With today's ultra-low interest rates, one area that has been drawing extra attention from investors is the Real Estate Investment Trust (or REIT) sector. Westfield Corp Ltd (ASX: WFD) and Scentre Group Ltd (ASX: SCG) are perhaps the best known of these, mostly as a result of the iconic 'Westfield' branding of their centres.
Due to a fairly complicated restructure a couple of years back, Westfield Corp now operates internationally in the UK, Europe, and USA, while Scentre Group operates solely in the ANZ region. Here's my take on the value each company offers today:
Westfield Corp – yields approximately 3.6% in Australian dollar terms (dividends paid in USD)
One of the easiest measures of valuing a property security is to use 'Net Tangible Assets' (NTA) which is a measure of the book value of the assets (shopping centres, etc) each security owns. In Westfield's case, these are US$4.44 per security, or around $5.80 in Australian terms. Westfield is thus valued at a significant premium compared to the value of its assets.
This is perhaps justified as Westfield's shift to focus on 'flagship' centres in key locations should generate higher returns and faster growth over time. Additionally, its assets will likely increase in value over time. Even so, it does not look like a bargain.
Growth is expected to be steady, as growth in Westfield's rents is usually limited by contract to just above the rate of inflation. New centres like the World Trade Center should add to earnings in a meaningful way, but Westfield looks fully priced. Although a great business, it doesn't stand out today.
Scentre Group – yields 4.7% unfranked at today's prices
The higher-yielding Scentre Group also trades at a significant premium to its NTA, which is A$3.44 per share. Scentre has a strong development pipeline and recently added to this with the purchase of David Jones in Sydney's CBD. Yet as with Westfield, the company's growth is largely constrained by rental contracts and market conditions, and as we noted here, Scentre is also vulnerable to higher interest rates over time.
Recent results indicated the degree to which Scentre could be highly priced, with the company growing its Funds From Operations (management's preferred measure of reporting) by just 2% at the most recent half year. This is fairly slim growth for a property company trading at a 30% premium to its assets.
Foolish takeaway
Lest you think that I'm unreasonably bearish on both Westfield and Scentre, I think that both companies have great assets and an above-average chance of delivering market-beating returns over a 10-year timeframe. Overpaying for them now (and neither company is cheap) would significantly reduce the chances of this happening however. They're better left on the watch-list for the time being in my opinion.
