COMMERCIAL
Portfolio Pricing
Andrea Kirkby on the underlying values of commercial property companies
T
he stock market is quite used to valuing trading companies such as supermarket chains, aircraft engine manufacturers, or software firms. It does so by looking at their earnings; you
might buy a supermarket on twelve times projected earnings, for example, or a fast growing tech firm on twenty-four times. But with property companies such as
British Land or Hammerson, earnings are not much help. Current earnings aren’t what the property business is about; creating a portfolio, with a solid stream of longterm rental income, may mean taking a hit in any one year from investing in refurbishment or new buildings. In fact, under the usual accounting
principles, earnings can be highly misleading, because they may reflect losses on the capital value of the portfolio. If, for instance, a certain property’s value needs to be written down from £300m to £250m, then that would lead to a £50m write-off against the profit and loss account, which would force the company into loss despite
a £20m plus rent roll on that property. One way in which property companies
get round this is the use of EPRA earnings. This metric, which is backed by the European Public Real Estate Association, excludes revaluations and gains or losses on disposals, as well as tax accruals and changes in intangible assets. Unlike declared earnings based on conventional accounting, EPRA earnings give some idea of a company’s profitability as an investment company based on its underlying rent roll. But even so, it doesn’t get round the fact
that earnings aren’t really what make property companies tick. Longterm income is more important. Just as capital values in the commercial property sector are always derived from yield, listed property companies can quite usefully be assessed in terms of their dividend yield. That’s particularly the case for REITs (Real Estate Investment Trusts) which are obliged by their status to pay a percentage of their rental income as dividends. Yield has certainly come to the fore
recently as retail investors, feeling the pinch now the interest rate on their bank savings has gone down to as little as half a per cent, look for higher returns in equities. Certainly yield is a good way to compare the property sector as a whole with returns on other asset classes, whether you’re looking at the yield on property shares, or on direct property holdings. Because a property portfolio has a
Glitzy shopping malls have been experiencing some real ups and downs in recent years
58 FEBRUARY 2011 PROPERTYdrum
defined long-term income stream, it’s more similar to gilts (government bonds), which pay a regular rate of interest, than to shares in companies that might see their earnings increase or decline in any particular year. And generally, because property companies try to smooth out the kinks in earnings in order to pay a smoothly progressive dividend, shares in property investment companies tend to be fairly similar. However, property is evidently riskier than a government bond, as there is the possibility that the company will fail, perhaps through borrowing too much against its assets, or a tenant may go bust;
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68