Hi Mrs a,On a purchase price of $65 and an average BBSW at 5.2%...

Hi Mrs a,

On a purchase price of $65 and an average BBSW at 5.2% from 2009 onwards I have an "average" 33.5%pa return until 2011. This drops down to 23.1% until 2015 when the AAZPB must be redeemed. If you think the BBSW will go lower than 5.2% then subtract from this return or add if the think rates will stay higher. 31.5%, 32.5% or 33.5% who cares, a couple of percent interest is obviously nothing at these prices.

To say Capitaland or any REIT is in trouble at the moment because their share price has fallen is both stating the bleeding obvious and perhaps confusing price action with insolvency risk. BHP dropped 50% in the last year, are on their way to insolvency too?

Fear, loathing, de-leveraging and severe liquidity preference are stalking the market right now, everyones cash flow is stretched and share price is in trouble. AAZPB have extreme illiquidity and so the nervousness of what is the market price if one is to get in or out is amplified greatly. $65 today could be $55 or $75 tomorrow on a small trade.

I would suggest first read the AAZPB prospectus and satisfy yourself of all the terms and conditions under which they operate. Then consider financial risk of ALZ in view of a large capital raising that has already brought their gearing down to the bottom of the REIT sector (32%). Then consider the financial risk of Capitaland, which still has a modest 43% gearing but with significant cash liquidity. When considering the insolvency risk of Capitaland, consider that Temasek is a majority 40% owner of Capitaland and that Temasek is one of the largest and soveriegn wealth funds in the world of unquestionable strength ($18B profit 2008 with little debt). Temasek has too much interest in it's baby and pride in Sinagporean financial credibility to let Capitaland go belly-up.

For all intent and purpose, ALZ is Capitaland because ALZ is 60% owned by them and represents a very significant $1.65B of their net assets. ALZ will only go to the banks if Capitaland goes to the banks because this majority ownership creates an imperative to save ALZ, unlike other REIT's who only have investors that run at the first sign of trouble (eg CNP, VPG etc). Capitaland will get recapitalised by Temasek and other holders if need be rather than see the largest REIT in Asia sold by the banks at the bottom of the property cycle.... and property does go in cycles. If you think inflation and the debasing of fiat money is dead and buried I still wouldsn't bet on it.

The million dollar question is indeed what price to compensate for the financial risk of AAZPB. IMHO the financial risk is low even though ALZ will go through a very rough patch during this recession as anticipated by share price falling $2 to 38c. I have stress tested ALZ on a 40% fall in property prices and gearing only gets up to 57%, assuming no profits and sales are recycled back into the balance sheet which of course they will be. The biggest risk and the one which has seen them sold down IMO is liquidity risk. No-one wants their money in a stock that can fall at a drop of a hat and is difficult to get back out of in the short term without incurring a significant capital loss. I also think this liquidity risk has been largely priced in but then again I'm a believer.

Value in AAZPB is largely seen through the eye's of the beholder, dependent on personal circumstances and risk profile. Don't take my word for it, DYOR and form your own opionion. I appreciate all and any considered opinions to put in the mix and I have/will change my mind if the situation proves otherwise.

goodluck