My word v their bonds
JOHN BULL
An increasing number of investors who would like to put money into property as well as (or even instead of) into shares are being tempted to buy property bonds. I sympathise but I don't altogether approve. Certainly, if you trust the management, a property bond is a better holding than a property company share because our tax system now favours the former. And over long periods, property values have shown faster growth than ordinary share prices. You can see that from watching the house- for-sale advertisements (though shops, offices and industrial premises rather than residential properties comprise the assets underlying a property bond). All the same, there is room for doubt. The property bond business is virtually unregulated and none of the existing management groups have been going long enough to establish a record upon which they can be judged.
What, then, is a property bond? The simplest definition is that it is a holding in a unit trust which owns properties (rather than shares) plus life assurance. It is the last element, the life assurance, which seems out of place but is in fact crucial to the schemes now on the market. By offering life assurance you remove yourself from the Prevention of Fraud (Investments) Act which governs unit trusts and at the same time you gain the benefit of the tax pri- vileges extended to -the life insurance com- panies by successive governments.
Under the Prevention of Fraud Act, unit trusts are not allowed to invest directly in property. There are two perfecy good reasons for this and it is arguabl( whether the property bond gets round the difficul- ties satisfactorily. The first is the problem of valuation. An independently established price for an ordinary share is almost always available; day-to-day dealings ensure that. Some share prices may be somewhat un- realistic in the sense that disposal of a large line of shares would sharply depress the existing level but they are a good deal more satisfactory a measurement than there is available in the property market. As no single property asset is quite like another, property valuation depends partly upon the valuer's own ideas and long periods may elapse between sales of broadly similar pro- perty. It is a matter of some controversy how you adjust today's prices for whatever degree of inflation is thought likely. It is no use taking a deliberately conservative view of the property market because then you are being unfair to existing holders of your property bonds by letting in new investors too cheaply : on the other band, if you are systematically over-optimistic you build up a fine record but the fund goes bust when you have to realise investments.
The second problem recognized by the ex- isting unit trust ligislation but dodged by property bonds is that of liquidity. In conventional unit trusts, unit holders are always able to realise their investments be- cause the managers can be sure of selling the underlying shares on the stock market. This is not so for property funds. No day- to-day market exists for property. With the best will in the world it can take months to sell a particular office block or shop de- velopment. In fact property bond mana- gers retain the right to suspend encashment by bondholders for six months.
The astonishing aspect of all this is the absence of regulations. Nobody likes government intervention but it has been found necessary to provide savers with statutory protection in most fields. As far as property bonds are concerned I should like to see it established that portfolio valuations must be carried out by inde- pendent valuers at regular intervals. As for liquidity, it is surely essential that a pro- portion of each fund should be held in cash. This is a rule which the banks and building societies have to observe. Two other points: managers should not (repeat not) be able to trade with associates (e.g. a property group trading with a property bond off-shoot) and a scale of management charges should be laid down.
Who is who in property bonds? There are five groups in business. Largest is Abbey Property Bonds, which uses Ham- bros Bank as property manager. Oldest is City of Westminster (three years), whose properties are valued by outside surveyors (unlike Abbey Property). Others are Cru- sader Growth Property Bonds (part of the Bowring group), Fordham Property Bonds (masterminded by `young property tycoon' Mr David Rowlands) and Property Growth Bonds (with which Lazards seem to have some connection). There are some good names here, but I think readers should watch out.
It is a pleasure to turn to an investment I can recommend with enthusiasm. After years of neglect, the market in local authority yearling bonds is attracting the interest of private investors. The reason is simply that yields have gone over 10 per cent. Two weeks ago a batch of these bonds was issued with a 101 per cent coupon, last week the coupon was 10+ per cent. You can deal in them on the Stock Exchange in the nor- mal way. As their name suggests, they are redeemable at the end of twelve months. And as deposits with local authorities are only earning 91 per cent or so for the twelve- month period at the moment, yearling bonds are particularly attractive. The safety of these securities is unimpeachable; and their short life preserves them from major fluctu- ations in price should you need to sell out before the end of the year.
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