Property Leaders trio waves the white flag in lacklustre market

Friday 6th July 2001

By Peter V O'Brien

The New Zealand sharemarket will shrink again if shareholders approve a proposal to wind up three listed property companies, Property Leaders Australia, Property Leaders New Zealand and Property Leaders Australia and New Zealand.

A statement from the group last Friday said directors planned to put wind-up resolutions to the respective annual meeting to be held on August 23.

The statement said the concept behind the establishment of the three companies of a passive investment fund based on publicly listed properties, with the fund itself being publicly listed, was an excellent one but it had not found favour with the market.

Chairman Bill Wilson said part of the reason was timing, with the property sector attracting limited interest in recent years, particularly in New Zealand.

Mr Wilson said the three listed Property Leaders companies had consequently struggled to attract new investors or investment funds against competition from a "host of new managed funds products" introduced to the market since the companies were listed in 1998.

The three companies currently had between them about 1000 investors and funds invested of $32 million.

Without the benefit of the investment fund being much larger, the administration costs associated with investing through publicly listed companies had restricted the returns available to shareholders.

Mr Wilson said the very real possibility of the Property Leaders companies losing their tax-free status from Inland Revenue in relation to capital gains was also on the horizon.

The companies had received at formation a three-year binding ruling excluding them from tax on capital gains and they would not have been formed without the exemption, which expires in March next year.

The Property Leaders companies were formed under the auspices of Guardian Trust and probably seemed a good idea at the time but they never set the market on fire.

The share prices have been dull since listing. Property Leaders Australia's four-year high was $1.12 and the four-year low 80c. Property Leaders Australia and New Zealand's high and low were respectively $1.16 and 80c and Property Leader New Zealand's figures were respectively $1.07 and 65c.

The companies reported in June on the year ended March 31. Results were said to remain in line with the corresponding UBS Warburg property indices and, like previous results, continued to "maintain efficient index tracking."

The report said there was a significant increase in revenue for the three companies compared with the previous year.

It was due mainly to the significantly improved market performance of the underlying property security investments as opposed to the previous year and was reflected in revaluations of the Property Leaders investments.

Mr Wilson's comments last week about administration costs would be applicable to all managed investment funds, passive or otherwise. A big fund can operate more efficiently in terms of costs, than a small one. Administration costs of, say, a $50 million fund, are not five times the costs of a $10 million operation.

Share prices of the companies last week were close to asset backing. Property Leaders Australia was priced at $1.05 and had a net asset backing of $1.03, Property Leaders Australia and New Zealand sold at $1.05 against nta of 97c and Property Leaders New Zealand's price was 85c and NTA was 82c.

There is nothing unusual in shares associated with property, directly or in the Property Leaders cases indirectly, selling near asset backing, although company directors and executives certainly have a case when they moan about prices being at a substantial discount to NTA.

The proposal to wind up the Property Leaders companies was ironic, given their much improved profitability this year, mainly resulting from a revaluation of the underlying securities. There were substantial writedowns of investments in the year ended March 2000 on the "mark to market" system in managed equity funds.

Managing director Anthony Quirk referred to the 1999/00 situation when he addressed last year's annual meeting.

He said rising interest rates, increased vacancy rates and pressure on rental levels contributed to a tough year for New Zealand commercial property.

Those factors led to a disappointing performance from New Zealand property companies with a commercial property orientation, which had directly affected the return from some Property Leaders New Zealand investments over that year, given its passive index approach.

There were problems in Australia property companies in 1999/00. Property Leaders' investment there were also revalued downward for the year ended March 2000.

Winding up the Property Leaders group in an orderly manner seems a sensible approach, on the basis of Mr Wilson's statement. The company's investors can probably get better returns elsewhere, either on their own account or through some other fund, but a reduction in equity options, however small, further narrows an already narrow sharemarket.

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