Capitulation from retail property investors

This week has seen some more dramatic falls in the valuation of property investment companies. Particularly those with a substantial holding in UK property as fear of a slump in values escalate.

Retail investors naive
The irony is that many of the retail investors who are dumping these stocks were the ones who have been buying enthusiastically over the last 12 months, urged on by 'back ground chatter' from the media that property is always a good investment.

Investment companies spotted early on the sales opportunity of riding the property investment wave by launching their own property investment funds. When retail investors bought these funds often on the back of advice from their financial advisor, these funds were already overvalued with retail investors buying into these investment funds at a tiny discount or even a premium to their net asset value and yielding for the investor saver a paltry single digit dividend income of say 3-4%. These valuations all assumed a continued high rate of capital growth which was clearly unsustainable in an already over heated market.

Retail investors reach capitulation point
Sadly these same investors are now selling up as their confidence in these property investment funds and their nerve of loosing more money finally breaks. A capitulation point is rapidly being reached for the share price of many property investment companies as the last of their retail investors finally bail out.

Buying opportunity
The thing is this is just the point when retail investors should be buying more. At these prices a retail saver and investor is buying typically a company trading at 40%+ to its underlying assets. Whats more for an income monkey is that they are yielding near or above 10%. Investors should realise that income yields on property shares are different to normal companies. Very rarely do rents fall, which is the companies primary income stream. Their main cost is servicing their debt so increases in interest rates can be a factor although many of the companies have taken steps to fix these rates. Therefore, incomes are relatively secure irrespective of what happens in the short term to asset values. Asset values will inevitably recover and grow in the longer term.

Property share good bet
Shares in commercial property companies remain a good bet. Why? The main risks to the global economy are an economic slowdown and inflation. I take the first scenario. An economic slowdown will result in a lowering of interest rates. Lower interests reduces a property companies costs and means that they have a higher margin and more revenue with which to pay out in dividend. It also means that a high dividend is more attractive to investors unable to get as high a return through interest paid on cash deposits. Secondly inflation is a debtors friend, as it devalues the real value of a debt. What are property investment companies other than a business that uses their property assets to generate income to pay off their debt. Therefore higher inflation is beneficial to these companies as the values of their debts fall in relation to their assets values and rental values over time.


What shares to buy
For investors and savers interested in the pick of the best high yielding property stocks. COMING SOON my report on the 5 hottest high yielding property stocks to buy.