Stock pickers who appreciate the security of property should take a serious look at companies like Tesco, which own real estate without being real-estate companies. They offer impressive levels of asset-backing - the reassurance that, if the company went bust, its properties could be sold to bail out shareholders - but without as much exposure to the cyclical vagaries of property pricing as, say, Land Securities. Tesco's enterprise value (market capitalisation plus net debt) is £36.6bn, suggesting that about 60 per cent of the business is backed by property. The equivalent figures for its smaller rivals are even higher - 80 per cent for Sainsbury's and 96 per cent for Morrison. Sainsbury's even provides an estimated market value for its properties of £11.2bn, which is 32 per cent more than its enterprise value.
This is reassuring - but not to the extent it appears. Supermarket portfolios are different from property company portfolios for the crucial reason that they are owner-occupied. Because the vacant value of commercial property is much lower than the occupied value, Sainsbury's supermarkets would be worth far less than £11.2bn if the company did not exist to occupy them. So the premise of liquidation that keeps shares in Land Securities trading near book value does not apply to the grocers, which have accumulated property more for reasons of competition - to get to a site before their rivals - than to bolster their balance sheets.