Real estate
JOHN BULL
Cost-push inflation, it has been pretty con- clusively proved on both sides of the Atlan- tic, is hard on company profits and therefore on share prices. Ordinary shares provide no protection against cost-push inflation. Pro- perty, on the other hand, does. This is why the property bond promoters—who are sell- ing a unit trust investment based on real estate rather than industrial equities—are doing so well at the moment. At their best, property bonds allow you and me (assuming, that is, that we have a spare £100) to invest in a portfolio of top-class and expertly managed commercial and industrial pro- perty.
There are, however, property bond pro- moters and property bond promoters. Some schemes are good, some are not so good.
This week I want to look at a new one very carefully. It is called the Merchant Investors Property Bond. The first thing to look for is the backing. Who is running this scheme? Is it a big City institution which is unllkely to abuse some of the weaknesses of the law relating to property bonds? The answer is reassuring. The Merchant Investors Property Bond is sponsored by Old Broad Street Securities, which is the merchant banking arm of United Dominions Trust, the largest finance company in the country. No ne i to worry about that. But does this City Institu- film know much about property investment? Well, it is by no means the first name that springs to mind in this connection.
In fact a reputable firm of estate agents, Richard Ellis & Son, has been appointed to 'manage' the properties in the fund, to advise of their selection and negotiate each purchase.
This I suppose is fair- enough. But in the
same way that I would prefer a merchant bank rather than a stockbroker to manage a large portfolio of shares. so I would prefer a property company rather than an estate agency to manage a large portfolio of pro- perty. Brokers and agents (they are the same) have been brought up on the idea of turnover. They are in business to buy and sell. I doni suggest that the best firms buy and sell just for the sake of the commission, but lesser ones do. I certainly do not suggest that Richard Ellis would do this. They would not (repeat not). And lust as a merchant hank has access to the • esearch effo-tc of all stockbrokers. .so a property company has access to the expertise of all estate agents. In this, it seems to me, they are superior to brokers or agents themselves. So I would be happier with the Merchant Investors Pro- perty Bond if the sponsors themselves were stronger on property expertise. I don't think that just employing a good agent is a perfect answer.
Four other items to look for: how sensible arc the forecasts? What arrangements have been made for independent valuation and li- quidity? And what are the expenses? What one should distrust are specific forecasts of X per cent capital appreciation over so many years. The worst case I have seen was an advertisement which pictured a cheque with a notional gain for a thirty year period written on it. The assumptions upon which that forecast depended would have taken eight columns of newsprint to list. The Merchant investors people publish a table which takes you as far forward as twenty- five years and works out growth rates on assumptions of 8 per cent, 10 per cent and 12 per cent growth per annum. They add that these rates cannot be guaranteed as property values can go down as well as up. But 'they assume that high quality, well- selected and expertly managed property will continue to appreciate in value as in the past'.
Here again, I must confess that I am not absolutely satisfied. I don't want to be finicky, but I have a deep distrust of cheer- ful forecasts, however qualified, which invite one to look a generation ahead. I wonder, for instance, what would happen to com- mercial property prices if some government imposed a ceiling on commercial rents—not quite impossible.
The other details are satisfactory. In- dependent valuations are to be carried out by Jones Lang Wootton. It is difficult to see an offshoot of United Dominions Trust running into liquidity problems and the charges are reasonable.
Altogether it is a property bond I would recommend, though I doubt if it will figure at the very top of the charts.
ffolkes's taxpayers' alphabet
y is for Yield prospects
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