Property fund prices see-saw.

Posted On Thursday, 03 June 2004 02:00 Published by
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Perhaps the roughly 15% fall in the share price of Premium Properties over the past few weeks is warning investors of what could still happen with the prices of other PUTs and PLSs in future.

1 June 2004
 
By Vic de Klerk

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THE price of fixed interest-bearing assets, such as Government bonds, falls when interest rates rise, and vice versa. The most important government bond in Brazil - the emerging economy with the most debt - with a coupon rate of 11% and maturing in 2040, is generally regarded as the benchmark of interest rate expectations in developing countries.

The price of the Brazilian bond has fallen by about 30% since January, from R123 to R83 per R100 of nominal value. On the other hand, its price increased from R42 to R120 between 2002 and early this year, while Brazil’s domestic interest rates fell from 26,7% to 9,5% over the two-year period.

The same trend can currently be detected in the US, where rates on US government bonds with a 10-year term have climbed from 3,65% to the current 4,75% since March. That’s resulted in a 12,5% decline in their capital value.

In SA a rising trend can also be detected in long-term rates. The rate on SA’s popular R153 Government bond, with a term of around six years, has increased from an 8,4% low in October 2003 to the current 10,15%. As a result of this increase in the rate the rand value of the R153 has already dropped by 7,5% from R122 to R113 per R100 of nominal value.

However, it looks as if the increase in SA’s long-term interest rates - and therefore the fall in the value of bonds - is lagging those of the rest of the world. Therefore, long-term interest rates could still rise further.

In addition, it appears as if the increases already reported have not yet really filtered through to the prices of listed PUTs and PLSs. So the expected fall in prices in this sector has not yet occurred everywhere.

The price of Grayprop, the JSE’s largest property fund, is still on its highest-ever level of between 320c and 325c. The consensus view among analysts is that Grayprop’s interest payments over the next three years will not increase much more than between 30c and 34c/share. Grayprop is therefore trading at a future interest return of 10,65%. That’s just a fraction more than investors can now earn from Government bonds.

Perhaps the roughly 15% fall in the share price of Premium Properties over the past few weeks is warning investors of what could still happen with the prices of other PUTs and PLSs in future.


Publisher: Finance Week
Source: Finance Week

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