#245 TR Property’s Marcus Phayre-Mudge on manager-investor alignment and the NAV problem

Three decades on from joining a graduate scheme during one of the deepest property recessions in living memory, Marcus Phayre-Mudge, fund manager and partner at Thames River Capital, has watched the listed real estate sector cycle through booms, busts, structural change and a creeping crisis of confidence between boards and shareholders. Speaking to Propcast host Andrew Teacher, the long-serving manager of TR Property Investment Trust delivers an unvarnished assessment of governance, manager-investor alignment, communications and the persistent question of scale that continues to challenge the UK market.

Phayre-Mudge begins by setting out a framework he still uses to explain the two distinct ways property cycles inflict damage. “There are two diseases for real estate,” he said. “One is a much more short, sharp shock, a bit like being punched in a pub. It hurts like hell, but it’s over quite quickly. That’s when you get a very dramatic change in the cost or availability of capital, which is what we saw in the GFC and more recently in 2021 with the dramatic change in the cost of money.”

The second, he warns, is more pernicious. “The other disease, which is actually much more insidious, more of a long COVID if you like, is the consequence of a long period of overdevelopment.” In periods like this, landlords across entire sectors become price-takers, dealing with tenants who know that competition to lease space places enormous downward pressure on rents.

His own entry into fund management came via a deliberate pivot away from surveying. Recalling a conversation with his boss at Knight Frank & Rutley over funding for an accounting night course, he laughed at the negotiation. “Marcus, if I fund this and you get the qualification, you’ll leave. I said: well, if you don’t fund it, I’ll also leave.”

The qualification opened the door to Henderson, predecessor to Janus Henderson, where alongside veteran fund manager Chris Turner he looked after the private allocation of TR Property Trust, then a smaller vehicle with exposure across both listed and private real estate. Later, in 1999, he assumed control of the listed property equity sleeves of two small Henderson diversified equity funds, each capitalised at between £20 million and £30 million, marking the start of his career in the public markets.

A move to Thames River Capital (TRC) in 2004 with mentor Chris Turner remains a moment Phayre-Mudge recalls fondly. “We told the founders of Thames River, Charlie Porter and Johnny Hughes-Morgan, that the only reason we’d really moved was because we didn’t have to change the name, which was entirely fortuitous.”

A new hybrid fund, blending equities with physical property, launched in 2005 and remains a source of pride. “That fund is still alive and strong and has never closed to redemptions,” he said, a particularly impressive feat given the recent difficulties faced by PAIFs in the UK as well as some of America’s largest real estate fund managers.

The Global Financial Crisis tested the model and, by his own account, came close to derailing it. “Whether by good judgment or good luck, probably a bit of both, we moved to 20% cash in both funds the quarter before Lehman went down. That’s why we survived.”

But he is quick to acknowledge the asymmetry that defines life in fund management. “If you’re a fund manager and you move to 20% cash and you’re wrong, you’ll massively underperform your benchmarks. If you’re right, your clients are still losing money, just considerably less than if they’d been fully invested.”

Among the more provocative observations of his career has been how the rise of passive capital has hollowed out the dialogue between boards and shareholders. “Around 20 years ago, I only ever engaged with the C-suite and had virtually no engagement with boards. That has changed a lot. We’ve had to feed back views to boards behind the scenes, partly because so much capital has moved passive that boards are living in something of a vacuum. T