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Property shares yield results

Those of you that have been reading my posts for a long time may remember my pre-credit crunch posts about commercial property shares. I posted that I thought commercial property shares represented a good income generating opportunity.

Well I got it WRONG, big time, ….property companies were massively over geared.

A credit crunch and a dive in commercial property values saw many property companies become worthless over night. 

Throw in the towel?

Most people, having failed once would of thrown in the towel and not tried the same thing again. I subscribe though to the Robert the Bruce school of thought. Remember the story about the self proclaimed ‘King of the Scots’ who on the edge of defeat drew inspiration from watching a spider trying to thread its web. Despite frequent failures it kept on trying until eventually winning out underlining the maxim "if at first you don’t succeed, try, try again."

Learning from your mistakes.

This time the banks aren’t bust. Property companies are often trading at a significant discount to their assets often over 25%. Most of the ones that have survived have much lower gearing levels than at the height of the boom having recapitalised or sold off property. Many property companies are also paying hefty dividends approaching a 10% yield, much higher than on many buy-to-let property yields.

Their mortgage costs are also fixed as many opted for fixed rate mortgage or SWAPS thereby insulating them against a sudden rise in the interest rate. Inflation is taking a hold; which is good news for property shares, which generally carry a relatively high level of debt. Inflation as landlords know is a debtors best friend.

Commercial property a once in a generation opportunity?

If you believe that lightening doesn’t strike twice in the same spot and go along with the maxim of the most successful investor in history, Warren Buffet who advises investors to: "Be greedy when others are fearful."

 Then now could be just the time to take a punt on some commercial property shares.

The risks are that commercial property values tank as vacancy levels rise and rents fall. A real possibility given the precarious state of the world economy. 

However, this time we know the risks and these in my view are priced into share valuations. Commercial property shares therefore may just make a good long-term buy and generate a fair bit of income into the bargain.

Which commercial property shares to buy?

I’ve opted for Picton Property Income (PCTN). This company is a Guernsey domiciled investor in UK commercial property

It’s trading at about a 25% discount to its’ underlying Net Asset Value (NAV). At the current share price of 45p it’s annual dividend of 4p means that it is yielding just under 9%.
Gearing is conservative at under 50%. The price is near it’s year low of 43.75p and some way shy of the high of 54p. What’s more is that I was impressed with the way the management took decisive action during the credit crunch to avoid breaching it’s banking covenants.

Gearing up your income

Landlords are familiar with the concept of gearing as most of us borrow to finance property investments. For those that like to live dangerously it is possible to gear up on your purchase of commercial property shares by opening a CFD account (Contract For a Difference) with a broker, mine is through Cityindex.

This allows you to buy shares but have a loan to buy a proportion of the stock. In the case of Picton the margin is 65%; which means that you need the money to buy approximately one third of the shares you buy and then borrow the money to purchase the other two thirds. So if you buy 3000 you effectively buy 1000 and then borrow the money to buy the other 2000. The current interest rate on your loan is 2.5% above LIBOR or 3%.

So for those investors with an appetite for risk you can potentially gear up on your property share holding and thereby increasing your income on your capital invested. Take for example the above scenario. You would receive annual income of £120 on your 3000 shares. After paying your interest payments of 3% on the £900 loan to buy the 2000 shares; which equates to £27. This leaves you a net dividend of £93 on the £450 invested in your 1000 shares and works out at a annual income of over 20% pa.

Not bad if you are prepared for the RISK!!

Discounted landlord insurance with Alan Boswell

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