Price vs Value

On 4 September 2017, Straits Times published an article highlighting “more upside ahead for developers. As real estate companies are typically heavy on their balance sheet, I did a back testing on the historical book value compared to share price of the companies highlighted in the article. The financial data is based on the financial year end of the respective companies and the 2017 data is based on the latest announced numbers obtained from SGX. Price is obtained based on price at year end for each year except for 2017 where I took the June 2017 share price.

Lets have a look:

Despite the challenging local property scene from 2013 to 2017 (prior to the current improved sentiments), developers have continued to show resilience through improved net asset value per share over the years. The improvement in net asset value is made through investments in other asset class such as completion of South Beach by City Dev (Singapore largest mixed development project) in 2015 and completion of Tanjong Pagar Centre by Guocoland in 2017 as well as contribution from overseas investment.

Also note the interesting trend of rather flattish trend for Capitaland and Frasers Centrepoint Limited. This could be because the 2 groups have an established REIT structure whereby mature real estates could be offloaded to its REIT vehicle.

Now lets look at the price:

The trend of share price which will generate the most interest is undoubtedly City Development where it made a V shape recovery from the 5 year low witnessed in 2015 and 2016. The sentiment on real estate in Singapore is probably at its lowest in those years arising from various cooling measures introduced to buyers and developers alike.

The rules which hit the developer hardest are the ABSD and QC ruling which basically prevent any land banking activity from the developer (i.e. having a timeframe for all units in a development to be fully sold), failure which a heavy penalty awaits them. Coupled with increased leashed to curb speculative buying such as ABSD on foreign buyers and TDSR to limit the amount of mortgage, developer are faced with a government imposed “winter”.

The reason why CDL is affected the most is probably due to it having the greatest exposure to the Singapore real estate market while other players like Capitaland are slowly winding down their inventories in Singapore.

Investors who wants the biggest bang for their bucks would prefer to buy something at a price discounted from its net worth.

Lets see the price to book ratio to see the trend over the last 5 years:

I would like to emphasis to readers to not compare the above across companies as I have not adjusted the net asset value on the Companies balance sheet to reflect its market value. For example, one of the major reason why City Dev is able to trade above its book value is because it account for its investment properties using the cost model instead of fair value model adopted by other companies. Typical valutaion adjustments for real estate companies can be a separate topic for discussion.

By comparing the price to book value across time, all companies is currently trading at their 5 year high. Personally, I would view that as an indicator that the sector as a whole is trading at a fairly rich level with share price driven up by sentiments rather than fundamentals.

With price of land bids heading north in the recent government land sales and en bloc sales, the margin of safety that the developers have to continue generate profits for the coming years is greatly reduced. Do you place your money on hard assets or potential growth, its a question you have to answer yourself.

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