Northern rule serves investors well

I believe there’s a strong case for making that oft-quoted northernism, “You don’t get ‘owt for nowt,” much more popular and widespread than it presently is. It’s time for the phrase to raise its profile, get some publicity, spend more time in the public eye.

Why? Well, for a start, there are far too many people who appear to revel in proving the adage wrong. Their identities needn’t bother us here and we’re certainly not about to go viral with their names, or worse still, reveal them to Philip Schofield because the poor man would never leave that comfy-looking settee of his, given the amount of time it would take to read them out.    

Flippancy aside though, the phrase has stood the test of time because it’s incontrovertibly true, though I’m a little concerned that a sizeable number of investors ignore these perceptive, succinct words when it suits them. You can see how closely related to the phrase, “When something looks too good to be true, it probably is” our well-established northernism is. Both are probably hewn from the same great northern oak tree: two irrefutable, indisputable statements of fact.

Of course, on occasion, we may think we have received something for nothing, or examined an attractive-looking opportunity in great depth and concluded that there are no catches, but life’s great score-keeper has a habit of coming along, usually when least expected, to remind us, perhaps not immediately, of our phrase’s veracity.   

Which brings me on to investment trusts, or more particularly property investment trusts and their enormous dividend yields.

It’s easy to see how savers, investors and pensioners in particular yearn for a greater return on their money. Interest rates appear likely to remain anchored at their current level for at least another twelve months and probably well into 2014. Given inflation’s corrosive impact upon our nest eggs (and despite official figures to the contrary, inflation remains a major threat – it has to when one considers that the Bank of England’s ‘quantitative easing’ has effectively boosted the money supply by £375 billion), real rates of return are negative.

In such circumstances, any investment opportunity which appears to offer returns three- or four times greater than those available at a high street bank is bound to be of interest to people. Or at least worth a look before it’s dismissed (at this point, please refer to either of the above phrases) and common sense makes a timely appearance.

However, what makes property investment trusts so beguiling, so siren-like in their appeal, is Britons’ innate love of anything to do with real estate. We’re all experts. Everyone knows the value of their house to within £2.50. We’ve seen the transformational TV programmes and thought, “I could do that.” So why wouldn’t we invest in a property investment trust with a projected dividend yield exceeding 11% (yes, such a beast actually exists) and which, on paper,  trade at a discount to their net asset value (NAV)?

Let’s consider NAV for a second. As everyone knows, there’s a difference between value and worth. Your home might be valued by a reputable estate agent at £x, but it’s only worth what a buyer is prepared to pay you. This could be £x, or £x minus 10%, or even 20%.

Commercial property is covered by this rule too, so if a surveyor values a property asset, be it an office, retail premises or a factory, at £y, it might only be worth £y minus 15%.

In fact, six of the UK’s leading property investment trusts trade at an average discount (currently 15.33%) to what their assets are valued at. In other words, the market is valuing these assets accurately, otherwise the trusts wouldn’t be trading at a discount to NAV.

Then there’s the projected dividend yields. Only one, F&C Commercial Property Investment Trust, could be considered to own a portfolio of high quality property which has held its value through the most tempestuous times, primarily because its portfolio comprises mainly central London properties. Its rent roll reflects this and the trust is currently yielding what appears to be a very sustainable 5.6% gross.

Elsewhere, however, investors might be lured into property investment trusts promising yields more than twice this level (don’t even think about any capital growth), but they should tread very carefully indeed. Is the yield sustainable? Who are their tenants and how strong are their covenants?

Remember: you never get ‘owt for ‘nowt and if something looks too good to be true…well, you know the rest.



posted on 10 November 2012 17:44 byPJS