The PUT sector came off by 3.3% on the date of the announcement, as institutions and portfolio houses lightened exposure to some of the larger stocks. This compared favourably to the All Share, which was dragged 6.5% lower. Since then, the All Share has actually recovered all of its losses, while the PUT index remains 3.9% lower than levels pertaining pre the MPC meeting.
With little consensus as to the future direction of interest rates, what then is the likely investment scenario for PUTs over the next few months?
Relative to the earnings of general equities, PUTs’ distributions are considerably more stable and predictable thanks to the long-term, escalating leases in place with a broad selection of tenants. Gearing in PUTs remains relatively low, and where debt has been used, it is typically fixed for varying periods into the future. Because of the high yields from listed property, the instrument class is closely benchmarked with bonds, which, by implication makes PUTs interest rate-sensitive, and the capital values (share prices) will generally drop in the face of upward pressure on the yield.
James Templeton, spokesperson for the Association of Property Unit Trusts, believes the market reaction may have been overdone.
“Despite the rise in interest rates, the fundamentals for the property market remain robust,” says Templeton. “Whereas the bond income is static, the PUTs are in a strong growth phase with distributions expected to grow by around 7,5% annually over the next two years,” he adds.
Growth fundamentals aside, the market perception holds that higher interest rates are bad for property investors, but this may vary from fund to fund. Distinct from many other property investment structures, PUTs employ very little gearing. “This means,“ says Templeton, “that the rate hike will not affect profitability to the extent of some of the other more leveraged property instruments, or equities in general.”