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One Mistake You Shouldn’t Make With Real Estate Companies

CapitaLand (SGX: C31), City Developments (SGX: C09) and Hongkong Land Holdings (SGX: H78) are three of Singapore’s largest pan-Asian real estate developers, owners, and managers. Under a broad brush, the trio can be said to be pretty similar. But as it is, investors in each share seven years ago would have had very different experiences since then depending on which they picked.

Back then, on 22 April 2007, they had each carried a tangible book value per share of S$2.85, S$5.34, and US$4.45 respectively. Fast forward seven years, and we can see that each company has managed to grow their net tangible assets by considerable amounts.

Share

TBV: 22 April 2007*

TBV: Today*

% Change

CapitaLand

S$2.85

S$3.67

29%

City Developments

S$5.34

S$8.26

55%

Hongkong Land Holdings

US$4.45

US$11.42

156%

*TBV: Tangible Book Value

Source: S&P Capital IQ

But, despite their corporate growth, both CapitaLand and City Developments have been huge market laggards and have been painful investments for their shareholders, unlike Hongkong Land Holdings.

Share

Price: 22 April 2007

Price: Today

% Change

CapitaLand

S$8.25

S$3.26

-60%

City Developments

S$15.5

S$10.81

-30%

Hongkong Land Holdings

US$4.50

US$6.86

52%

Straits Times Index (SGX: ^STI)

3,291

3,273

-0.6%

Source: S&P Capital IQ

Even after factoring in reinvested dividends, both CapitaLand and City Developments have still been disappointing investments with their shares down by 44% and 23% respectively.

So here’s a question: Shouldn’t a real estate company – in which the change in its tangible book value can be a very good proxy for the change in the underlying economic value of its real estate businesses – with a growing tangible book value be worth more over time?

Actually, the statement above is quite right, but only if investors had elected to not overpay for the company’s assets. Yet, as it turns out, investors were more than willing to pay $2.90 for every dollar of CapitaLand and City Developments’ net tangible assets back then. In contrast, Hongkong Land was priced at only 1 times its tangible book value.

In light of that, the discrepancy over their returns from seven years ago could be traced back to how cheap or expensive their shares were priced at on 22 April 2007.

This brings me to the important mistake investors can sometimes make with real estate companies. As such companies are operating in a cyclical industry, the market can sometimes be afflicted with irrational exuberance over their shares during the good times and cause them to be priced dearly in relation to their fundamentals. Investors without a keen sense of valuation or market history would likely be caught up in the euphoria and end up paying a huge premium for their shares.

While market sentiment for real estate companies cannot be said to be remotely close to being exuberant right now, when the next boom comes, be sure to avoid the mistake that investors in 2007 had committed with both CapitaLand and City Developments. At the end of it all, valuations are important.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.