Listed Property Trusts

[Excelsior]

Can someone give me a quick lesson on what is meant by Cap Rate which is frequently referred to in LPT literature, I know that when NAV falls the Cap Rate rises but what exactly is it - a ratio?

[fungus pudding]

Can someone give me a quick lesson on what is meant by Cap Rate which is frequently referred to in LPT literature, I know that when NAV falls the Cap Rate rises but what exactly is it - a ratio?

It's the capitilisation rate. Yes it's the ratio formed by the price relative to income. A building with a rental income of 100,000 capitalised at 10% makes the building worth $1 mlllion.
If the prevailing cap rates for say an industrial building in Boomtown is 8% then by knowing the rent, you can quickly establish it's value. An 8% cap rate means the bldg is worth 12.5 times the rent. (100 divided by 8 = 12.5) So if it's returning 60k the value will be 750k.
It all gets a bit confusing as most commercial bldgs are net leases (tenant pays outgoings) so cap rate is accurate. Unfortunately most residential properties quote cap rates on the gross income, which strictly speaking is incorrect. Should be on the net.

[Excelsior]

Thnx for that. Thinking of buying some KIP at current levels but came across a Herald article from Feb 4 with Bruce Sheppard quoted as below

Shareholders Association chairman Bruce Sheppard criticised the LPT sector generally and warned against it.
He said reading research reports without taking into account the somewhat unusual structure of LPTs or the future of their businesses was flawed.
"The NTAs are the asset values unencumbered by a management contract," Sheppard said. "The discount has always been an issue with these stocks as the management arrangements, in essence, encumber the assets by the unbreakable costs of management which are often not value for money."
LPTs appeared to be good value now but he questioned how long this would last because the sector depended on rents flowing regularly, and current rates were unrealistic, particularly in large shopping centres.
"The divided yields are currently attractive and may well be reasonably sustainable until the tenants start falling over which is likely, especially for retail funds which all have grossly over-sold retail space and are a disaster just waiting to happen."

Is situation any worse for LPTs than other companies. Management still does well as shareholders suffer.

[fungus pudding]

Thnx for that. Thinking of buying some KIP at current levels but came across a Herald article from Feb 4 with Bruce Sheppard quoted as below

Shareholders Association chairman Bruce Sheppard criticised the LPT sector generally and warned against it.
He said reading research reports without taking into account the somewhat unusual structure of LPTs or the future of their businesses was flawed.
"The NTAs are the asset values unencumbered by a management contract," Sheppard said. "The discount has always been an issue with these stocks as the management arrangements, in essence, encumber the assets by the unbreakable costs of management which are often not value for money."
LPTs appeared to be good value now but he questioned how long this would last because the sector depended on rents flowing regularly, and current rates were unrealistic, particularly in large shopping centres.
"The divided yields are currently attractive and may well be reasonably sustainable until the tenants start falling over which is likely, especially for retail funds which all have grossly over-sold retail space and are a disaster just waiting to happen."

Is situation any worse for LPTs than other companies. Management still does well as shareholders suffer.

To answer last point first: no worse, but in my view a hell of a lot safer because owning buildings doesn't really require great skill, therefore lower risk. Shepard is partly right; there are management costs, but unavoidable for an individual who wants to get involved with substantial commercial properties. I'm not sure that retail rents are as vulnerable as he thinks, it's anyone's guess, but NZ seems to be reasonably safe. At current prices I reckon some LPTs are a steal, KIP being one. I like ING. I only invest in real estate, and real estate shares. Don't know the first thing about other shares, except they all seem too risky to me compared to a pile of bricks on a commercial or industrial site..