Real estate companies

I used to cover real estate companies. For 10 years. It was a long time. I enjoyed it, although I got a bit tired of talking about the same companies over and over. I love the process of initiating on a company, and when things are really happening (mergers, acquisitions, spin offs), it is really fun, because you have something to talk about.

The rest of the time, you are just kind of sitting there updating your charts on prices, and it can be hard to find something to write about.

Source: Vietstock.vn, WSJ.com, chart by Vietecon.com.

Now that I am looking at Vietnam, there are so many things to look at! It is exciting again. And Vietnamese real estate companies make up a good portion of the stock market as well - a quarter by some counts.

But when you really look into the market, there are only four companies that matter. What I mean by that is that these four are big enough so that foreigners can easily invest in them (and even then you run into foreign ownership limits). The rest would be considered small cap and difficult to make a big bet on.

And then looking at those top four, it turns out that three have significant ties to each other. Vingroup (VIC) owns majority stakes in Vinhomes (VHM) and Vincom Retail (VRE). That leaves just No Va Land (NVL) as an independent. The market caps of numbers 5-10 don’t add up to the market cap of No Va Land, the fourth largest.

Ultimately, while real estate is not a concentrated industry (there are tons of developers of all sizes), but within the stock market, only a few matter.

Source: Vietstock.vn, WSJ.com, chart by Vietecon.com. Change in share price is from Jan 2 to June 10.

The weird thing is that generally, P/E falls along with market cap. This could be because they probably don’t trade as much, and investors would demand a better risk-reward ratio (as reflected by the P/E) to invest in them.

Also, looking at performance year-to-date, the stocks have been all over the place. Vincom is up 79%, despite having lots of shops and malls closed. While, Vingroup is down 17%. Vinhomes is down 9%. But No Va Land is down just 5%. Looking further down the list, there is no general trend.

Earnings in 1Q weren’t predictive of performance either. Naively, you might think that a really good performance in 1Q would drive the stock up. Unfortunately, you would be gone. VRE had the best share price performance, but five companies had better profit changes than it did.

One of the main reasons for that is because the balance sheet matters so much more than the income statement for real estate companies than for other companies. If a home is “sold,” but it hasn’t been bought, then the company won’t recognize it on the income statement until it is delivered. It’s a real pain to figure out changes in each of these accounts, and that’s why the balance sheet changes is a much better reflection of what is really happening. Also, that means that the income statement, even more so than in other industries, is reflective of the past, sometimes the “distant” past, say 2-3 years when a home was sold “off plan” or off the master plan.

I will delve further into this over the next few days, but I thought it was interesting to take a quick look at what is happening with real estate.