One of Nulabour first reckless throws of the dice to try and prop up property prices was to invent "Real Estate Investment Trusts" by which small savers would be conned into putting their hard-earned into commercial property.
They went live in early 2007, and were quite highly geared - so every 10% fall in commercial property means a 25% fall in the value of your REITS shares. The insiders bailed out at the top of the market, leaving Nulabour & Tory core voters, the small savers, nursing huge losses. Not that I'm a conspiracy theorist or anything, but remind me, who votes for these people? Here's the chart for the FTSE Real Estate Sector Index for the last two years:
There's an old saying, "Don't invest in a railroad company until it's gone bankrupt three times", which applies to all companies based on speculative land values. True to form, these companies (REITS and other UK property companies) are now on the edge (i.e. are breaching their lending covenants) and have asked their shareholders for another £3 billion in the next four weeks.
Land Securities "added that its combined investment property portfolio had been valued at £9.97bn as at January 31, down from £12.5bn in September [2008]. After adjustments, the valuation deficit over the four-month period was £2.45bn, representing a decline of 20.1 per cent. Land Secs added that it was cutting its dividend payment pool from £307m in to £221m."
To put this in perspective:
a) Land Securities currently has a market capitalisation of £2.5 billion, so shareholders have already lost £7.5 billion in value and are now being asked for another £755 million to keep the wolf from the door.
b) It admits that its properties lost a fifth of their value in just four months.
c) It doesn't appear to grasp that cancelling dividends is a much cheaper way of preserving capital than paying a dividend of £221 million and then promptly asking shareholders to pay back £755 million.
d) The more prices fall, the higher the gearing. If and when commercial property prices bottom out, a REITS share will more or less equate to a call option on property prices, i.e. pretty much risk free with unlimited upside. But let's wait for another couple of waves of rights issues, debt-for-equity swaps and the like before we start buying.
UPDATE Per The FT (thanks to Umbongo & Lola for the steer):
The government is to consider whether to allow the payment of stock dividends by real estate investment trusts, a measure that would help alleviate the strain on balance sheets in the struggling listed property sector...
Whether stock dividends are allowed by existing rules is uncertain. Some accountants and analysts warn such a move would be a minor breach of the Reit legislation, which stipulates that Reits need to distribute 90 per cent of rental income to shareholders.
Thursday, 19 February 2009
I hope none of you invested in Real Estate Investment Trusts!!
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7 comments:
"the insiders bailed out at the top leaving Nulabour & TOry core voters, the small savers, nursing huge losses"
The UK Is Not The US. In the UK, small savers don't invest in the stockmarket (cue dozens of self-declared counterexamples, I'm sure, but you're statistical outliers - even Mrs T's privatisations failed to bring in US-style mass share ownership).
It's not quite as bad as it looks - really!!
REITS are useful - if and only if you have a vague idea of what you are doing. They were seen as A Good Idea by property companies because in a growing market they were a tax efficient way of running their businesses. So you could convert from a Property Company to a REIT and save tax. But, investment trusts have regulatory rules on their borrowings and debt to equity ratios that do not apply if you are a Ltd Co. Hence the current need to raise extra capital as capital values (driven by achievable rents) have fallen leading to potential negative equity.
The problem goes back to the English and their slavish love of property. A lot of stupid advisers (not as many as you might think) and equally ignorant private investors did the usual thing of buying at the top of the market.
Property has a place in a proper balanced investment portfolio. We reckon about 10% max. It is uselful for yield, not repeat not capital appreciation. And REITs are one of the ways that retail investors can access this asset class in a well diversified way - at a resonable price.
What do I do? Well, I reckon you need to be as close to the market as possible. Therefore we tend to recommend the biggest directly invested property funds we can find. These usually belong to insurance companies. Then just stick with it and benefit from the yield. If you can do some regular investment you'll benefit from pound cost averaging.
JB, superficially that is true, with Land Secs, the largest 84 shareholders owned 70% of the shares, see page 19. But those 84 were probably pension funds, cheerfully flushing their members' money down the toilet while pocketing the value of the tax breaks in fees and commissions.
MW I seem to remember that there used to be some rule of trust/pension fund investment that, other things being equal, to be grade 1 (or whatever the assessment scheme was) corporate investments had to pay an annual dividend (even if that dividend was 0.1p per share). If so, I can see some logic in the Land Securities' decision to keep paying with one hand and asking for money with the other: it keeps their stock open to a wider population of investors.
U, true, but surely they've heard of stock dividends?
I'm not sure whether stock dividends cut the mustard where trustee investments are concerned. But these esoterica are very old knowledge (or lack of same) as far as I'm concerned.
OTOH call me Mr Cynical, but I suspect that - applying Occams Razor - the safe assumptions are either that Land Secs doesn't know what its doing or, more likely, an important shareholder needs some cash sharpish.
Probably can't pay stock dividends if you're a REIT. I think it has tax implications.
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