Investment risk

Each property company owns multiple buildings and usually these buildings are funded by multiple loans so even with 8 businesses, risks of business failure are greatly reduced. Each property company has multiple tenants instead of one like the traditional local residential investment.

Larger investments by clients in excess of my minimum will have more businesses in their portfolios but it is not envisaged to have much more than 15 businesses.

Too much diversification with traditional unit trust portfolios diversifies return away and this is not what we are aiming to do.

South African country risk

Our investments protect you from South African country risk. It always amazes me that locals do not fully take advantage of the R 4 million offshore investment allowance but keep all their eggs in one basket here.

Underlying assumptions of our investments

The financial crisis pushed the world economy into a deflationary period where hard assets got cheaper. Due to the central banks printing money and increasing the money supply to bail out the big commercial banking institutions that failed we believe INFLATION is now inevitable longer term.

We are assuming that we will be entering an INFLATIONARY period and hard assets like gold,silver, all commodities, infrastructure and real estate do well in this type of period. Of all the aforementioned hard assets only real estate and infrastructure have contractual arrangements with counter parties which ensures that their incomes are stable and ensuing dividend income streams to investors are very reliable.

Rental contracts incorporate fixed, market related or inflation adjusted rental escalations. Our investments should provide increasing income streams in the form of increasing dividends over time. This can be modeled on the excel spreadsheet for Charter Hall Office REIT.

As a result of the above assumptions we believe real estate and infrastructure shares are the best way to play this crisis.

We also believe as past studies of the property sector shares have proved, we will have what is known as reversion to NTA per share - (Net tangible assets per share). Currently the shares are trading below their NTA per share and over time this will correct so that share market prices align themselves with these figures. The NTA (fair value) of Charter Hall Office trust is currently 44c (18/05/2010).

We assume that the period of property write downs is over and fair value can now only increase. We say this because we have proof that the building costs per m2 are greater than the written down values. As credit markets improve and the world moves from a deflationary environment to an inflationary environment, higher prices will be obtained for physical property sales. This will cause appraisers to adjust upwards the carrying value of the buildings on the books of these property companies.

As per the attached excel spreadsheet for Charter Hall Office REIT (on the home page of this website) we have two ways to make capital gains:

1) The market price closing the gap to current fair value

2) The market price closing the gap to the new future fair value when asset write ups occur.


Investment not for everyone

This investment is for the intelligent more affluent investor not the average retail investor who pays a monthly debit order to buy unit trusts. The intelligent investor will understand that market prices are at any time not necessary reflective of TRUE VALUE.


I expect clients to understand the concept of what we are trying to do (i.e.) take advantage of this great opportunity to buy solid property businesses at a discount with net rental income streams attached.

In fact we could not have done this in the 1930's because the listed property sector did not exist until the early 1960's. So its an opportunity that has never before presented itself !!

I expect the majority of people who have invested in these types of shares in recent times will as a result of huge recent losses both real and on paper NEVER want to invest in them again !!  Such was the general feeling after the CRASH of the 1930's.

One needs to put this into perspective - this banking crisis has turned a safe asset class into a risky asset class only because the normal rules don't apply for now (i.e.) normally businesses with contractual income streams and hard assets have no trouble in getting finance. Normality will return and these property businesses will prosper again.

This is a focused property investment with exposure to fewer businesses than any traditional unit trust and as a result it will be more volatile from a daily market pricing perspective. Investors must be prepared to be "down on paper" as it is impossible to time the market correctly.

This highlights the difference between the market price and the value of a business.

Share prices will oscillate wildly but over the longer term the value we have bought should be reflected in the market prices. It is not uncommon for a share price to drop over 5% in a day and go back up the next. 

An intelligent investor will see that there is no way a solid property business can be worth more or less on a daily basis !! 

The latest European debt crisis is depressing the markets and presenting a good entry point to get even better value and a higher dividend yield.

Currently market prices are NOT REFLECTING the underlying business value.

One of the reasons for this besides all the fear in the market is that the market prices are often set by the minority of the shareholders (i.e.) if you look at the volume of shares traded on any given day for a particular share and express this as a percentage of the shares that are available to be traded (the issued shares) the % is very low. Sometimes less than 1% of the shares trade.

So the majority of the shareholders don't give their shares away at these low prices !! This market mispricing occurs to a greater degree with the smaller listed companies but it also occurs amongst the bigger companies - its just that the smaller ones are not so researched by the big institutions and tend to be overlooked for longer !!

It is my job as portfolio manager to ensure the property/infrastructure businesses we buy are undervalued and have strong balance sheets and NEVER SELL THE MAJORITY OF THEIR PROPERTIES AT A FIRE SALE PRICE IN A FORCED SALE.

The road will be rocky ahead as the world's financial system recovers but as long as the companies we invest into are fundamentally sound, my clients and I will MAKE A LOT OF MONEY over the next 5 years.