Chapter 10 - Equity and Property Markets Flashcards
Equity SYSTEM T
S - security
- depends on issuing company , in particular
- stability of company profits and ratio of earnings to dividends
Y - Yield
- long term real yield
- higher expected return vs bonds and money market , lower vs property
S - Spread
- both equity prices and dividends are volatile
T - Term
- can usually be held in perpetuity
E - Expenses & Exchange Rate risk
- cost of dealing in equities linked to marketability of equity itself
- generally higher vs bonds
- currency risk exists if equities in foreign companies purchased as mismatching liabilities can occur
M - Marketability
- varies greatly between companies
- in general , more marketability for a large company
- depends also if company is listed or not
T - Tax
- Income and capital gains from quoted (and unquoted) shares may be taxed differently
- different investors will often pay differing tax rates upon these
Equity Categorisation by 3 main features:
- Industrial Sector
- Expected Profits Growth
- Size of company
Categorisation by industry due to :
- practicality
- correlation of investment performance
Why specialise in a specific investment sector ?
- factors affecting one company within an industry are likely to be relevant to other companies in the same industry.
- Info for companies within a sector usually come from common source and presented in similar manner
- No single analyst can expect to be an expert in all areas, so specialisation is appropriate.
- The grouping of equities according to a common factor gives structure to the decision-making process.
- It assists in portfolio classification and management
Why divide equities by industry ?
- share price movements of companies within industrial groupings tend to correlate more closely with each other than with companies in other industries.
- The share price movements reflect the changes that have occurred in the operating environment. These changes affect companies in individual industries in similar ways.
- For this reason, listings of share prices are often sub-divided by business sector, and major markets have separate indices for the different sectors
- similar input resources so similar input costs
- similar markets supplied to so similarly affected by changes in demand
- similar financial structures so similarly affected by interest rate changes
What defines prime property ?
- Location
- Age and condition
- tenant quality
- lease structure
- size
- number of comparable properties available to compare rent at rent review and for valuation purposes
Property SYSTEM T
S - security
- risky
- very much depends on tenant quality
- risk of voids ( periods with no tenant )
- obselescence
- government intervention through rent and planning controls
Y - yield (nomina/real vs expected )
- long term real yield
- hedge against inflation
- expected return higher than all other asset classes due to high risk
S - spread
- can be volatile over the long term
- stable over short term due to infrequent valuations and stable valuation methods
T - Term
- long term
E - expenses
- high dealing and handling expenses
M - marketability
- unmarketable due to :
- indivisible unit size
- valuations
- uniqueness
T - Tax
Investor has ability to change investment characteristics
Indirect Property Investment
Property disadvantages include:
- Size , too big for most investors to afford
- Valuation, values never known till sale and estimating values/obtaining these estimates can be expensive
- Lack of Marketability
- Expenses , high dealing and management costs
- Diversification , hard to achieve diversified portfolio without many properties
- Expertise Needed , often lacking and lack of knowledge compared to investment specialist
How to invest in property indirectly ?
- Pooled property funds
- investment in property companies such as property developers
- Listed JSE REITS (Real Estate Investment Trusts) which are companies that manage, operate and own a real estate portfolio consisting of income-producing property
