The property market is heating up. Let's take a look at three companies that stand to benefit.
Mirvac Group (ASX: MGR), a real estate investment, development and management company, has just made an acquisition of three office and retail buildings in the Melbourne CBD for $552 million, further cementing its position as a leading owner and manager of office real estate in the city.
The Harbourside Shopping Centre was bought for $252 million, a 33-level A-grade office building at 367 Collins St went for $227 million, and lastly, the "Olderfleet buildings" at 477 Collins St was purchased for $72 million. This third building has development potential, and the company is proposing building a 36-level building from within the interior air space of the old building, retaining the historical façade.
Recently, there have been a number of acquisitions, new developments and takeover offers within the real estate investment trust (REIT) and property development space — one such example is Commonwealth Office Property Fund (ASX: CPA), which is fending off a takeover bid from Dexus Property Group (ASX: DXS).
To make its suitor offer more, it has had 16 of its 25 office buildings in its portfolio revaluated so that an extra $60 million of asset value has been added to its books. The takeover offer will be based on a market multiple of its net asset value, so now the expected offer will rise from $1.16 per share to $1.19. Dexus Property Group's current cash and scrip offer stands at $1.155.
How do these three companies stack up against each other?
All three have been rising in share price due to the revival in the property markets. Commonwealth Office Property Fund and Dexus Property Group are REITs, whereas the majority of Mirvac's revenue is from development.
That said, apart from a great 44.89% profit margin in 2013, Mirvac's 6.16% return on equity is actually lower than the other two. Instead, we really have to look at earnings and earnings per share growth. Mirvac is expected to grow its earnings per share by more than the other two, and if the property market does really expand, then its earnings growth will win out.
Foolish takeaway
All three are either at or very near their book values, and frankly, none of them are at an attractive share price for value investors. You would have to assume that the property market would expand by a fair amount to make up for the low returns expected. Mirvac currently pays the highest dividend yield of the three, 8.04%.
With stronger forecasted earnings per share growth and a better dividend, the total return would be better if you buy Mirvac.
