Company analysis in the real estate fund industry

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In one of my previous blogs, I described the problems with analyzing financial statements of real estate companies. My central message was that purely quantitative earnings-based balance sheet analysis does not provide a robust indication of the value of the company and cash-oriented ratios, dividends and qualitative observations should be given preference.

Similar to my blog on construction companies, I now apply the suggestions I presented then to the semi-annual reports of Austria's listed real estate funds.

For this purpose, I compare some key figures with the performance on the stock market and interpret the correlation.

Ratios CA Immo AG, Source Basic Data: Vienna Stock Exchange Website

Ratios S Immo AG, Source Basic Data: Vienna Stock Exchange Website

Ratios Immofinanz AG, Source Basic Data: Vienna Stock Exchange Website

Looking at the sets of key figures above, the following statements can be made:

  1. Compared to other shares, the fluctuation range of real estate shares is very low.

Immofinanz suffered the strongest loss in the observation period between HY 2019 and HY 2020 with around 50%. This is certainly painful for investors, but it roughly corresponds to the minus of the ATX. This shows that other stocks lost significantly more in the admittedly extraordinary comparison period.

  1. There is little correlation between earnings figures and share price

Looking at the above figures, it is confirmed that the market does not follow the results of any of the companies, neither with nor without taking into account the valuation result.

  1. Dividends are a (relatively) good indicator

Regarding dividends, it can be said that for Immofinanz and S Immo the years with the highest dividend yields were also the best for share prices. For CA Immo, dividend yields were more balanced, as was the share price. Thus, if one is forced to perform a quantitative company valuation, the use of a dividend discounting model seems to me advisable.

  1. A correlation between qualitative factors and share price is not discernible

In contrast to the construction companies, there is no discernible correlation between qualitative factors such as management changes or the message sent out and the share price. It is possible, however, that this is simply due to the public takeover battle that the companies have been fighting in recent years. It will be interesting to see how this issue develops in the coming years.

  1. A fundamental decoupling of book value and market value does not seem possible

I must admit that I was particularly puzzled by the narrow range of fluctuation from book to market value. For example, the ratio market value (defined as market capitalization + liabilities) / book value fluctuates de facto between 120% and 130% for all stocks during the observation period.

In summary, three key messages can be derived.

Firstly; if a company valuation is necessary, a dividend discounting model appears to be more practicable than a classic DCF method. Dividends provide a better basis for valuation than earnings.

Secondly; if it is purely an investment decision, the best strategy seems to be to wait until one of the real estate stocks has reached the lower end of the range and then to buy and sell again when it has reached the upper end.

Thirdly; the meaningfulness of real estate company financial statements remains very limited relative to financial statements in other industries.