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Unpopular property sector offers investors good yields

By Peter V O'Brien

Friday 16th June 2000

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The absence of foreign investors has seen the market suffer

Colonial First State Property Trust general manager Lloyd Cundy summed up the state of listed property companies and trusts when he said in the preliminary report for the year ended March that investors' preoccupation with seeking high growth from shares and an environment of rising interest rates have seen the sector remain out of favour with many people.

Mr Cundy's remarks were made in the context of the trust's units continuing to trade at a discount to book value.

He also said recent volatility of global sharemarkets had hardly affected the trust's unit price, reflecting the quality underlying rental income.

Many investors buy into listed property vehicles for regular high-yielding income.

They have less interest in the relationship of share/unit prices to net asset backing, irrespective of the concern the organisations' directors and executives express about price discounts.

Only two stocks, Property for Industry and St Lukes Group, had a gross dividend less than 10% last week and St Lukes' 4.7% was the result of a $1.70 a share offer from Australia's Westfield Trust, the largest shareholder.

Any investment held for income purpose is price-sensitive to the overall level of interest rates.

Dividend yields, net and gross, rise as interest rates increase and that means prices for the securities fall.

Prices for the listed companies and trusts last week were at the lower end of the year's high/low range, again with the exception of St Lukes Group, reflecting recent rises in interest rates as well as the general state of the New Zealand sharemarket.

Capital Properties New Zealand's preliminary report for the year ended March said the past year was difficult for property companies.

The company more than doubled its asset base, increased profit and earnings per share, maintained high occupancy rates and a solid weighted average lease term and successfully integrated two substantial listed entities, including Shortland Properties.

There was a catch - Capital Properties said it revalued the property portfolio down 4.9%, or $19.7 million. That arose because of the increased interest rate environment and marginally higher yields on all property investments.

Market conditions were causing writedowns of similar levels for commercial property owners in the country's major centres but long-dated debt financing counterbalanced that situation.

A revaluation of the company's borrowings to recognise current interest rates would offset the movement in property values.

The company noted the movement in property values did not affect its earnings, profitability or dividend levels.

Capital Properties' dividend yield should alter when installment receipt holders pay their second instalment by June 30, although the company said there was a prospect of increased dividends once debt levels have been reduced.

The company had $141,04 million of debt at March 31, or 36.5% of total assets, compared with $54.54 million (29.1%) in 1999, before the group expanded through acquisition.

While the property sector has been relatively weak in terms of recent share/unit prices, it is attractive for some investors, particularly people who already have a stake in it. That was seen when Property for Industry reported in February for the year ended December.

The report said shareholders had their first opportunity in November to increase their investment through the dividend investment scheme.

About $141,000 was reinvested, representing 7.5% of the third-quarter dividend payment.

The amount may not seem much, but it was an indication of shareholder interest in the company and was, in a sense, the equivalent of holders of fixed interest securities compounding their regular interest payments.

Kiwi Income Property Trust's preliminary report for the year ended March made similar comments about the current environment to those in other reports.

Chairman Robert Narev said investment activity in the property market had slowed markedly as New Zealand suffered from a lack of foreign investors. Rising interest rates also had a negative impact.

Mr Narev said there was a significant adverse effect on a market that had become dependent on continued offshore investor support.

Rising interest rates influenced share/unit prices in the sector since NBR last reviewed it on February 4. But they have increased the dividend yields. Current yields should be attractive for income-conscious investors, particularly as not much is happening in the rest of the sharemarket.

Listed property companies and trusts

Company/fundsPrice Price Price Gross
10.6.00 (c)2000 high (c)2000 low (c)yield (%)1 div
AMP Office8194799.3
CDL Investments19.5241919.1
Capital Props28422541.2
Col First State85917910.2
Kiwi Income88978011.8
Nat Prop Trust73906510.9
Newmarket54635017.5
Prop for Ind7379699.4
Prop Leaders NZ76846510.0
Southern707445N/A
St Lukes 21661651104.7
Trans Tasman18.32717.5N/A
Property company statistics

(1) At current price

(2) Under takeover offer

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