Smaller Companies: New trust is hot property but risky for investors

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THE LAUNCH of a new property investment trust by Paribas confirms the return to favour of a sector that underperformed the rest of the market by almost 80 per cent from 1988 to 1992.

Applications for shares in the Wigmore trust, which plans to raise up to pounds 50m, are due by Wednesday, and dealings are expected to begin a week later.

With plans to manage Wigmore so that it qualifies for inclusion in a personal equity plan, and the inclusion of a savings scheme, there is no doubt that it is designed to appeal to the private shareholder. Small investors should be wary, however.

Wigmore plans to invest in a portfolio of small quoted property investment companies. If the managers think the potential return justifies the risk, they have left themselves the option of investing in development companies and property traders as well.

Up to 20 per cent of the funds under management may be directed into 'special situations', including putting up cash for corporate restructurings.

With property values rising as yields harden and rents show signs of improving again, Wigmore's investment criteria will appeal to many potential shareholders.

But the concentration on smaller companies exposes investors to several risks. Small property companies tend to be weighted towards secondary properties, the market for which will recover much later than for top-notch City and West End properties, where shortages are already being experienced.

One attraction of small property companies is that they tend to be more heavily borrowed than their larger brethren, which means that as the value of their assets rises, their assets per share rise proportionately faster. But potential investors should bear in mind that high debt levels carry risks as well.

Wigmore has spelt out the 10 largest shares in its initial portfolio. They are City Site Estates, Chesterfield Properties, Ex-Lands, Hemingway Properties, London & Associated Investment Trust, Olives Property, Prior, Southend Property, Tops Estates and Town Centre Securities.

Since September 1992, when sterling's withdrawal from the ERM put a rocket under the sector, seven of the 10 have more than doubled in value. Chesterfield has risen by more than 400 per cent. The shares may still have a way to go, but private investors are often the last to hear about bull markets and it is no coincidence that sales of unit and investment trusts tend to peak with the markets they invest in.

There is a further reason for investors to hold fire. New issues of investment trusts usually fall to an immediate discount to net assets, although this has been narrowing over the past 20 years. There is little point in paying 100p for Wigmore shares if they can be bought in the market after a few days' trading at 95p.

Investment trust managers try to get round that problem these days by issuing warrants with new shares to make them more attractive. In the case of Wigmore, there is one warrant for every five shares issued giving the right to buy a share at 100p in the future. It is not easy to decide whether the value of the warrant will exceed the combined discount on the five shares.

An interesting investment but not one without considerable risks.