How You Can Value Real Estate Companies

How You Can Value Real Estate Companies

tracy suttlesThe final couple of years saw property rates go through the roof. Three factors which affect property price are actually price, interest rate and income levels. Because of the fact that in India, the shortage of residential units is around nineteen million, demand side won't ever be a concern. Reduction in interest rates and tax incentives for home loan repayment drastically increased the affordability and desire of residential properties after 2005. And as supply lags behind the demand for residential properties, prices logically rose drastically. Similarly, progress in IT and ITES sector and organized retail sector resulted in increase in professional property prices.

Driven by soaring commercial and residential property prices, valuation of real estate companies also increased dramatically. Some investors think about the measurements of' land banks' as a key parameter for investing in realty companies, as well as give very little significance to margins and execution time taken to complete the projects. The major pitfall of this technique is that even loss making companies will be valued highly, despite having poor fundamentals.

While size of land banks held do provide indication about expected growth of a real estate company's revenue, investors should also think about certain ratios specific to this industry. Operating margin and Return on Capital Employed should not be ignored as they provide valuable insight into a realty company's operating efficiency. Furthermore, because realty projects have long gestation period, it is crucial to know how the business is financed. Hence, debt to equity tracy suttles and working capital to sales are very important proportions to be utilized while studying such companies.

Investors who value real estate companies based on the utter land held use' best cost per square foot' method to value the land size, experts opine that because it has a tendency to ignore the risks involved, using' normalized cost per square foot' or' profit per square foot' are more appropriate methods. As outlined by several specialists, Price to Earnings ratio and Price to Sales are proper ways for valuing real estate organizations.

One major shortcoming of valuing land banks for determining the importance of real estate companies would be that there is no standard cost which may be used. Furthermore, land prices defer widely from location to location. Working with higher values per square foot will tend to overvalue companies.