ARTICLES

If done at the right price, nothing beats a buy back 

Macro factors remain the primary drivers in the European Listed Property Market, and with rate cuts on the horizon, the direct market could finally reopen. While this may seem optimistic, recent deals, such as those in the German residential sector, suggest accumulating evidence.

The first to bridge the spread will be companies compelled to sell for balance sheet purposes. However, we may also see transactions from companies without leverage challenges or those with funds remaining after deleveraging.

In such cases, investors often ponder the 'what if' scenario. Naturally skeptical yet rational, most investors are cautious about initial proposals for bold investments. This leaves a few distribution options, notably super dividends and share buybacks.

While theory suggests there is no clear evidence that one creates more value than the other, many investors favor dividends for their straightforward nature. A stock goes ex-dividend, and you receive the cash shortly thereafter. Sell-side analysts often share this view but sometimes overlook a significant factor – TAXES!

Tax regulations vary by country, but most REIT jurisdictions impose a reasonable 15% withholding tax on dividends, whereas the US imposes a noticeable 30%. However, 15% of this tax is recoverable where a Double Taxation Agreement exists with the investor's domicile.

A quick refresher on the rules, as some companies are currently conducting buybacks and hopefully more investors will advocate for this. There are no harmonized rules, but Euronext follows European Union guidelines:

1. Shares must be bought on a trading venue where they are admitted to trading.
2. Orders shall not be placed during auctions, and orders placed beforehand shall not be modified during this phase.
3. Issuers shall not buy more than 25% of the average daily volume on the particular trading venue.
4. Share buybacks cannot be executed at a higher price than the last trade or the highest bid on the trading venue.

The last point requires further explanation. Essentially, a buyback can't exceed the last printed price or cross a spread, so companies must wait on the bid side to be filled by sellers. This rule ensures that companies and REITs can't artificially inflate their share price.

Investors often complain that stocks decline post-buyback as support vanishes. While this is partially true, market purists argue that regardless of the buyback's size, purchasing shares will inevitably prompt sellers to respond, removing them from the market sooner. This process will occur anyway, but with an additional buyer, there is support that the market cannot negate.

In summary, investors should advocate for buybacks rather than special dividends in the current environment.

Credit -Van Lanschot  Kempen Research