VALUE INVESTING
Property Value

By Stephen Bland (TMFPyad)
October 10, 2003

What determines value in the property, or if you prefer American, real estate sector? By the way is there any unreal estate? Timeshares perhaps.

It is normal for property shares to trade at a discount to net asset value, so filtering on this feature, as I do for other shares, will throw up nearly the whole sector. Similarly, nearly all properties will have debt so seeking net cash will not necessarily be too helpful. Earnings per share carry little weight as well because it is on the performance of asset value that property shares are usually measured.

So taking the usual levels at which I employ the four PYAD principles when sieving the market, three of them, P, A and D, cannot be used in their normal way when mounting a value search on the property sector. Even Y -- yield -- may not throw up my desirable minimum of 50% over the market though I still consider the yield on a property share to be of importance in the selection criteria.

Here's how I pervert PYAD when applied to property shares. P, the price to earnings (P/E) ratio, is of little relevance though profits are of course preferable to losses and may influence dividend policy. Yield should be good relative to the sector and if possible half decent relative to the market as well. A -- assets per share -- must be better than average for the sector and D -- debt -- must be below average for the sector. Thus it is in finding substantially below sector average price to tangible book value (P/TBV) and debt combined with decent yields that value may be found in a trawl.

Investors need to look further into the accounts of any shares thrown up in this way. There are properties and then there are properties. A company invested primarily in shopping centres may be a different proposition to one with a portfolio of factory units for example, plus there may be other special factors for a company having a particular rating such as a substantial majority family holding.

Here are the seventeen property companies in the FTSE 350 ranked by P/TBV. Assets and net debt (gearing) are historical, based on the last annual accounts, and yields are forecast.

                              Price  Cap£m   P/TBV   Debt%  Yield%

London Merchant (LSE: LMSO)     145    470    0.53    38.7    4.6
Minerva (LSE: MNR)              203    325    0.58    87.9    0.0
Derwent Valley (LSE: DWV)       672    357    0.70    58.0    1.8
Land Securities (LSE: LAND)     880   4640    0.75    46.5    4.3
Hammerson (LSE: HMSO)           561   1549    0.76    80.4    3.1
Liberty Int (LSE: LII)          645   2013    0.77    68.1    3.9
Slough Estates (LSE: SLOU)      391   1638    0.77    66.3    4.0
Brixton (LSE: BXTN)             238    579    0.78    93.3    4.8
Shaftesbury (LSE: SHB)          225    296    0.79    80.3    1.9
Great Portland (LSE: GPOR)      227    461    0.81    32.2    4.7
Chelsfield (LSE: CLF)           301    849    0.83    84.3    1.7
Pillar (LSE: PLL)               441    479    0.85    71.3    2.0
Canary Wharf (LSE: CWG)         264   1543    0.90   141.0    0.0
Quintain (LSE: QED)             318    404    0.92    62.7    2.8
British Land (LSE: BLND)        518   2524    1.08   106.0    1.6
NHP (LSE: NHP)                  131    263    1.32   285.0    2.1
Grainger Trust (LSE: GRI)      1400    347    2.86   184.0    1.2

Averages                                      0.94    93.3    2.6

The average discount to book in this list is only about 6% but if you strip out the freaky fliers trading over book, namely the last three, you arrive at an average discount of around 24%, equivalent to a P/TBV of 0.76, which is a more representative average right now. The discount varies with the mood of the times, narrowing when property is seen as desirable and vice versa. Taking the 0.76 as an average, my table shows that only the first two companies provide any appreciable discount and could on this basis be considered value for the sector amongst the larger property shares that fall into the FTSE 350.

However, Minerva has substantial debt and no yield, ruling it out for me, and leaves us only with London Merchant as a share that stands out from the larger property shares shown in this list. It stands out also because it has one of the lowest net debt ratios and one of the higher yields and thus scores on all the initial property value requirements that may make it worthy of further investigation. Speaking from memory, the company has a share portfolio as well as its properties, making it something perhaps of a special case. Given the high volatility of shares compared with property, the P/TBV figure of London Merchant may be subject to more fluctuation than is normally the case with property shares.

Generally, because my database uses the last annual accounts, it follows that the asset and debt figures of any share may well be somewhat unreliable and as with all database searches, investors must follow up the initial trawl with a look at the latest interim accounts and any news.

Where next? Value Guide To Property | Property Sector