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These shares are hot property

By Peter V O'Brien

Thursday 24th April 2003

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Investors in listed property companies and trusts should be smiling at the erratic performance of other sectors over the past six months. Apart from AMP NZ Office Trust, all eight companies in the table outperformed the market since October.

Shareholders and unit holders had the additional benefit of high gross dividend yields, unmatched elsewhere after allowance for comparative operational performance and risk.

Trans Tasman Properties was the exception to the dividend yield argument. The company's yield was nil, given its inability to pay dividends. Its result for the year ended December indirectly revealed the potential downside effects of missing two vital property investment criteria: site and price paid. Property sales realised $187 million, comprising $46.8 million for one Australian site and $142.2 million for 11 in New Zealand.

The company lost $9.6 million on sales (5.1% of total realisations), suggesting an earlier overoptimistic buying policy in relation to site and price.

Trans Tasman had unrealised revaluation increases of $1.5 million, compared with a $60.9 million write-down in the previous year. The latter figure indicates other earlier misjudgments, irrespective of historic ups and downs in market values.

Site and quality, occupancy/vacancy rates, rental yields on investment and rent reviews are the key elements of successful property investment. Each relates to the other three.

An undesirable site and/or poor quality lowers demand for space, puts pressure on available rents and affects future rent reviews. Desirable sites and high-quality accommodation result in higher demand and occupancy rates ­ subject to general economic conditions ­ which allow good rental income and yield on investment.

Rent reviews are struck from the previous base, again subject to economic conditions and resulting demand. Recent reports confirmed those views.

Commercial and industrial property companies referred to occupancy/ vacancy rates (the latter being preferable) and sites.

AMP NZ Office Trust's vacancy rate was 6.2% at December 31, although the trust said leasing vacant space "remained a challenge, with an uncertain global economy causing companies to defer their accommodation decisions and instead focus on core operations." That was at the end of February. The challenge could have eased in the ensuing eight weeks.

Capital Properties' vacancy rate was 2.9% at September 30, Colonial First State Property Trust's nil at September 30, Kiwi Income Property Trust's 1% for retail holdings and 1.1% for commercial, National Property Trust's 2% at November 30 and Property For Industry's apparent nil at December 31, although the company sold four properties in the 2002 year.

CDL Investments seems to be concentrating on residential land developments, a relatively rapid turnover operation compared with commercial and industrial buildings.

National Property acquired Newmarket Property Trust in the six months ended November and the latter company was delisted and removed from the October 21 section of the table.

Southern Capital has property interests in its diversified investment mix but the company's recent decision to acquire the remaining 50% of equipment-leasing company Hirequip it did not already own (subject to shareholder approval) lowered the level of property investment relative to other interests. The company is excluded from the table for that reason and because it signalled an expression of interest in acquiring Owens Group's Hirepool. Southern Capital has Commerce Commission approval for that deal if it goes further.

The gross dividend yield column in the table is another indication investors should be smiling. They had relatively stable share price and excellent income returns. Conservative, income-conscious investors have a well-performing sector for their funds, with low volatility.

Property companies' share price performance

Company Price Price Change 2002/03 2002/03 Gross

15.4.03 21.10.02 Oct-Apr high low div yld


--------------------------------------------------------------------------------

AMP NZ Office $0.84 $0.86 -2.3% $0.91 $0.81 8.1%
CDL Investments $0.19 $0.18 +5.5% $0.24 $0.151/2 12.6%
Capital Properties $0.92 $0.83 +10.8% $0.92 $0.80 10.0%
Colonial First State $1.12 $1.08 +3.7% $1.15 $0.99 9.4%
Kiwi Income Prop $1.11 $1.01 +9.9% $1.11 $0.88 8.4%
National Prop Trust $0.86 $0.83 +3.6% $0.98 $0.78 10.5%
Property for Industry $0.94 $0.90 +4.4% $0.97 $0.84 7.4%
Trans Tasman Props $0.25 $0.23 +8.7% $0.30 $0.20 Nil

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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