Tesco PLC Begins To Unlock Value From Its Giant Land Portfolio

Struggling supermarket giant, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has a trick up its sleeve — the company sits on a huge land bank.

These vast areas of undeveloped land spread across the UK, were acquired during the late 1990s as the company began its rapid expansion across the country. 

Huge land bankTesco

All in all, it is estimated that Tesco owns more 1,000 acres of undeveloped land. Much of this land is now surplus to requirements, as Tesco shifts its focus from large out-of-town supermarkets, to smaller convenience stores and online retail.

Unfortunately, due to this shift in strategy, Tesco wrote down the value of its land by £800m last year, admitting that much of the land would never be built on.

However, with 310 undeveloped sits across Britain, Tesco has decided to unlock value from this bank. The company has revealed plans to develop 4,000 homes on its land by 2017. Experts believe that the company has enough space to construct around 15,000 new homes in the long run.

As of yet, it not clear if Tesco will develop the land itself, using developer Spenhill, which it owns, or bring in an outside developer.

You don’t need to be a City analyst to work out that the construction of 15,000 new homes could result in a hefty payout for Tesco. 

Plenty of value

Tesco has over £20bn of property on its books, a staggering figure considering the fact that the group’s market capitalisation is only £23bn.

Nevertheless, owning a vast property portfolio is commonplace for most UK retailers and Tesco is not alone.

Indeed, Morrisons (LSE:MRW) owns almost all of its owns stores and the company also owns some farms. In total, this property is worth £9bn, compared to the company’s current market cap. of £4bn. After factoring in liabilities, Morrisons’ book value per share stands at around 200p.

Additionally, Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) owns much of its own property. Sainsbury’s property is booked on the company’s balance sheet at around £10bn. Once again, this is below the company’s current market cap. of £6bn.

This suggests that if both Sainsbury’s and Morrisons went bankrupt overnight, shareholders would actually be better off than they are now. For example, with a book value per share of 200p, Morrisons could close its doors, sell its property, pay off all liabilities and still have 200p per share to return in cash to investors — a 15% gain from current levels.

Still, it's up to you whether or not you decide to buy, sell or hold Tesco following this news. However, if you don't find this advice useful, analysts here at the Motley Fool have plenty of tips to help you beat the market. 

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Rupert Hargreaves owns shares of Morrisons and Tesco. The Motley Fool recommends Tesco. The Motley Fool owns shares of Tesco.