There are few stock markets in the world which can match the London Stock Exchange for volume of shares traded, variety of company shares on offer and the depth of expertise. Whatever sector, whatever area of the world you are looking at there is sure to be a company with exposure in that area, but what are the pros and cons of buying property shares? What should you be aware of before even seeking professional advice?
There are many areas to consider but first you need to be aware of what is on offer and how these shares are valued.
Whether you are looking for a fledgling property company worth under £10 million or a company worth billions of pounds there is sure to be something for you to look at on the London Stock Exchange. The market has grown very quickly over the last 20 years and many have benefitted from the general boom in the UK property market, but it is not all a bed of roses, some companies have gone to the wall and left shareholders out of pocket.
Property shares such as those in British Land and hundreds of other property companies are traded as you would a share in Marks and Spencer for example. The larger the property company, the more liquid the market and the more chance of being able to deal in large volumes of shares. However, some of the smaller companies may be a little tricky to deal in if you are looking to buy or sell a substantial amount of shares. BE AWARE THAT WITH SMALLER COMPANIES IT MAY BE DIFFICULT TO SELL LARGE CHUNKS OF SHARES ESPECIALLY IN THE MARKET CONDITIONS WE ARE EXPERIENCING TODAY.
Valuing property shares is also a fairly complex affair as there are so many different issues to consider such as the levels of debt, balance sheet asset value, real asset value and potential for the future. As a rule, property shares tend to trade at a small discount to current net asset value in order to accommodate the cost of liquidating the assets if the company ever chose to wind itself up.
That in a nutshell is the UK market in property company shares but what are the pros and cons of exposure to property shares?
Pros of holding property shares
As we touched on above, there are very often very liquid markets in shares which makes buying and selling shares in a property company a whole lot easier, quicker and less expensive than selling a physical property. This is a vital element to consider especially if you need to raise funds at short notice.
While there are a number of large property investors out there with enough backing to spread their risk over a number of properties and property sectors, few individual investors would be able to organise this kind of spread of investments. However, by selecting a number of property companies which operate in different markets and allocating part of your property investment fund to these shares you can structure a portfolio of shares which mirrors the exposure and risk factors you are happy with.
Many of the larger property company shares are covered by literally dozens of research analysts and every aspect of their business and dealings is scrutinised. This in depth information can often give you access to details you would not normally see and allow you to adjust your property share investments accordingly.
While it would be depend upon the type of property company you were looking at, and the area in which they operate, many will pay shareholders fairly chunky dividends. This flow of income from your investment can often help in your everyday life and ensure an ongoing return on your investment rather than just when you sell the shares. In many ways it can be compared to a rental income, but more secure.
We have seen a number of takeover approaches in the property sector and no doubt there will be many more in the pipeline when the sector starts to pick up. The vast majority of takeovers will be at levels in excess of the current asset value to ensure that an offer is attractive to shareholders, with the acquiring group obviously of the opinion that there is more value to be created longer term.
Cons of holding property shares
One main downside of holding property shares is the fact that you will have no input whosoever with regards to the individual properties acquired, the price paid and when they are sold. Your investment is quite literally in the hands of a third party with whom you have trusted your funds.
In difficult economic conditions you can often see the discount at which property shares traditionally trade to their net asset value widen considerably depending up the company in question. It is widely thought that stock markets tend to look 9 months ahead and value investments on that basis. This is in direct contrast to holding a property where the value you would expect to receive in the market would be the ‘price’ now.
Debt can be a problem with property companies in times of recession and economic slowdown as we are seeing now. In the good times the companies would expect to cover interest payments from their rental income but if tenants or businesses struggle to pay their rent on time, companies go under and tenants leave, this can put pressure on a company’s balance sheet. In the good times ‘gearing up’ can lead to large gains but in the bad times it can be a ‘millstone around their neck’.
The advantages and disadvantages of investing directly into property shares probably needs to be considered in terms of your expertise in the sector, funds available and your investment aims. It must also be stressed that you do need to take professional advice before investing into stocks and shares as the value of your investments can go down as well as up.
However, used in the correct manner there is no doubt that investment into one or a wider range of property companies can have serious advantages over direct property investment.