VALUE INVESTING
Compact & Bijou Property Value

By Stephen Bland (TMFPyad)
October 17, 2003

After looking at potential value amongst property shares in the FTSE350 last week, I am taking the theme further today with a look at smaller property companies by filtering on the FTSE All-Share index for low P/TBV, gearing and yield.

Similar comments to those I made last week will apply regarding the altered nature of the PYAD principles. This is needed to identify an initial list of possibly attractive value selections for further investigation. In particular, earnings per share and hence P/E matter only venially when analysing property shares.

Investors would need to look further into the accounts and recent news 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 top ten smaller cap property companies by P/TBV in the FTSE All-Share. Assets and net debt are historical, based on the last annual accounts, and yields are forecast. Incidentally, British Land is shown because, although it is one of the largest caps in the sector and was thus included last week and should not be here amongst the small caps, the data supplied from my source was completely wrong on the asset figures. An illustration of the dangers of relying too heavily on databases.

                              Price  Mkt Cap   P/TBV   Debt  Yield
                                         £m               %      %
Tops Estates (LSE: TOPS)        229     104    0.47     114    1.8
Benchmark Group (LSE: BMK)      207     201    0.54      65    2.6
Unite Group (LSE: UTG)          166     180    0.60     133    1.5
CLS Holdings (LSE: CLI)         244     219    0.62     123    0.0
British Land (LSE: BLND)        544    2650    0.63     106    2.8
Marylebone WBG (LSE: MWB)        62      68    0.70     303    0.0
Freeport (LSE: FPR)             385     194    0.73       7    0.7
Town Centre Secs (LSE: TCSC)    173     108    0.75      85    3.4
Development Secs (LSE: DSC)     354      99    0.84       0    1.7
Workspace Group (LSE: WKP)     1230     206    0.84      99    2.7

Averages                                       0.67     104    1.7

From this list it can be seen that, with the average P/TBV at 0.67 or discount to book of 33% which is how this ratio is often expressed with properties, the shares offering appreciable discounts to the average are Tops Estates and Benchmark Group. Of these Benchmark had rather lower debt than Tops plus a higher yield too. But its discount to TBV is not as low. There may be good reasons for this. It is critical that those interested look further before arriving at any conclusions.

British Land, in fact the second largest property cap of all after Land Securities (LSE: LAND), actually comes out quite well on its P/TBV figure. Its gearing is around average, even if you take last week's table of large caps. Its yield is above average too.

Someone asked what the outer is for properties, even if they present value for the sector by having above average discounts to book etc. Why should they rise more than other shares in the sector or the market? Well, assuming the above average discount is undeserved in that there are no special factors that justify the low rating, and the other value factors like encouraging directorspeak and good asset value forecast figures are in place, the outer is simply the fact that they are undervalued on assets and the hope that this will be corrected at some stage. This is particularly the case if a strongly rising asset per share forecast exists and it the actual result works out that way.

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. As with all database searches, investors must follow up the initial trawl with a look at the latest interim accounts and any news.

That's it on property shares for the time being. One last point though, apart from shares actually included in the real estate sector, there are a number of shares in other sectors with substantial property holdings. UK Coal (LSE: UKC) is a good example of this. Superficially a coal miner, the real attraction is the large asset cover in the form of its property interests. It's not really a coal miner with some property, more a property share with some coal mining on the side.