How To Value Real Estate Companies

The past two years have seen real estate values fly through the roof. Price, interest rate, and income levels are three variables that influence the price of land. Provided that the scarcity of residential units in India is about 19 million, demand would never be an issue. The decline in interest rates and tax benefits for repayment of home loans dramatically improved residential housing affordability and demand after 2005. And as the market for residential properties lags behind availability, rates have logically risen sharply. Similarly, development in the IT, ITES and organized retail sectors has contributed to higher prices for commercial land. Check Real Estate Company.

Impelled by increasing industrial and residential property costs, real estate firms’ valuations have also risen significantly. The scale of ‘land banks’ is regarded by some investors as a main parameter for investment in real estate companies and gives little value to the margins and implementation time needed to complete these ventures. The biggest pitfall with this policy is that, despite having weak fundamentals, even loss-making firms can be rated exceptionally.

Although the size of land banks owned gives an indicator of a real estate company’s projected sales rise, investors should also understand those ratios unique to this field. As they offer useful insight into the financial performance of a real estate firm, the operating profit and return on capital invested can not be overlooked. It is also necessary to consider how the business is supported, as real estate developments have a long development cycle. Therefore when evaluating those businesses, debt to equity and working capital to revenue are very relevant ratios to be implemented.

Experts agree that because it continues to disregard the uncertainties involved, utilizing ‘normalized price per square foot’ or ‘benefit per square foot’ are more suitable approaches for buyers who consider real estate firms based on the overall land owned using ‘best price per square foot’ strategy to value the land size. The price to profits ratio and price to revenue are ideal strategies for valuing real estate firms, according to some analysts.

The reality that there is no uniform price that can be used is one big shortcoming in valuing land banks to assess the valuation of real estate firms. In addition, land prices vary greatly from position to spot. The usage of higher prices per square foot continues to over valuate enterprises.