Property loan stocks thrive on rate cuts

Posted On Tuesday, 21 October 2003 02:00 Published by eProp Commercial Property News
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Flexibility in raising money will allow Hyprop to buy Canal Walk entirely from borrowings

Angelique de RauvilleIn the context of the lowinterest environment, listed property loan stock companies offer better opportunities for investors than property unit trusts because they have greater flexibility when it comes to borrowing money.

However, Mariette Warner, head of fund management and securitisation at Standard Bank Properties and manager of the Standard Bank Property Income Fund, says that when the interest rate cycle turns again the opposite will happen.

Warner says that at this point in the interest-rate cycle, property loan stock companies offer better opportunity for earnings growth, with some able to restructure their interest rate fixes.

"Some of them are up to 200 basis points lower on the weighted average cost of borrowings," she says.

Angelique de Rauville, MD of listed asset management company Provest, which is part of Investec Bank and does monthly reviews of the listed property sector, says that property loan stock companies have had more flexibility in acquiring properties with borrowings.

Previously, property unit trusts were able to borrow only up to 5% of the total cost of their assets, but with the Collective Investment Schemes Act coming in this year they can borrow up to 30% of their market value. De Rauville says that because the act is so recent, only a few have accessed borrowings of up to 30%.

She says property loan stocks have different borrowing capacities according to their articles of association: "How much property loan stock companies can borrow is decided case by case."

Some have unlimited borrowing potential, while others are restricted in terms of their articles of association to borrowing 40% to 50% of their market value.

Most of the property loan stock companies do have limited borrowing capacities, but De Rauville says she does not know if any of them has borrowing capacities of less than 30%. De Rauville says, for instance, that property loan stock company Hyprop will be buying Canal Walk shopping centre entirely from borrowings. If it does this, it will exceed its borrowings, which are restricted to 50%. "They will be having a general meeting in respect of increasing this gearing capacity ," De Rauville says.

She says the meeting will take place next Tuesday, and unitholders will be given to the opportunity to vote in favour of increasing Hyprop's debt ratio to 55% so that it can purchase the shopping centre with 100% borrowings.

Jonathan Smith, director of property strategists Courtwell Consulting believes, however, that both property unit trusts and property loan stocks offer value for investors.

"From a gearing perspective, property loan stocks offer better return opportunities than property unit trusts, but in principal property unit trusts have the ability to outperform property loan stocks anyway because they are more liquid and can take advantage of buying and selling opportunities ," Smith says.

He says that as interest rates fall vendors perceive that their properties are worth more. Being more liquid, property unit trusts are in a better position to pay a higher price. Smith says that, in general, property unit trusts have better quality portfolios in terms of A-grade properties.

However, he says, this is no "black and white issue", where property unit trusts also have better properties.

"Although property unit trusts can only gear up to 30%, there is no limitation on the amount which institutional and private investors may borrow in order to invest in property unit trusts, and this means that investors will benefit substantially by a lower interest-rate environment because their equity environment will increase substantially."

Smith says property unit trusts do not pay income tax on their earnings, and their distributions are taxed only in the hands of unitholders.

Property loan stock companies are less tax advantageous to investors.

"Lower interest rates do make property loan stocks more attractive, but this could well be negated by the improved liquidity of property unit trusts and better tax structure," he says.

John Rainier, chairman of the Association of Property Unit Trusts, says that despite market commentary that the listed property market is overpriced prospects for capital and income growth still exist.

Rainier says an improving economy, lower inflation, cuts in interest rates, increased listing activity and improved confidence in the sector bode well for listed property investors.

He is also upbeat about prospects of property unit trusts.

"Historically, property unit trust (PUT) yields tend to track long bond yields. As interest rates fall, prices rise, and we can expect listed property prices to increase further. In a lower interest rate environment, geared portfolios will benefit, and this will have a positive affect on PUTs that have taken advantage of the ability to gear following the promulgation of the Collective Investment Schemes Act," says Rainier.

 

Last modified on Friday, 09 May 2014 15:40

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