Investing in property

Property as a sector behaves differently to other asset classes in relation to the business cycle and individual property companies require modified analysis. Most companies are assessed on price/earnings (P/E) ratios. Property company fundamentals focus on yield and net asset value (NAV). Typically, property companies are valued at a discount to NAV. This discount arises because property company assets are often highly varied, comprising many different projects of different types (retail, office etc.), at various locations and in different stages of completion.

Yet, individual property companies have their particular characteristics. Land Securities, for example, is probably the most diverse of UK quoted property companies. British Land has most exposure to the City office market. Hammerson has moved towards retail, while Brixton has hardly any office exposure, preferring industrial and retail.

The accounting policies used to arrive at individual valuations, and to capitalise expenditure, need to be scrutinised closely. This makes it extremely difficult for the analyst to arrive at the 'sum of the parts'. Furthermore, there are often tax liabilities or other claims on assets to take into account.

The discount to NAV essentially reflects the uncertainty over book values. For example, the company might not realise book values were it to become a forced seller for some or all of its properties, finished or unfinished.