No way

A quick grumble... I have two picks in the property sector that I hold units in - GrowthPoint and ApexHi B...

Earlier this week I saw the offer from Redefine Income Fund to buy out the units in Madison and ApexHi.

As an ApexHi shareholder I intend voting against the offer. The distribution yield in APA / APB exceeds what was on offer in Redefine (irrespective of the promises for 2010.)

On top of that the conversion ratio doesn't seem particularly generous to APA / APB unit holders to convert to Redefine.

Finally Redefine is going to have to issue a bucket load of new shares to fund the deal.

Definately voting against the deal and I encourage other ApexHi unit holders to do so as well...

I don't get it!

But Barack Obama has won, the world should be rejoicing that the leader of the free world is back in sensible hands... we hope...

Since Obama won the election, the Dow Jones has declined nearly 1000 points (more than 9%) - there's no patriot rally going on here.

A big contributor to this was the announcement by Toyota that it expected operating profit to decline some 56% next year. If it had been BMW or Mercedes or one of the luxury brands, then yeah maybe I could have understood it - but Toyota which services the ordinary 'pleb' market - geez things must be bad...

Ok - if you haven't worked it out, I'm in something of a sarky mood this morning. But I'll live.

The JSE all share index fell more than 3.4% yesterday resuming the downward trend. My personal opinion is that we are going to see the All Share Index trading at or around the 18 000 level by the end of 2008.

The way I see it playing out is that we're going to see the odd big down day, followed by some bottom feeders coming into the market and then after the middle of November, the fund managers are going to say - 'enough! We're going to sit on the sidelines until 2009 starts'. This is probably going to have the affect of a gradual downward drift.

My Strategy
Is it going to create opportunities? I think so - but don't expect to see any returns on it during 2009.

I read a report that SA asset manager Allan Gray was expecting the JSE to move down to the mid 16000 level over the next four years. A couple of other investors I know indicate that this is likely to continue lower than this.

Tough one to call, but logically if you have nice spread of assets, you should be able to generate some income and with any luck position yourself at relatively low entry points, to take advantage of the next upward moves in markets.

As mentioned in my previous post, I've got my grubby little paws on small cap pharma firm Bioscience Brands. I've discussed the prospects for this business in previous posts, so I'm not going to touch on it again.

Next on my shopping list is to add to my Exchange Traded Fund (ETF) and Property (Fixed income) holdings.

I've got some exposure to the Japanese economy through my DBXJP and to balance it out I'm going to switch my attention to the US economy. My logic is very simple and basic here - for all the doom and gloom that America is a dying economy, it is also one of the world's biggest and most sophisticated - Getting some exposure to the hard dollar earnings here is attractive for a South African investor, particularly when the US is out of favour. For this reason, I'm going to pick up a few of the DBXUS, exchange traded fund.

Property and fixed income are also an important component of any balanced portfolio. The distributions that these guys throw off, mean that you can benefit from some capital appreciation as well as the cash flow. My prefered property stock is the Apexhi-B units. I'm a little bit worried about the increasing vacancies in the shopping malls around the country, but not worried enough to stop me buying into quality portfolios such as those managed by Apex-hi and Growthpoint.

I think for many of us ordinary investors who don't have benchmarks to beat, we have to accept that we are buying into downward trends, but we are not trying to pick the bottom of the market - we're trying to build a valuable portfolio, one small brick at a time....

Property and stock market correlation

An interesting piece was run on Realestateweb yesterday with two rather big name property players giving contrasting views on whether the stock market collapse would have a negative impact on housing prices in South Africa.

Saul Geffen, the CEO of ooba, the country's biggest mortgage originator, apparently described the property market as compelling and argued that investors that were tired of the uncertainty of the stock market would instead move back into property because it was something tangible because they could touch and feel it.

Samuel Seeff, chairman of the Seeff Properties on the other hand argues that the uncertainty and economic downturn would probably further depress prices and keep investors out of the market.

Now obviously Geffen has to ‘talk his book’ to some extent so I guess we have to try and look at the real factors to find out whose right.

First and foremost, I suspect that many ‘paper millionaires’ have seen much of their wealth get obliterated with the stock market tumble. That obviously affects their credit records.

I don’t think it is rocket science to work out that if you previously had R1m in assets listed on the stock market and those are now worth R700k, you credit score will have decreased. This obviously makes you more of a credit risk than it did than before and the credit you qualify for will be lower.

If one just looks at the general economic consensus going forward, one would think that it gives you some idea of how property is likely to perform…

Yes interest rates may drop next year but lets remember that overall GDO growth is expected to halve for the next two years. That would mean a lot more delinquencies and businesses closing up shop – just in general a lot less extra cash in the consumers hands.

I just don’t buy anybody arguing that property demand and prices is likely to increase in the middle of an economic slowdown that will halve growth prospects.

In terms of prudent capital management, I also don’t expect Absa to be the only bank to put the brakes on clients drawing against their access bonds. There is going to be a hell of a lot less free cash available to draw on.

My final comment on this is as follows:

If you have R10 000 cash and you want exposure to the property market, you are probably faced with 2 options:

A) Put the R10k down as a deposit and apply for a loan which you might or might not get. Lets be blunt – if you are paying a R10k deposit on an investment property, you are probably going to be cash negative on the transaction

B) You put R10k into a quality listed property fund (such as Apexhi or Growthpoint) where you might find your unit price being buffeted a bit depending on the mood of the stock market but you are pretty much guaranteed an 8 – 10% cash positive return

Sorry I don’t buy it – the performance of the stock market would lead the performance of the property market from where I stand….