Lenghty Installment shares on property funds...??

[mack1]

It has been my understanding that installment shares usually run for a year at a time and that these can then be rolled over if you choose not to pay the final installment, by its due date. I have however noticed, that you can now purchase installment shares on some of the property stocks such as Growthpoint and Redefine which run until 2016, which means that you only have to pay the final installment in 9 years time! This almost seems to be a no brainer to buy (if you want to invest in property stocks) as you only pay a portion of the share now, receive almost all the benefits of a normal share, specifically dividends/interest, and then only have pay the balance of the share in 9 years. In nine years time, this balance would be an insignificant amount! You would also think that in 9 years time the value of a share such as Growthpoint, would be quite significant as well... Have I missed something here? Why would these Installments being running for such a long time? I look forward to anyone's input....

[SimonPB]

these are self funding instalment, locally they're called variable strike warrants in that the strike changes every quarter.

How they work is that every quarter the strike is reduced by the interest received from the prop company and also the strike is increased by the interest rate that the issuer (Investec) charges for the loan (remember that when you buy one of these they buy the underlying share, essentially lending you the differnece). Now what will happen over time is that the strike price drops off and will eventually hit zero. When that happens they expire and Investec will give you the underlying shares in a one for one basis.

So they work for people who want prop stocks and do not require the income just yet. By buying these you give up the income but get in at a discount. I have some and they work very well.

[SimonPB]

point I must be clear about - you receive no income from these.

[barry_1]

Thanks Mackl,for bringing this to our attention,as i had not noticed this before.I know nothing about EDS and have installments of APB and RDF with the Standard Bank.Yes it seems a very good idea and might qualify for capital gain with the receiver? How about it SB can u also issue longer term installments?

[SimonPB]

small point - these are warrants not instalments. Gearing is very low at around 1.5x and yes if you hold then for three years it'l be CGT but in theory if you don't sell and hold the stocks after expiry then no tax event.

[mack1]

Simon, you have to excuse my ignorance as I have only been investing for just over a year. If my reasoning for investing in the stock market is purely to build a portfolio over the next 30 years to take into retirement with me and I am thus buying shares that I believe are solid and which I want to hold for long term (I am thus not a trader); does buying these "installments" make sense, or would you suggest another form of strategy?

[SimonPB]

for a long term investor who does not require the income from these prop stocks for another 9 years (until 2016). They are an excellent discounted entry into prop stocks.

[mack1]

Simon, Once again, my ignorance, but when you mention the income are you referring to the dividends/interest - do I still get these paid on a quarterly/half yearly basis or are you reffering to the capital appreciation due to the increase in the price of the share?

[SimonPB]

you receive no income (div or interest), the payment is kept by the issuer and used to offset the loan.