Real Estate Valuation: Garbage In, Garbage Out?
Both Mint & Business Standard ran articles on the issues with valuation of real estate stocks & funds:
Mint: Valuing realty stocks is not easy
But earnings may not be the right way to value a company’s stock. As the DLF management has pointed out, the reason they chose to sell a portion of their commercial assets to a group company, in spite of normally leasing such assets, was to show the earnings potential in the asset. Earnings in a year depend, therefore, on whether an asset is sold or leased out. That’s the reason analysts prefer net asset value (NAV) as the key driver of real estate stocks.
Market experts say the DLF issue has improved the sentiment for real-estate stocks. But in an interesting twist, bankers to the DLF issue now point to Unitech’s share price and the fact that it is trading at a premium to its NAV to justify DLF’s IPO pricing. With each company propping up each other’s valuations, it’s evident that the markets still have a long way to go in learning how to value real-estate stocks.
Unitech to DLF: “You scratch my back, Ill scratch yours” 
Business Standard: Valuation blues for realty funds
Lack of uniform valuation and disclosure standards could dampen the enthusiasm of investors in real estate mutual funds (REMFs).
. . . accuracy of land valuation is the most critical element in the market performance of realty firms and REITs.
Something to keep in mind as we figure out whether to join the DLF IPO bandwagon at Rs 550 per share!
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