With the weaker retail environment recently, the share price of two of the biggest retailer property investors on the S&P/ASX200 Index (INDEXASX: ^AXJO) (ASX: XJO) have also come under pressure. Westfield Corp Ltd (ASX: WFD) and Scentre Group (ASX: SCG) have dived 8% and 6% in the past 3 months, which is a relatively large move for these generally staid stocks.
At today's prices of $4.16, Scentre Group is getting close to attractive levels, as the company has net tangible assets (NTA) of $3.67 per share, meaning it is priced at about 1.1x its book value.
Westfield Corp has US$4.60 per share in NTA, equivalent to about A$6.17 at current exchange rates. Thus at $8.26, Westfield is priced at just over 1.3x book value.
Price to book
Getting a price close to book value is generally recommended for this type of investment, since Scentre and Westfield earn a rental yield that is a % of the property's value. If you pay 2x their book value, the rental yield of the property – and thus your returns as a shareholder – would be effectively halved.
In some cases, it may be shrewd to pay above book value, especially if a company hasn't revalued its properties in a while or if there is some other reason (such as redevelopment) that could lead to the properties being worth substantially more in the future.
However, both Westfield and Scentre revalue their properties regularly, so it is unlikely that there will be much of disparity between book value and market value. Yet both companies also have billions in new properties under development, which have yet to be reflected in income.
As a result, I would consider paying up to 1.1x book value for each company today, although it is important to note that current book values don't reflect what might happen if interest rates rise, and/or consumer spending falls. It is hard to raise rental rates if tenant sales aren't growing or are falling.
Neither company is likely to shoot the lights out, although at the right price both Westfield and Scentre should deliver respectable returns to shareholders over the long term.
