The Rent Review Specialist
Stock Market
Investment - Stock Market - REIT
Investing directly requires skills that may not be available to the investor: it also requires the availability of the desired proposition. Buying shares in a property company whose property investment and/or property development strategy is often a better bet both in the short and/or long term because the company is often better placed to procure the properties in the first place, and may already own them.
Whether best to invest directly or indirectly by buying shares in a property company is an interesting question.
Property companies whose shares are quoted on a stock market are basically companies that have floated on the stock market in order to raise money to buy the sort of property the directors have their sights on, in exchange for cheap money in the form of shares in the company.
It is cheap money because there is no obligation to pay a dividend, although many companies do and for as long as they can afford to.
Basically, when you buy shares in a quoted property company, you are paying others to buy and manage property that you might not have bought or couldn’t afford, in return for which you might get a dividend and capital growth.
Stock-picking - which companies to invest in - includes an ability to read company accounts. For property companies, the bottom-line is tangible net asset value (“NAV”) so for that it is also necessary to appraise the valuation and assess the valuer. Never be scared to think valuations might be dubious. Many valuers are more conservative or optimistic than others, the calibre of the portfolio can make a difference to saleability at any point in time. Also, watch out for the ‘collection’ value where a premium value has been attributed to the NAV for the opportunity to acquire a collection of properties in one place.
Remember NAV is the total net asset value of the portfolio as a whole. If the ‘rubbish’ outnumbers the ‘gems’ then that could depress the overall NAV.
With smaller quoted property companies, beware those where the directors have a controlling interest. If they decide to take the company private, their offer might be a lot lower than how much outside shareholders would expect. Also, beware of smaller companies where the directors’ salaries, options and compensatory package is disproportionate. How much a director of a quoted property company should be paid when often the bulk of the work is done by others to whom fees and commissions might also be paid begs the question “what is the director doing for the money?”
Generally, shares in quoted property companies are priced at a discount to NAV. Occasionally the share price is at a premium to NAV and that can happen when the prospects for growth are not reflected in the NAV, maybe comparable transactions at the NAV valuation date would if the valuation were carried out at a later date result in a higher NAV, or maybe there is talk of bid for the company whereby the opportunity to acquire a portfolio is the attraction. In my opinion, quoted property companies whose share prices are at a premium to the last reported NAV (assuming the date of NAV is recent) come under my heading of “high risk” because there is no telling whether the higher share price is in sync with valuation reality or Stock Market investor sentiment.
Where the share price is substantially below the last reported NAV, reasons include controlling interest in the company by director(s), low-grade assets, and so on. I do not think there is a rule-of-thumb as to what would be reasonably considered a safe discount to buy at, because the attitude towards safety varies. Sometimes investor quest is yield, other times capital growth, and others times a bit of both. The challenge is to estimate whether the share prices of many quoted property companies are too high, too low, or about right. Personally, I think the only way to answer that is to ignore commentators and evaluate the NAV yourself: that can be done by appraising the assets in the company's portfolio (information probably in the accounts on the website) and considering whether you'd buy them, or not.
Personally, for companies whose assets come under the heading of “run of the mill” and perhaps yield around 8.5-12% I should want share price about 50-60% NAV (net asset value). For companies whose assets are undoubtedly prime, important, and would surely attract considerable if interest if offered for sale in the market whether individually or as portfolio then I should want share price around 10-25% NAV. For companies whose share price exceeds the last reported NAV for no reason other than “collection value” I avoid. “Collection value” is a way of inflating share price to a level that effectively can make the company bid-proof and help safeguard the directors and managers’ careers.
Beware companies whose directors are prone to justifying holdings or recent purchases by reference to what it would cost to build the property today. That a property has been bought for less than its replacement cost does not in itself make the purchase price cheap: the point is that if it would cost less to build than its market value it would make no sense to build it! There are hundreds if not thousands of properties that have outlived their shelf-life and continue to exist for no reason other than not having been demolished or redeveloped.
Real Estate Investment Trust (“REIT”) originated in the 1880s and a time when investors could avoid ‘double tax’ or a tax at corporate and individual level. In the 1930s, the tax benefit was removed causing investors to pay ‘double tax’. Nowadays, REIT is a tax designation for a corporate entity investing in retail estate. The purpose of the designation is to reduce or eliminate corporate income taxes. In return, REITs are required to distribute 90% of their taxable income to investors. REITs can be publicly or privately held; and public REITS may be listed on public stock exchanges.
In the UK, the rules for REITs were enacted in the Finance Act 2006 and REITS came into being in January 2007. I think the timing of the conversion date for becoming a REIT was politically motivated. There was considerable untaxed value in property assets and the Labour government was intent upon extracting potential tax. When REIT were first introduced into the UK, in my opinion the companies that converted overpaid because their assets were revalued and tax paid on the book value of the increase at that time, around the peak of the market. That the companies that rushed to convert saw no harm in destroying shareholder value struck me as curious because no one seem to mind.
Although REITs can be tax-efficient, because the property company pays no corporation or capital gains tax on the profits made from property investment, that presupposes there are profits made from the property investment activities. Where properties are held for development, the investment potential may take years to come to fruition.
I am sceptical whether REITS are run for shareholders, so much as for their directors and managers! Of course, some professional advisers enthuse about REITS - for example, there are currently 22 REITS owning approximately £40Bn of property, approximately 80% of all property held by UK companies - presumably (dare I say it) because they are on the receiving end of lucrative fees, or regards REITS as the vehicle for new types of investment (in other words, selling from the outside in). As for yield on shares, the same appraisal criteria is necessary; for example: is the prevailing share price a good value reflection of the net asset value, how reliable in the NAV, how sustainable long-term is the dividend and whether there that much scope for increase?
For more information about REIT, the British Property Federation has a website.
Many quoted property companies are better at property than company management. Consider, for example, Land Securities plc: its portfolio is undoubtedly prime and its people adept at realising potential, but in my opinion how it manages the company for shareholders leaves a lot to be desired, such as embarking upon a share buy-back programme costing about £570 million in 2000 and more buy-back again in 2007 when the share price was around £17.20 (today it’s about £8.00, and at 30 September 2011 adjusted NAV £8.63), and converting to a REIT at the height of the market thereby paying tax on peak prices. Had that money not been wasted, Land Securities might not have needed a deep-discount rights issue (eight shares for five at £2.70) to raise £755M in 2009, and to reset the dividend.
Unlike investing on the Stock Market where investors own a share of the company, the performance of which is largely in the hands of the directors and their choice of managers and/or advisers, a property is what a company or person leases for its business purposes.
The main attraction of property is that the payer of the investor’s return on capital - the tenant - is under a legally-binding contract to pay, whether or not the tenant’s business is profitable. Furthermore, a feature of business tenancies in England and Wales is the “upward-only” rent review: although that does not mean the rent must go up at review, it does mean the rent payable cannot go down. Although upward-only review can cause problems for tenants, and there is talk of legislation, reviews are for the most part still upward-only, or on terms that compensate the landlord for the loss of certainty.
In the shop property market, each property is unique, so part of the market value will depend upon the attitude of investors for the type of investment at the time the proposition is for sale. Property transactions are one-to-one. Although interest rates play a part, for rent to have to cover interest on borrowing is not as important as the other determining factors: whether rent is likely to increase, scope for capital growth or angles to improve value.
The other part of the market value is the effect on rent of the business plan of the tenant in occupation. Although in business tenancy law, and subject to the guidelines for rent review in the actual lease, any effect on rent of the tenant’s occupation of the premises or any goodwill attaching to the premises by reason of the tenant’s occupation is usually ignored, neither of those ‘disregards’ applies to the capital value of the property. Consequently whether the tenant can afford the shop and whether that affordability is enduring so much so that on expiry of the tenancy the tenant would want to renew and for a long period of time are factors that can make an appreciable difference to the value of the investment. Where many investors go wrong is in assuming the tenant is bound to want to continue in occupation and/or renew.
Whether best to invest directly or indirectly by buying shares in a property company is an interesting question.
Property companies whose shares are quoted on a stock market are basically companies that have floated on the stock market in order to raise money to buy the sort of property the directors have their sights on, in exchange for cheap money in the form of shares in the company.
It is cheap money because there is no obligation to pay a dividend, although many companies do and for as long as they can afford to.
Basically, when you buy shares in a quoted property company, you are paying others to buy and manage property that you might not have bought or couldn’t afford, in return for which you might get a dividend and capital growth.
Stock-picking - which companies to invest in - includes an ability to read company accounts. For property companies, the bottom-line is tangible net asset value (“NAV”) so for that it is also necessary to appraise the valuation and assess the valuer. Never be scared to think valuations might be dubious. Many valuers are more conservative or optimistic than others, the calibre of the portfolio can make a difference to saleability at any point in time. Also, watch out for the ‘collection’ value where a premium value has been attributed to the NAV for the opportunity to acquire a collection of properties in one place.
Remember NAV is the total net asset value of the portfolio as a whole. If the ‘rubbish’ outnumbers the ‘gems’ then that could depress the overall NAV.
With smaller quoted property companies, beware those where the directors have a controlling interest. If they decide to take the company private, their offer might be a lot lower than how much outside shareholders would expect. Also, beware of smaller companies where the directors’ salaries, options and compensatory package is disproportionate. How much a director of a quoted property company should be paid when often the bulk of the work is done by others to whom fees and commissions might also be paid begs the question “what is the director doing for the money?”
Generally, shares in quoted property companies are priced at a discount to NAV. Occasionally the share price is at a premium to NAV and that can happen when the prospects for growth are not reflected in the NAV, maybe comparable transactions at the NAV valuation date would if the valuation were carried out at a later date result in a higher NAV, or maybe there is talk of bid for the company whereby the opportunity to acquire a portfolio is the attraction. In my opinion, quoted property companies whose share prices are at a premium to the last reported NAV (assuming the date of NAV is recent) come under my heading of “high risk” because there is no telling whether the higher share price is in sync with valuation reality or Stock Market investor sentiment.
Where the share price is substantially below the last reported NAV, reasons include controlling interest in the company by director(s), low-grade assets, and so on. I do not think there is a rule-of-thumb as to what would be reasonably considered a safe discount to buy at, because the attitude towards safety varies. Sometimes investor quest is yield, other times capital growth, and others times a bit of both. The challenge is to estimate whether the share prices of many quoted property companies are too high, too low, or about right. Personally, I think the only way to answer that is to ignore commentators and evaluate the NAV yourself: that can be done by appraising the assets in the company's portfolio (information probably in the accounts on the website) and considering whether you'd buy them, or not.
Personally, for companies whose assets come under the heading of “run of the mill” and perhaps yield around 8.5-12% I should want share price about 50-60% NAV (net asset value). For companies whose assets are undoubtedly prime, important, and would surely attract considerable if interest if offered for sale in the market whether individually or as portfolio then I should want share price around 10-25% NAV. For companies whose share price exceeds the last reported NAV for no reason other than “collection value” I avoid. “Collection value” is a way of inflating share price to a level that effectively can make the company bid-proof and help safeguard the directors and managers’ careers.
Beware companies whose directors are prone to justifying holdings or recent purchases by reference to what it would cost to build the property today. That a property has been bought for less than its replacement cost does not in itself make the purchase price cheap: the point is that if it would cost less to build than its market value it would make no sense to build it! There are hundreds if not thousands of properties that have outlived their shelf-life and continue to exist for no reason other than not having been demolished or redeveloped.
Real Estate Investment Trust (“REIT”) originated in the 1880s and a time when investors could avoid ‘double tax’ or a tax at corporate and individual level. In the 1930s, the tax benefit was removed causing investors to pay ‘double tax’. Nowadays, REIT is a tax designation for a corporate entity investing in retail estate. The purpose of the designation is to reduce or eliminate corporate income taxes. In return, REITs are required to distribute 90% of their taxable income to investors. REITs can be publicly or privately held; and public REITS may be listed on public stock exchanges.
In the UK, the rules for REITs were enacted in the Finance Act 2006 and REITS came into being in January 2007. I think the timing of the conversion date for becoming a REIT was politically motivated. There was considerable untaxed value in property assets and the Labour government was intent upon extracting potential tax. When REIT were first introduced into the UK, in my opinion the companies that converted overpaid because their assets were revalued and tax paid on the book value of the increase at that time, around the peak of the market. That the companies that rushed to convert saw no harm in destroying shareholder value struck me as curious because no one seem to mind.
Although REITs can be tax-efficient, because the property company pays no corporation or capital gains tax on the profits made from property investment, that presupposes there are profits made from the property investment activities. Where properties are held for development, the investment potential may take years to come to fruition.
I am sceptical whether REITS are run for shareholders, so much as for their directors and managers! Of course, some professional advisers enthuse about REITS - for example, there are currently 22 REITS owning approximately £40Bn of property, approximately 80% of all property held by UK companies - presumably (dare I say it) because they are on the receiving end of lucrative fees, or regards REITS as the vehicle for new types of investment (in other words, selling from the outside in). As for yield on shares, the same appraisal criteria is necessary; for example: is the prevailing share price a good value reflection of the net asset value, how reliable in the NAV, how sustainable long-term is the dividend and whether there that much scope for increase?
For more information about REIT, the British Property Federation has a website.
Many quoted property companies are better at property than company management. Consider, for example, Land Securities plc: its portfolio is undoubtedly prime and its people adept at realising potential, but in my opinion how it manages the company for shareholders leaves a lot to be desired, such as embarking upon a share buy-back programme costing about £570 million in 2000 and more buy-back again in 2007 when the share price was around £17.20 (today it’s about £8.00, and at 30 September 2011 adjusted NAV £8.63), and converting to a REIT at the height of the market thereby paying tax on peak prices. Had that money not been wasted, Land Securities might not have needed a deep-discount rights issue (eight shares for five at £2.70) to raise £755M in 2009, and to reset the dividend.
Unlike investing on the Stock Market where investors own a share of the company, the performance of which is largely in the hands of the directors and their choice of managers and/or advisers, a property is what a company or person leases for its business purposes.
The main attraction of property is that the payer of the investor’s return on capital - the tenant - is under a legally-binding contract to pay, whether or not the tenant’s business is profitable. Furthermore, a feature of business tenancies in England and Wales is the “upward-only” rent review: although that does not mean the rent must go up at review, it does mean the rent payable cannot go down. Although upward-only review can cause problems for tenants, and there is talk of legislation, reviews are for the most part still upward-only, or on terms that compensate the landlord for the loss of certainty.
In the shop property market, each property is unique, so part of the market value will depend upon the attitude of investors for the type of investment at the time the proposition is for sale. Property transactions are one-to-one. Although interest rates play a part, for rent to have to cover interest on borrowing is not as important as the other determining factors: whether rent is likely to increase, scope for capital growth or angles to improve value.
The other part of the market value is the effect on rent of the business plan of the tenant in occupation. Although in business tenancy law, and subject to the guidelines for rent review in the actual lease, any effect on rent of the tenant’s occupation of the premises or any goodwill attaching to the premises by reason of the tenant’s occupation is usually ignored, neither of those ‘disregards’ applies to the capital value of the property. Consequently whether the tenant can afford the shop and whether that affordability is enduring so much so that on expiry of the tenancy the tenant would want to renew and for a long period of time are factors that can make an appreciable difference to the value of the investment. Where many investors go wrong is in assuming the tenant is bound to want to continue in occupation and/or renew.