How you can Value Property Companies

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The final couple of years saw property prices feel the roof. Three factors that impact property cost are cost, rate of interest and earnings levels. Since in India, the lack of residential units is roughly 19 million, demand side should never be a problem. Decrease in rates of interest and tax incentives for mortgage loan repayment drastically elevated the affordability and need for residential qualities after 2005. So that as supply lags behind the interest in residential qualities, prices logically rose drastically. Similarly, development in IT and ITES sector and arranged retail sector led to rise in commercial property prices.

Driven by soaring residential and commercial property prices, valuation of property companies also elevated dramatically. Some investors consider how big ‘land banks’ like a key parameter for purchasing real estate companies, and provide little importance to margins and execution time come to complete these projects. The main pitfall of the approach is the fact that even loss making companies be valued highly, despite getting poor fundamentals.

While size land banks held do provide indication about expected development of a genuine estate company’s revenue, investors also needs to consider certain ratios specific for this industry. Operating margin and Return on Capital Employed shouldn’t be overlooked because they provide valuable understanding of a real estate company’s operating efficiency. Also, since real estate projects have lengthy pregnancy period, you should know how the organization is financed. Hence, debt to equity and dealing capital to sales are important ratios to become applied while analyzing such companies.

Investors who value property companies in line with the total land held use ‘best cost per square foot’ approach to value the land size, experts opine that because it has a tendency to disregard the risks involved, using ‘normalized cost per square foot’ or ‘profit per square foot’ tend to be more appropriate methods. Based on some experts, Cost to Earnings ratio and Cost to Sales work means of valuing property companies.

One major disadvantage of valuing land banks for figuring out the need for property companies is the fact that there’s no standard cost that you can use. Furthermore, land prices defer broadly from area to area. Using greater values per square ft will have a tendency to overvalue companies.

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