active 5 months, 3 weeks agoHow you can Value Real Estate Companies
The final few years saw property rates go through the roof. Three elements that impact property price are actually cost, interest rate and income levels. Given the fact that in India, the shortage of residential units is around nineteen million, demand side will never be a problem. Reduction in interest rates and tax incentives for home loan repayment drastically increased the affordability and desire of residential properties after 2005. And as resource lags behind the desire for residential properties, prices logically rose drastically. Similarly, growth in IT and ITES sector and organized retail sector resulted in expansion in business property prices.
Driven by soaring residential and commercial property prices, valuation of real estate companies also increased dramatically. Some investors give consideration to the size of’ land banks’ as a key parameter for investing in realty makers, and give little value to margins and execution time taken to finish the tasks. The key pitfall of this technique is actually that actually 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 also need to give consideration to certain ratios specific to this particular industry. Operating margin and Return on Capital Employed should not be ignored as they give invaluable insight into a realty company’s operating efficiency. Also, since realty projects have extended gestation period, it is important to learn how the company is financed. Hence, debt to equity and working capital to sales are very important proportions to be used while analyzing such companies.
Investors who treasure real estate companies based on the total land held use’ best rate per square foot’ technique to treasure the land size, experts opine that since it has a tendency to ignore the risks involved, using’ normalized price per square foot’ or’ profit per square foot’ are tracy suttles far more appropriate methods. In line with several authorities, Price to Earnings ratio and Price to Sales are actually proper ways for valuing real estate companies.
One major shortcoming of valuing land banks for determining the importance of real estate companies would be that there’s no regular price which can be used. Furthermore, land prices defer widely from location to location. Using higher values per square foot will tend to overvalue companies.