Valuation of Real Estate Companies: A Critical Assessment of Different Corporate Valuation Methods

"Research on real estate asset valuation is largely reflected in the literature, whereas valuation of real estate companies is widely ignored. Taking into account the actual amount of investments of opportunity funds in European real estate portfolios and companies and the wide discussions on real estate investment trusts (REITs), the determination of the ""fair and true value"" is of upmost importance for all ñ listed and non-listed ñ real estate companies. In this respect the valuation of real estate companies reflects the integration of real estate and capital markets. The paper analyses in detail the most important methods to evaluate real estate companies: the multiplemethod, the net asset value approach (NAV) and the discounted cash-flow-method (DCF), where all the methods are explained theoretically and discussed critically. In the first part of the paper, the different possibilities in evaluating real estate companies with the multiple method will be set out, focussing in detail on the recommendations and approaches of the DVFA/SG (the leading German association of financial analysts) and the NAREIT (the leading US-association on REITs). Evaluating real estate companies with the NAV-method implies a separate appraisal of the different assets and liabilities of the real estate company, where the precise value strongly depends on the information published or possible different value concepts. Finally the DCFapproach will be presented in detail, focussing on the strengths and weaknesses of different DCF-methods with respect to the real estate sector. Especially the weighted average cost of capital-concept (WACC) will be discussed. A detailed focus lays in the critical assumptions of the Discounted Cash Flow Method, especially on the detailed information needed, the required discounting rates and the possible value of hidden assets. "