Money Matters: When that share is really a receipt

By MARY HOLM

Instalment receipts become shares only when the second instalment is paid, so holders who sell rather than pay up drive share prices down

Q: I am puzzled and hope you can help.

In December, I bought some Capital Properties shares at 50c each with a further 50c to be paid in June 2000.

The return on these shares was promised to be initially 22 per cent, dropping to 11 per cent when the final 50c was paid.

These shares are now selling at 30c, and at that price show a yield of 42 per cent.

If the yield is so good (the highest of any New Zealand share) why are investors not rushing to buy? Could it be that other investors know something I don't know?


A: No, you know it too. But it's a bit tricky.

Capital Properties shares are actually instalment receipts - they become shares when the second payment is made on them. Instalment receipts are pretty new to New Zealand, and many people seem confused about them.

Firstly, let's get a few numbers straight. You've got your price or your timing wrong. Capital Properties was selling for around 40c to 45c last December. Either you bought earlier or you paid less.

People who didn't buy in the initial public offering, in November 1998, but bought on the market since have to pay 57c, not 50c, in the second instalment. Finally, at 30c, the yield equals about 37 per cent, by my reckoning.

Capital Properties instalment receipts are selling so cheaply partly because rising interest rates and other factors have hurt all property shares.

But probably of more importance, they're cheap because holders know they have to come up with the second payment per receipt in June.

Perhaps some holders don't have that money. They had hoped their investment would rise in value - as it did when it first listed - and had planned to sell before now.

If they hold on until June and then can't come up with the second instalment, their receipts become worthless. Some might be desperate to sell, pushing the price down.

That, in turn, leads others to think: "The market says this investment isn't worth much. I'd better get out before I have to put more money in." That pushes the price down further. It's a spiral.

Meanwhile, you say, there seems to be a good buying opportunity. Trouble is, anyone who buys now must come up with 57c per receipt next month. Their investment is then 87c. The yield on 87c will be around 13 per cent - not quite 37 per cent, but still not bad. Don't forget, though, that if they want to sell the shares later there's always a chance they might not get back what they put in.

Sharebroker Craig & Co is advising Capital Properties holders to hang in there and pay the final instalment.

"Any property investment should be regarded as primarily a yield investment, and Capital Properties is no different," the firm says in a recent newsletter.

"The dividend yield at 12.7 per cent continues to be attractive and should remain so. We would expect the acquisition of Shortland Properties to have a positive impact on earnings over time."

Given the current low price, those who simply can't meet the second payment might do best by selling only as many receipts as they must to make that payment.

They'll get a little help from Capital Properties' next quarterly dividend, to be announced soon and probably paid before the second instalment is due, chief executive Nick Wevers says.

Q: I was disappointed to see in your April 26 article the canard that one can obtain from the property file at a council office all the information about a property which would normally be contained in a Land Information Memorandum (Lim).

I do not know what the practice is in other cities, but so far as Tauranga and Auckland are concerned, what you have said is incorrect.

It is something some real estate agents will tell a buyer to prevent the buyer from applying for a Lim. The Lim procedure can take up to 10 working days and also would warn the buyer of faults in the property that the agent might prefer the buyer was not aware of.

Enclosed is a copy of a warning pamphlet published by the Tauranga District Council which lists the items covered by the Lim that are not covered by the building file.

Similarly, if you phone the Auckland City Council they will no doubt advise you, as they advised us, that there is more information contained in a Lim than what is in a site file.

Furthermore, at Auckland City Council there is apparently a file for each property in several different departments, and to look at all of them would cost more than the price of obtaining a Lim.

I do ask that you correct this. As a solicitor who acts for purchasers of property buyers, I am too often faced with clients who have signed agreements on the basis of checking the property file without first obtaining a Lim. Usually it will not matter, but occasionally it does.


A: Unfortunately, what you said isn't quite correct either.

These days, at the Auckland City Council, Lims take only one to three working days if you pay $150, or less than four hours if you pay $200, says the council's Rachael Hanna.

She also says you're wrong when you say the files for each property are in several different departments.

And in most instances, it wouldn't cost more to see and copy the files than to get a Lim.

Nevertheless, she agrees with your basic point, that it's better to get a Lim.

"It takes time to view the information manually. And much of the information may not relate specifically to the inquiry," she says.

And, as you say, occasionally the extra information in a Lim may be all-important.

Q: I am fascinated by your fascination with annuities. I share your fondness for them and the frustration that New Zealand's market is so underdeveloped.

In last week's bifWeekend Herald piece you recommend an annuity for a couple from the $400,000 they have saved.

This gives a joint annuity of $14,700, rising by 2 per cent a year. But I can't see how this could be a good thing.

If they invested the $400,000 at 7.5 per cent they would get a gross $30,000. This is then taxed at 21 per cent if they both have other income of over $9500, so that the net income falls to $23,700.

If they consumed $14,700, they would have $9000 to add to their savings - more than enough to allow them to consume $14,700 plus 2 per cent the next year.

This way they could retain their capital for their estate while getting all the advantages of the steady income stream. The guarantee of 10 years of payments, i.e. a maximum of $147,000 plus the compounding of the 2 per cent, is peanuts.

The insurance company selling the annuity would be laughing, except that, of course, they have to pay tax at the higher rate of 33 per cent.


A:Perhaps not laughing. Perhaps just being cautious.

As I said last week to the 40-year-old man and 50-year-old woman who want to retire to their house by the beach, chances are that they will live for several decades yet.

And nobody knows what will happen to interest rates and inflation in that time.

If they get an annuity, the insurance company doesn't want to be caught short by lower-than-expected returns. So it promises rather low payments. At the same time, though, the couple gets certainty of income.

True, if interest rates stay at their current level or rise, the couple is stuck with an annuity that will give them a lower income than they could otherwise get.

But if rates fall a fair bit - and that's always on the cards - they will be glad to receive more than they could get on a term deposit.

Still, you make a valid point. Interest rates would have to fall a fair bit before the couple was better off, over the long haul, with the annuity.

The fact is that annuities are not such a good deal for people as young as them.

The insurance company expects to pay out for too many years.

But, if the couple follows my suggestion of working and saving for a while longer, they'll get higher annuity payments - not just because they can buy a bigger annuity but also because their older ages will work in their favour.

I still think annuities can work well, particularly for older people.

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