PROPERTY
Out of bonds
JOHN BULL
I return to the subject of property bonds (first mentioned in these columns on 6 Sep- tember) because I have no doubt at all that they have more sales appeal than any other product in the savings field. They are unit trusts which hold property rather than shares (plus some life cover). The sales line is that property values expand steadily year by year —unlike share prices, which move sharply down as well as up or, more often than not, sideways. And as the growth rates forecast for property bond values are roughly three times as high as the average growth in share prices since the war—that is 10 per cent or so for the former against a mere 34 per cent for the latter--the prospectus is indeed a potent one.
My major worry about this development has been that, because the property bond business lies outside the scope of the Preven- tion of Fraud (Investments) Act, undesirable elements could set up shop. Well, it is not quite so easy to do this as I first thought— but still quite possible. To operate a property bond scheme you have to control a life assur- ance company. If you try to start one from scratch you find yourself under constant Board of Trade supervision. So the answer is to buy a small life company. But the Board of Trade has to be informed of changes in the ownership of life assurance companies and of subsequent changes in directors. In any case, small life assurance companies do not come on to the market very often, and when they do, competition forces the price up high. All the same, I would urge readers of this column to examine carefully the credentials of property bond promoters. Three which are associated with top city names are Abbey Property Bonds (Ham- bros), Crusader Growth Property Bonds (Bowring) and Property Growth Bonds (Lazards).
In my original article I mentioned two other difficulties—valuation and liquidity— and both of these need further comment. I have been persuaded that the valuation of commercial properties (the assets in which property bonds are invested are offices and shops rather than residential property) is not quite such a hit and mist affair as I suggested. The reason is that the main buyers of developed properties -are now the big financial institutions, the insurance com- panies and pension funds. The level of the market is determined by the return which these institutions demand—which at any onet moment in time is well known. Of coursii there is room for argument about the value of reversions and the exact standing of a particular district. 1 would simply urge that the standing of the estate agent which values
:le portfolio be taken into serious considera- on by potential property bond holders.
Liquidity is a problem because none of ?Le existing property bond groups have been ;oing long enough to have any idea of what evel of redemptions they may expect. In ,ther words, unlike the banks and building ocieties, they do not know what proportion Pf their assets they should hold in cash or n short term deposits. Moreover, property nosily takes much longer to sell than a )arcel of shares, which is a reason for more rather than less liquidity. In fact most of he property bond managers retain the right :o suspend encashment of bonds for a short )eriod (six months). Some argue that in wactice they could sell their whole portfolio °morrow (which I doubt), others observe hat liquidity is no problem with an expand- ng fund (true, but they won't all be expand- ing for ever). In my opinion liquidity remains problem; the Board of Trade should stablish minimum requirements.
Finally, those growth projections : how .ure are they? It is a pity that no study of :ommercial property prices since the war s readily available. I suspect that what some woperty men have done is to job backwards, hat is to argue that had one bought x type )roperties (say, in the City of London) then L growth rate substantially in excess of 10 per cent would have been achieved, that there is no reason to think that the situa- tion is changing, so that in indicating 10 per cent per annum as a minimum one is being conservative. I find that a treacherous line of reasoning. Take a parallel case, the private housing market. It is now estimated that the market in private house property will be dis- • inctly weak in the 1970s, chiefly because 'amily formation statistics suggest that remand could easily turn down below upply. Is the market in office space and hopping space really immune from bouts )f over-capacity and, consequently, from tatic or declining prices? I doubt it. I have .een too many unoccupied office blocks and zmpty shop centres recently to accept that.
ffolkes's industrial alphabet
U is for Up for grabs
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