Chapter 10 - Equity and property markets Flashcards
Define the term ordinary share
Ordinary shares are securities held by the owners of an organization
Ordinary shareholders have the right to receive all distributable profits of a company after debtholders and preference shareholders have been paid.
They also have the right to attend and vote at general meetings of the company
What are the advantages of listed shares over unlisted shares to the investor
- Greater marketability
- Greater divisibility
- More information is available, due to disclosure requirements
- Greater security, from stock exchange regulations
- Easier to value
List three reasons for the correlation of investment performance within the same industry
MRS
- Markets
- Companies in the same sector supply the same markets, and will therefore be similarly affected by changes in demand - Resources
- Companies in the same sector will use similar resources and will therefore have similar input costs - Structure
- Companies in the same sector often have similar financial structures and will therefore be similarly affected by changes in interest rates
On what factors would a prime property score highly?
CALL ST
1) Comparable properties for rent reviews and valuation
2) Age, condition and flexibility of use
3) Location
4) Lease structure
5) Size
6) Tenant quality
Give three examples of indirect property investment
- Open ended schemes, such as property unit trusts
- Closed ended schemes, such as property investment trust companies
- Shares in property (development/investment) companies
It is practical for analysts to specialise in one area of industry because
FIGS
- Factors affecting one company within an industry are likely to be relevant to other companies in the same industry
- Information for companies in the same industry will come from a common source and be presented similarly.
- Grouping of equities according to some common factor gives structure to the decision-making process. Assists in portfolio classification & management
- Specialisation is appropriate, no one analyst can expect to be an expert in all areas
Reasons for buying back shares
RECT
- Excess cash may only earn deposit RATE of interest, thus improves earning per share for remaining shares
- EXCESS cash that cannot be used profitably and is
returned to shareholders - Company may wish to change CAPITAL structure from equity financing to debt financing
- May be more TAX-efficient than dividends
Disadvantages of direct property investment
VS MED
- Valuation: valuation is never known until the sale
- Size: many properties are too big for most investors to afford
- Lack of marketability: lots of time & costs when buying and selling
- Expertise needed: need lots of local knowledge
- Diversification: need many properties for diversification
What are the difficulties that arise with industry groupings when performing analysis
- Conglomerate companies: some companies diversify into many sectors
- Heterogeneity of companies within particular sectors: size may be different or they may be operating within different niches of the market
Why is direct property unmarketable
- Large unit sizes
- Uniqueness
- Hard to value, subjective valuation
Investment and risk characteristics of property to be considered
MUST PROVIDE FIVE
M-Marketability
U- Uniqueness
S- Size
T- Type of Property (determines the running yield)
P- Political Risk
R- Real long term RETURNS (property is a real asset)
O- Obsolescence
V- Valuation
I- Indivisibility
D- Diversification
E- High Management and dealing EXPENSES
F- FORCED sales
I- stepped INCOME stream
V- Volatility
E- Expertise available
Why would property shares stand at a discount to NAV?
- it reflects the difference between the way in which investors value shares and the way they value the property
- risk of loss on forced sale
Why would property shares be at a small discount or even a premium to NAV?
- The market has a positive view of developments giving potential for capital gains
- The valuations underlying NAV are conservative
- The property company has a good management record
Investment and risk characteristics of equities
HE DIMPS
- Higher expected returns than government bonds
over the long term - Equities can generally be held in perpetuity
- Dealing expenses are linked to marketability
- Income and capital values can be volatile
- Marketability depends on the size of the company
- Provide a long-term real yield as companies grow in line with inflation, dividends tend to grow in line with GDP
-Security depends on profitability of the company
