Friday, August 18, 2006

Real Estate Rocks

If there is one thing that banks like lending you money for it is real estate. There is only a finite amount of real estate on this planet, the government can't just print more of it, the global population is growing and lunar apartments are not imminent yet. Just a few high level reasons why real estate is a great investment.

But I don't like getting my hands dirty so I won't be buying any land anytime soon. But what about real estate companies I could invest in? Here are two:

British Land

BLND is the giant of the two with a market cap. of £7 billion. It is what you might call a classic real estate company with a balanced portfolio of office and retail buildings. BLND regulary buys and sells assets in order to reshape its portfolio and lock in profits.

BLND trades below its net asset value of £8.4 billion but this is normal for real estate companies. The underlying PE is about 35 and the growth rate is about 15%. This seems expensive but then this is an asset situation. The dividend yield is about 1.4%.

Here is the latest chairman's statement:

"The year has started well for both British Land and the property markets. We continue to be active on both sides of the balance sheet and remain confident of our prospects." Sir John Ritblat.

A typically bland but pleasant statement at it is always nice to have a knight at the helm!

Big Yellow Group

BYG is a company I have spoken about it before, having held it for a few months last year. Unfortunately I sold it at about 230p and now it is at 440p! But is it still good value?

BYG is a self-storage company. They buy about 10 prime-location warehouses a year and convert them into self-storage facilities where the storage renter does all the work and they just maintain the facility and make a large profit. It is a great business model and unfortunately the market realised this while I did not own any.

So is it still a buy?

Here are the fundamentals:

Growth rate: 20%
Shares outstanding: 113 million
Yield: 1.1%
Trailing PE: 50
NAV: 300p per share
Market Cap. ~£500 million

Most recent chairman statement:

"The Group continues to make good progress in revenue growth both like for like and through new store openings. We now look forward to executing our extensive store opening programme over the next few years." James Gibson CEO

Again a bland but nice statement.

So how do you compare the two? I would say that BLND is the safer of the two as the PE is smaller, the market cap., is over ten times bigger and the business model would be less affected by a recession. I can imagine in hard times businesses and consumers would remove their self storage costs as one of their first cost cutting initiatives. However shops can hardly stop renting their premises, and businesses can hardly give up their offices.

BYG is a great business but its PE is high and it trades at a premium to its net asset value. I will keep it in my wish list but BLND looks like the rock solid choice for now.

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