A company is defined as real estate company if its main object is the management/development of a portfolio of real estate assets that own the property title. With reference to the evaluation of a real estate company, it is possible to use different methodologies: 1. Financial method; 2. EVA Method EVA (Economic Value Added); 3. Method of multiples; 4. Asset Method.
In the first case, the real estate company value is based on the value of its cash flows and the value is calculated by discounting the expected cash flows. The main difficulties of this method are determining the explicit forecast of cash flows, estimating the cost of capital, and calculating the terminal value (TV) and the proper discount rate.
In the second case, the real estate company value is obtained by using a methodology1 designed to highlight the effective ability to produce wealth. A company creates value if the difference between the operating income after tax and the cost of capital employed to achieve it is positive (EVA> 0). The main difficulties of this methodology are: the determination of the explicit forecast period of EVA, the estimated cost of capital, the calculation of terminal value at the end of the explicit forecast horizon, and the proper discount rate. The real estate company value is equal to the capital invested plus the sum of all future EVA discounted, plus the discounted TV.
In the third case, it is possible to infer that the value of a real estate company is based on the price of securities listed on a regulated market that represents shares of comparable companies. The goal of the method is to develop relationships (multiple), based on the report of the actual stock prices of companies with comparable business economic variables. The multiple thus obtained are applied to the same economic variables of the company being evaluated in order to obtain its value. The difficulties of this methodology are the growth prospects and the risk specific to the real estate company being evaluated.
In the fourth case, the value of a real estate company is given by its assets, by quantifying the price recovery of assets from the perspective of a business operation. The value corresponds to the net investment that is necessary to start a new company with an identical structure to the one being evaluated. The difficulties of this method lie in the analytical estimate of each element at current values .
1The introduction of the euro and the divergence between measured and perceived inflation. The methodology that introduced the EVA concept is a registered trademark of the consulting firm Stern & Stewart, which proceeded to implement it and to spread it in the 1980s.
Milano F. (2005), "Corso di Finanza Aziendale", Luiss University Press.
Monti E. (2005), "Manuale di Finanza per l'impresa. Teoria e pratica.", UTET.
Linneman P. (2004), "Real Estate finance and investments: risks and opportunities", Philadelphia.
Tronconi O., A. Ciaramella, B. Pisani (2007). "La gestione di edifici e patrimoni immobiliari". Milano. Il sole 24 ore.
AA.VV. (2007). "Societa di investimento immobialire quotate". Milano. Il sole 24 ore.
Editor: Alberto Maria SORRENTINO
© 2009 ASSONEBB