9 - Equity & Property Markets Flashcards
Investment characteristics of equity:
S - (i) Security depends on stability of issuing company’s profits
(ii) Listed shares more secure than unlisted shares
Y - (i) Historically, equities provide real yields as company profits/dividends tend to rise w inflation & economic growth, but inflation protection is not guaranteed
(ii) Equities are perceived as riskier than bonds => higher expected returns to compensate, margin depends on riskiness of issuing company
S - Equity prices & dividends can be volatile, depends on demand/supply of equities in the mkt.
T - Can be held in perpetuity
E - Closely linked to marketability (more marketable => lower expenses) generally higher than bond exp.
M - Depends on the size of the issuing company/listed on the exchange/ do only a few people hold a large proportion of the shares?
T - Income and capital gains from equity shares may be taxed differently
Why may a company buy back shares?
- Excess cash in the company which cannot be used profitably so it is returned to s/h
- If excess cash was earning a deposit rate of interest, less than returns earned from other company assets => share buybacks will dispose of the excess cash and improve the earnings per share.
- Might be a more tax efficient method of distributing profits (if capital gains tax is favourable relative to tax on dividends)
- The company is changing capital structure from equity financing to debt financing
What can you categorise shares based on?
- Size of company
- Expected profit growth
- Industrial sector
What categorisation do equity analysts commonly use to specialise their research and advice? And why?
Often specialise in an industrial group and confine their research and advice to companies within that group because of:
(i) Practicality
(ii) Correlation of investment performance
Why is it practical to categorise equity based on industry?
- Factors affecting one company within an industry likely to affect other companies in the same industry
- Information for same industry companies will come from a common source and will be presented in a similar way
- No single analyst can expect to be an expert in all areas, so specialisation is appropriate
- Grouping of equities according to a common factor gives structure to the decision-making process. It assists in portfolio classification and management.
Why is investment performance of equities in the same industry correlated?
- Share price movements reflect changes that have occurred in the operating environment
- Changes in the operating environment affect same industry companies in similar ways eg.
o Cost of resources (raw materials, land & labour)
o Market demand
o Similar financial structures => affected similarly by changes in interest rates
Problems with industry groupings:
- Some companies relate to several industries e.g. .conglomerates
o Companies increasingly diversify into new sectors - Heterogeneity of companies in a sector wrt:
o Size
o Operation in different niches of the market
What is “prime” property?
Most attractive properties to investors which score highly on:
o Size
o Age & condition
o Location
o Tenant quality
o Lease structure
o Comparable properties available to determine rent at rent review & for valuation purposes
Investment characteristics of direct property;
SYSTEM T OFF
Security - void/default risk/political risk
Yield - (i) long-term real returns > expected returns than IL bonds
(ii) Stepped income stream
(iii) Running yield varies w type of property
Spread - Long-term volatility of capital values w short-term stability due to infrequent valuations
Term - Freehold property held in perpetuity
E - High dealing & management costs, refurbishment costs
M - Unmarketable due to: large unit size, uniqueness, indivisibility, subjective valuations
Tax - Paid on capital gains and rental income
Obsolescence, deterioration & refurbishment costs
Feel good factor
Flexibility of investment characteristics eg redevelopment, renegotiation of lease
Investment characteristics of direct property;
Yield
Property returns move generally in line w inflation:
o Rent can be increased in line w inflation & upwards only
o Other factors affecting demand for property may affect the rent that can be charged on a property eg obsolescence
o Higher expected return than IL bonds:
-> Property is less mktable/more risky
-> Risk of obsolescence/depreciation
Investment characteristics of direct property:
Spread
(i) Capital values can be volatile in the long term
(ii) Infrequent valuations and stable valuation methods reduce short-term volatility
(iii) Property values move in cycles lagging behind the economic cycle (supply is slow to respond to changing economic scenarios)
Investment characteristics of direct property:
Term
Freehold ownership is in perpetuity
Investment characteristics of direct property:
Expenses
Property management + buying/selling costs is expensive e.g. future renovation, finder’s fees:
o The tenant is often responsible for building maintenance and insurance
Investment characteristics of direct property:
Marketability
Unmarketable and dealing costs are high due to:
(i) Unit Size - large & indivisible
(ii) Uniqueness - tough to value & reduces mktability
(iii) Valuation - Infrequent sales/confidentiality => less information for valuing property. Valuation might be subjective.
Investment characteristics of direct property:
Tax
Capital gains tax paid on sale + income tax on rental
