Pricing property unit trusts traded at JSE
Property unit trusts (PUTs) give investors the opportunity to buy units in a portfolio of properties traded on the JSE Securities Exchange.
But just how are those prices determined and what should investors consider when making a decision to buy or sell PUTs?
The association of property unit trusts' Craig Hallowes divides factors which drive the prices of listed property vehicles into three:
l Expected earnings.
A PUT's earnings is derived from rental income. Two factors to examine when forecasting rental income are expected rental growth and expected vacancy rates.
This means the higher rental growth is, the better this will be for the unit trusts.
But Hallowes says any vacancies will offset this and consequently the higher the vacancy level, the lower the expected earnings will be. Both these aspects need to be considered in forecasting earnings.
l Expected performance of short-dated bonds.
In general, the yield on listed property mimics that of long-bond yields. PUTs do not retain income, they are passed on to the unit holders in the form of a distribution.
The property portfolio can be considered as a collection of contracts for the payment of rental.
Hallowes says when an investor buys a PUT, he is effectively buying that income stream.
In this regard, the investment is similar to the bond market, where an investor is buying the interest income stream on a bond.
There is a degree of predictability to the income flow and to the future earnings in a PUT.
Bonds, he says, have a constant distribution based on the effective yield at which the bond was purchased.
So PUTs and bonds are seen as having a degree of substitutability as investments.
The yield on short-dated bonds will, therefore, be an influencing factor in determining the valuations of PUTs.
l Short-term interest rates.
Hallowes says that most PUTs have some borrowings but this is limited to 30percent of the value of its property portfolio.
Interest rate movements are a critical component in any assessment of the outlook for the listed property market.