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Better Real Estate Stock Now: City Developments Limited vs. CapitaLand Limited

City Developments Limited (SGX: C09) and CapitaLand Limited (SGX: C31) are two blue chip stocks in the Straits Times Index (SGX: ^STI) that develops and invests in properties.

Both also happen to be stocks that have performed badly over the past five years. To the point, shares of City Developments and CapitaLand have lost 26% and 10% of their value, respectively, since 25 April 2011.

Given their share price declines, the individual investor might ask: Would City Developments or CapitaLand be the better real estate stock right now?

There are many other important things investors should look at when trying to answer the question above. But in here, let’s focus on three key aspects of the two companies’ business fundamentals: Their financial strength, track record of growth, and valuation.

Financial strength

It’s the strength of City Developments’ and CapitaLand’s balance sheet that I’m interested in.

A shaky balance sheet – one that’s bloated with debt – can be a risky thing for shareholders. If a heavily indebted company has trouble servicing or repaying its loans, its shareholders may have to face painful consequences such as dilution, involuntary asset sales by the firm, the elimination of dividends, and in the worst-case scenario, bankruptcy.

Based on data from S&P Global Market Intelligence about the two real estate companies’ latest financials (12 months ended 31 December 2015 for City Developments and 12 months ended 31 March 2016 for CapitaLand), here’s what we have:

City Developments and CapitaLand balance sheet
Source: S&P Global Market Intelligence

Turns out City Developments is the one with the stronger balance sheet as a result of its lower net-debt to equity ratio.

Track record of growth

An observation of the track records of both City Developments and CapitaLand can give investors an idea of what to expect from their businesses in the future. That said, it’s worth noting that history is merely a guideline; it should not be taken as a perfect indicator for the future.

Given that City Developments and CapitaLand are both real estate companies, the metric I want to study is their book value per share. The metric’s changes over time can be a good proxy for the change in their real economic worth. The following chart illustrates how City Developments and CapitaLand’s book value per share has grown from 2010 to 2015:

Growth in book value per share for City Developments and CapitaLand from 2010 to 2015
Source: S&P Global Market Intelligence

City Developments is the winner here (again) in terms of growth. Its book value per share has climbed by a total of 46% in the timeframe under study, beating CapitaLand’s growth of just 28%.

Valuation

Even the best business can become a horrible investment if bought at too high a price. That’s why valuation is important when investing.

I’ve already mentioned how the book value per share is an important metric for the real estate companies. And so, the price-to-book (PB) ratio can serve as a useful valuation measure. Here’s how City Developments and CapitaLand stack up:

City Developments and CapitaLand PB ratio table
Source: S&P Global Market Intelligence

As the table shows, both companies have PB ratios that are below 1. But, it’s CapitaLand that sneaks past the finishing line with its lower PB ratio of 0.75.

A Fool’s take

In tallying up the scores, CapitaLand appears to be the stronger real estate stock by virtue of its sturdier balance sheet and better track record of growth.

But, it’s worth noting that all we’ve seen about City Developments and CapitaLand here, while important, should not be taken as the final word on their investing merits. As I’ve already mentioned, there are other important aspects of the real estate firms’ business to study before any investing decision can be reached.

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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.