they are conglomerate so earning of kind of variety of assets within them. So, what – you know student housing, warehouses, this sort of things, can you give us a flavour of things where you see opportunities particularly in any sort of area in equities?
Phayre-Mudge: Yeah. When I started in real estate equities 25 years ago, most companies were as you say conglomerate. They were diversified, they tended to own a little bit of lots of different sectors. Over time, there has been a huge amount of specialisation and that allows me, as a manager to pick whether I want to invest in something like student accommodation, self-storage, healthcare, logistics, et cetera. So, the one part of the market that we remain quite nervous about, which is I'm afraid shopping centers and retail, we're able to avoid or minimise our exposure to that. But right now at the moment, we are very interested in a number of sectors which are offering us quite long income streams, particularly with indexation. So, we find that in supermarkets, in healthcare and in – there are number of businesses offering these secure long income streams, which we think is very attractive.
Miller: Is that in UK or further afield?
Phayre-Mudge: That's Pan-Europe and then of course, the other advantage with investing Pan-European and TR Property Investment Trust (TRY) is only one-third UK, the rest of it is Continental Europe, is the fact that you know the traded Brexit would means that the people are feeling a little bit quite rightly insecure about where things are going in the UK and we have lots of exposure across Europe, particularly Germany, Scandinavia and you know big cities like Paris, Madrid, Stockholm. These are markets where rents are rising.
Miller: Okay. And finally, when you look at the listed equity space in the real estate market versus people who might traditionally invest in a fund where it's in bricks and mortar, illiquid nature of the market, but daily dealing, what's your view?
Phayre-Mudge: I think the big problem is that investors seem to look very carefree at those open-ended structures. Lot of them are now holding 15% to 20% cash, because obviously they are as daily dealing vehicles owning real estate. If you want your money back, they can't sell a building tomorrow. So, we think they are really intrinsically flawed, and you just need to be aware that if you are investing in them then you are probably having at least 15% of your capital is being – remaining in cash. And the other point is, a lot of them have really very high weightings towards retail property, because that is a very big part or traditionally was a very big part of the market. For us, being able to be move around quite swiftly in picking subsectors, we've been able to move into other markets and minimise our exposure to retail.
Miller: Marcus, thank you very much.
Phayre-Mudge: Thank you very much, Jonathan.
Miller: From the Morningstar Investment Conference, thank you for watching.
This article is part of Morningstar's special report on What the Experts Say
