Property push proves puzzling

THE definition of scarcity used to be hen’s teeth. Things that do not exist. In the financial world, scarcity has been redefined as a sell notice from a stockbroker, something that is so rare it might as well not exist – which is odd really because now is a time when honest brokers should be screaming sell about a whole class of shares.

Property, or just about anything related to the property market, is so obviously heading into a difficult year thanks to rising interest rates, falling values and falling sales that it is a surprise to find that most property stocks are holding their ground and even rising in price on some days.

Well, what the brokers refuse to do Briefcase will do for them because if you are serious about investing it is just as important to know when to sell, as when to buy.

Five stocks with a heavy property exposure that Briefcase looked at last week illustrate the point.

Cedar Woods, Port Bouvard, WRF, CP1 and Payce Consolidated have all done very well over the past 12 months, with their recent share price highs more than double the low point for the year, and in the case of Port Bouvard up by a factor of four.

Cedar Woods, which has a string of real estate developments in the southern suburbs of Perth and around the beachfront and canals of Mandurah, rose from a 12-month share price low of 67 cents on January 9 to a high of $1.54 on November 4, the day before the Reserve Bank lifted interest rates by 0.25 per cent, the first of what will be a series of interest rate hikes.

To illustrate the extreme sensitivity of property stocks to interest rates (the cost of money) Cedar Woods dropped to $1.35 within seven trading days of that first interest rate move, a fall of 12 per cent.

However, now comes the anomaly in the investment equation.

On December 3, when the Reserve Bank made its second 0.25 per cent move on interest rates Cedar Woods opened at $1.39 and closed at $1.40 – a remarkable one cent rise and a price the stock has held since the second rate hike.

Port Bouvard, another listed southern suburbs property developer, has a similar price trajectory but with a twist.

Its 12-month high of $1.37 was reached on November 4, the day of the first interest rate rise.

Reality dawned on the fools playing the property investment game via Port Bouvard a day later, but the slide to a recent low of $1.06 on December 4 (the day after the second rate rise) was a short-lived affair.

When Briefcase last looked, Port Bouvard was back up to $1.17 – a rise that would have delighted that man who told the tide to retreat, King Canute.

It is a similar story with WRF, which has a funds management arm as well as a property division.

It rose from a 12-month low of 13 cents to hit 27 cents and its now about 21 cents. CP1 and Payce, which are east coast property developers, have both doubled from their low points, but have eased marginally since rates started rising.

The reason for pointing out these share price movements is not to be unkind to the companies involved, however, to highlight the blinkered vision of investors and their advisers. In a nutshell, the property investment game is over – but some people refuse to let go.

The long wave interest rate trend is up, which will have a corrosive effect on profits, magnified by the high cost structures built up when property sales were booming.

In other words, it takes time to adjust. Cedar Woods, for example, had a bumper year to June 30, profit more than doubled from $3.4 million to $7.1 million and is tipped to hit $8 million in the current year.

It may still achieve that target, but it will be a slog.

For investors the warning bells of low auction clearance rates, rising house supply, a falling ratio of listings to sales, are ringing loudly, though obviously not loud enough for everyone.


WHILE we are in a cautionary mood, there is another class of share that Briefcase also rates very lowly – but about which he appears to be an orphan.

Airlines, the flavour of the month after the float of Virgin Blue, are attracting far more investor support than they justly deserve and, in this column’s humble opinion, also have one way to travel in 2004 – down.

The reasons for such pessimism about aviation are obvious to most thinking investors. Apart from the problem no-one talks about (the next terrorist attack somewhere in the world – sorry, didn’t mean to say that), there are other complex issues eating into profits such as fuel costs, and that favourite theme of Briefcase, competition.

It beggars belief that on the day that Virgin Blue floated its founder, Sir Richard Branson, was talking up a price war with Qantas.

"The float has capitalised Virgin Blue to the extent that in an all-out price war with Qantas, we would last twice as long as they would last," Sir Richard was quoted as saying.

Pardon! Could you run that by Briefcase again because a reasonable interpretation is that Sir Richard is confirming the point that both Virgin and Qantas will suffer heavily in a price war and it’s just a question of who can keep his hand in the fire the longest. Wow! That should give investors oodles of confidence. A classic macho brawl with management firing shareholders funds at 10 paces and both sides guaranteed to have their noses and accounts running red.

Quick, rush out and buy more Virgin and Qantas shares so you too can share in the losses.


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