Chapter 10: Equity and property markets Flashcards
Reasons to hold back profits
- Expansion
- Holding some in good years to compensate for bad years, stabilising the dividend payments
% of profits going to dividends (payout ratio)
dividend per share/earnings per share
Reasons for share buybacks
- Excess cash that cannot be used profitability, so it is returned to shareholders
- Cash could have been earning a low interest rate, less than the retun on the company’s other assets
- Tax efficient means of returning cash to share holders. Income gain tax less than dividends tax
- Changing capital structure from equity financing to debt financing
Property
A legal title to the use of land and buildings
Prime property
Property that is attractive to investors
Factors affecting the primeness of a property
- Location
- Age and condition
- Quality of tenant
- # of comparable properties available to determine the rent at rent review and valuation purposes
- Lease structure
- Size
List the characteristics of direct property investment
And their subcategories
- Security (Capital and income)
- Yield
- Spread (Capital values and income)
- Term
- Expenses
- Exchange rate
- Marketibility
- Tax
Upward only rent review
Level of rent cannot be reduced at any review
Rack rent
Another name for it
The rent that would be received from a building if it were subject to an immediate open-market rental review
Market rent
Running yield
Include formula
How much of return is given through income as opposed to capital growth
rental income(net of all management expenses)/
cost of purchase(gross of all purchase costs)
Site value
Value of the property derived from the site alone
High site value, means stable capital values
Full repairing and insuring lease
Tenant is responsible for management costs and insurance
Explain the following investment characterisc of direct property investments:
* Security
* Yield
* Spread
* Term
* Expenses and exchange rate
* Marketibility
* Tax
* Other characteristics
Security
Capital
* High site value typically stabilises capital values
* Primeness
* Absolescence - relative slowdown in growth rate in value between old and new buildings
Value of a partcular building might fall even though broad values might increase
* Governement intervention
Income
* Depends on the quality of the tenant
* Primeness may also influence t he price charged
* Voids/vacancies disrupt income
* Legal costs if rent is in arrears
* Related to economic cycles
Explain the following investment characterisc of direct property investments:
* Security
* Yield
* Spread
* Term
* Expenses and exchange rate
* Marketibility
* Tax
* Other characteristics
Yield
*Depends on riskiness, my be of property types or tenants
onstrained supply can push up yields
Real vs nominal
* Property is a real asset, and thus expected to hedge against inflation
* Due to external properties, only moves broadly with inflation.
In comparison to other asstes
* Property rental yields have often been lower than conventional bond running yield because of the prospect of capital gain, reflecting anticipated growth of rental levels.
* Property is less marketable and less secure, thus require a higher return
Explain the following investment characterisc of direct property investments:
* Security
* Yield
* Spread
* Term
* Expenses and exchange rate
* Marketibility
* Tax
* Other characteristics
Spread/Volatility
Income
* Lease agreements are usually fixed for some time.
* So predicatbility of rental income and capital gains will vary depending on type of tenant and type of property.
* For a property portfolio, a broad spread of review dates should generate a broadly increasing income stream
* Running yield differs between properties
* Subject to occupancy rates and voids
Capital values
* Capital values of property might be volatile in the short-term, but thi is reduced by infrequent valuations
* They move in line (with a lag) with economic cycles
