Chp 16-19 Flashcards
1) Characteristics of property
Nature of return – real asset, provide real returns
Obsolescence - buildings deteriorate and renovation needed
Running yield – yield is between bonds and equities
Marketability – very unmarketable, takes very long to sell a property and dealing costs are high
Valuation – subjective, no central market with quoted property prices
Expected return – less marketable and less secure than bonds, hence demand a higher return vs. bonds
Government intervention – rent & planning controls, due to political significance of property
Capital values – volatile over LT, less volatile in ST - infrequent valuations and stable valuation methods)
Cashflow pattern – rent may be upward only
Risk – security depends on quality of tenant, risk of void
Unit size – large, single properties indivisible
Uniqueness – each property is unique
2) Investment and risk characteristics of property (Acronym – SYSTEMT)
Security (risk) – depends largely on quality of the tenant, capital values can be volatile over long-term but infrequent valuations and stable valuation methods reduce short-term volatility, property susceptible to government intervention such as rent and planning controls, less secure than bonds
Yield (real or nominal, running yield, expected return, compare with other assets) – Property is real asset and provides hedge against inflation, yield between conventional bonds and equities
Spread (diversification, volatility)
Term – generally long-term
Exchange rate/expenses/economic conditions/expertise required – FX matters for international property investment, maintenance expenses generally high
Marketability – Property is very unmarketable, less marketable than bonds
Tax
4) Definitions of freehold and leasehold property and the differences between them as investments
a) Freehold – ownership is in perpetuity, right to occupy or let out, subject to planning and rental controls
b) Leasehold – Temporary ownership, building reverts back to owner at expiry of lease
5) Descriptions of property unit trusts and property shares
a) Property unit trusts
i) Open-ended unitized funds
ii) Close-ended investment trusts
iii) How they differ – restriction on property type, limits on liquidity, management charges deductable
b) Property shares – wider investment choice, no restriction on investments or management expenses, can invest in property developments (riskier)
b) Advantages of direct property / disadvantages of indirect property
Diversification – less for property shares as they are affected by movements in equity market
Volatility – direct property less volatile
Control – no control with property shares
Loss on forced sale – sale by property investment manager
Exposure – property developments (not sales) are riskier
c) Other factors affecting choice re property investment types
Financial gearing (= debt/equity)
Discount to NAV – property shares can stand at discount to NAV and may be purchased cheaply
Taxation treatment – depends on territory
7) Definitions of futures, forwards, long and short positions, call option, put option, option writer, options price, strike price, European and American options and a warrant
a) Futures are standardized and traded on exchange
b) Long means exposure to asset, short means negative exposure to asset
c) Warrant is option issued by company over its own shares
d) American option can be exercised on any date, European option can only be exercised on expiry
8) Definitions and descriptions of investment trust company, unit trust and open-ended investment company
a) Open-ended unit trust
i) Managers can create or cancel units as new money invested or disinvested
ii) Trust in a legal sense and not subject to company law
iii) Has stated investment objective
iv) Units priced at NAV
v) Limited borrowing power
vi) Has trustees – often bank or insurance company, ensures that managers obey Trust Deed and to hold assets in trust for the unit holders
8) Definitions and descriptions of investment trust company, unit trust and open-ended investment company
b) Close-ended investment company
i) Fund closed to new money after initial tranche of investment
ii) Works like a public company
(1) Can raise both loan and equity capital
(2) Has shares and can be traded on stock exchange
(3) Has board of directors
(4) Have a stated investment objective
8) Definitions and descriptions of investment trust company, unit trust and open-ended investment company
c) Open-ended investment companies
i) Cross between investment trust and unit trust
ii) Like open-ended unit trust – units priced at NAV, open-ended
iii) Governed by company rather than trust law
9) Differences between close-ended investment companies and open-ended unit trusts
Marketability – marketability on close-ended funds often less than the underlying assets, marketability of units in open-ended fund is guaranteed by managers
Gearing – of close-ended funds can make shares more volatile than underlying equity, most open-ended funds cannot be geared
Size of Discount to NAV – this can change in close-ended funds making it more volatile
Increased volatility of close-ended funds mean they should provide higher return
NAV per share of close-ended funds uncertain, especially if investments unquoted
Management charges higher for open-ended funds than close-ended funds
Close-ended funds provide wider range of assets to invest than unit trusts
Can purchase assets at discount to NAV in close-ended funds
Tax rates differ
10) Advantages of collective investment schemes
Cost of direct investment avoided Advantage with marketability Track return on specific index Divisibility Advantage regarding tax Diversification Specialist expertise
10) Disadvantages of collective investment schemes
Loss of control
Tax disadvantages – e.g. withholding tax
Management charges
12) Three main reasons for investing overseas
Match liabilities in foreign currency
Increase expected returns
Diversification
13) Problems of investing overseas
Mismatching
Tax
Volatility of currency
Custodians needed Additional admin required Time delays Expenses incurred/expertise needed Regulation poorer Political problems Information poorer Language difficulties Liquidity poorer Accounting differences Restrictions on ownership of assets/repatriation problems
