Unfortunately, both have produced lacklustre returns for their investors over the past five years. Adjusting for dividends, City Developments’ shares have generated a paltry gain of 3.6%, according to S&P Global Market Intelligence, while Hongkong Land’s shares have produced a slight loss of 2.6%. Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), has climbed by 12.5% in the same period, even after including gains from dividends.
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So it’s clear that both real estate giants have not given much reasons for their long-time investors to smile. But which of the two property companies would likely be the better investment for the next five years? Let’s take a look.
City Developments’ business spans a wide range of real estate classes, such as residences, offices, hotels, serviced apartments, integrated developments, and shopping malls. As of 30 June 2019, the company had total assets worth S$23.2 billion, of which 40% came from its property development business. The remaining 60% are from recurring-types of businesses, including hotel operations, rental properties, management and consultancy services, and more.
For a geographical perspective, 48% of City Developments’ total assets reside in Singapore as of 30 June 2019, with the rest spread across the UK (15%), China (12%), the US (7%), and other countries (18%).
Meanwhile, Hongkong Land ended the first half of 2019 with US$41.9 billion in gross assets (excluding cash). 88% of its gross assets are in investment properties, and the lion’s share of these properties are office and retail assets in Hong Kong. Hongkong Land also has investment properties – again mostly office and retail properties – in other parts of Asia including Singapore, mainland China, Macau, and more.
The remaining 12% of Hongkong Land’s gross assets are in development properties. The company’s main geographical market for this business is mainland China.
A key gauge of the underlying economic value of a real estate company is the NAV (net asset value) per share, or book value per share.
Over the past five years, City Developments’ book value per share has increased by a respectable 5.4% annually from S$8.67 to S$11.29, according to data from S&P Global Market Intelligence. Hongkong Land has done better, growing its book value per share by 7.4% per year from US$11.53 to US$16.50.
Winner: Hongkong Land
Current financial strength
The net debt to shareholders’ equity ratio is a useful metric to gauge the financial strength of a company.
On this count, both City Developments and Hongkong Land have robust balance sheets, but the latter does have the better number – their net debt to shareholders’ equity ratios are currently just 53% and 10%, respectively.
Winner: Hongkong Land
Given the importance of the book value per share in gauging the underlying economic values of City Developments and Hongkong Land, the price-to-book (PB) ratio is a suitable valuation metric for the pair.
Both companies have PB ratios of less than 1 at the time of writing, signifying that investors are getting a bargain on the assets that the two companies own. But Hongkong Land’s PB ratio looks significantly more attractive than City Developments’. The former has a PB ratio of just 0.35 at a share price of US$5.73 whereas the latter’s share price of S$9.43 gives it a PB ratio of 0.84.
Winner: Hongkong Land
Both City Developments and Hongkong Land have a respectable track record of growth, a robust balance sheet, and a low valuation. But Hongkong Land has the better performance on all three counts.
It’s worth noting too that what ultimately drives the share prices of the two companies is their business performances. If they can manage to increase the value of their investment properties over time while being opportunistic and prudent in their property development activities, both City Developments and Hongkong Land could beat the market comfortably over the next five years given their low valuations at the moment.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of City Developments and Hongkong Land. The Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.