Merger holds implications for stock exchange

Posted On Tuesday, 17 July 2001 03:01 Published by eProp Commercial Property News
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Choice between unit trust or loan stock could reshape property sector IF GRAYPROP and Grayvest merge they will have to choose whether to house the newly created entity either in a property loan stock company or a property unit trust.

JSEThe two companies recently issued a joint cautionary notice saying they were exploring the possibility of merging.
Their choice of vehicle holds significant implications for the listed property sectors of the JSE Securities Exchange SA, particularly in terms of the sector's size, quality and liquidity. The sector that wins a merged Grayprop could be on the path to becoming the heart of listed property in SA.
If Grayprop and Grayvest merge they will have to choose between property unit trust Grayprop and property loan stock Grayvest as their listed entity.
Analysts say the liquidity of the merged entity will be enhanced, and this will attract new investors.
With estimated market capitalisation of more than R2bn, unit trusts are likely to increase their demand for the merged entity.
Unit trusts are restricted by legislation from holding an interest of greater than 5% in any company with a market capitalisation of less than R2bn. This limit rises to 10% in companies with market capitalisation greater than R2bn.
Property analysts say investors' appetite for risk is key in choosing between a property loan stock and a property unit trust.
Property unit trusts are regarded as less risky than property loan stocks as they are more tightly regulated than the latter. Property unit trusts' gearing is limited to 5%, but loan stocks' gearing is unlimited.
However, this will change with the introduction of the collective investment schemes bill later in the year. This will permit property unit trusts to raise gearing to 30%.
Property unit trusts will still be closely regulated through legislation and a board of trustees attached to each property unit trust.
An analyst says property unit trusts exist primarily to serve riskaverse investors. The property unit trust sector has been the darling of retirement funds, which for good reasons are highly sensitive to risk. For such funds, high gearing represents high risk.
Rental income is relatively fixed, while interest rates are volatile. Gearing for property loan stocks, therefore, amounts to speculating on interest rates.
A recent dispute between the management and unit holders of loan stock Octodec illustrated investors' aversion to risk.
Octodec raised its gearing from about 25% to 67% to acquire Killarney Mall.
This alarmed some of the unit holders, including Allan Gray-controlled funds, which said their investment was not suited for such high gearing.
Allan Gray fought tooth and nail to block the decision to raise Octodec's gearing, taking the matter to the high court.
Many other loan stock companies tend to maintain their gearing below 30% for fear of being caught on the downside should the market turn south.
One analyst said track record would be a key factor in deciding which vehicle would house a merged Grayprop.
The property unit trust has an upper hand with track record: it was formed in 1997, while Grayvest was established only last year.
However, if the merged entity seeks to grow fast it will have to be housed in Grayvest, the property loan stock company which offers unlimited gearing and incomparable flexibility.

Last modified on Thursday, 24 April 2014 10:43

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