Land bank valuation, a difficult task for real estate cos: say analysts
Land bank valuation, a difficult task for real estate cos: say analysts
Commenting on SEBI`s recent move of mandatory grading of IPOs and tighter disclosure norms for real estate IPOs, real estate sector analysts, Saurabh Mahajan and Bhuvan Yadav of Karvy Stock Broking said that, SEBI`s move is a step in the right direction.
According to them, the move will make the sector more transparent and boost the foreign investment in the sector, reducing the risks and concerns of the foreign investors.
Under its move, SEBI, asked the real estate companies to provide land bank details, accompanied by ownership status. It said that the complete disclosure would be required for development of land.
Saurabh elaborated that, the main concern regarding the real estate companies has been on the valuation front. Land bank valuations of various real estate companies are increasingly becoming questionable.
He said that, the main concerns regarding the valuation are that, they should not be fetched by just quoting the land bank . Many subjective aspects like the location of the land, type of project planned, marketability & saleability of the development should be duly considered
Further he said that, typically the real estate developers, enter into an agreement with the landlord by booking the land and paying a token amount or they make him a partner with his share being equal to the land value as a percentage of the saleable value of the project.
In both of the above cases, they are not supposed to show the whole value of the land under their land bank, which is unfortunately being done, he added.
Quoting an example, Saurabh and Bhuvan said that, a developer goes to a landlord and signs a MoU with him to purchase a 10 acre land for Rs 5 crores and pays a token amount of Rs 10 lakh for the same. Now at the same time, the developer gets the same piece of land, valued by an independent valuer at Rs 50 crores upon development.
Now a days, the developers hire independent qualified valuers, to give a value to the land bank of the company. Their valuations are based on the information provided by the company, but mostly, the company does not provide the exact location of the properties, which is very important in case of valuations. In this scenario, giving a fair valuation to the real estate developers becomes difficult, Saurabh and Bhuvan added.
The analysts said that, to incorporate these reservations, an appropriate discount should be given to the net developed value of the land bank.
Commenting on the stocks in the real estate sector, they said that, some real estate stocks, in the near future will trade at sharp discounts, to incorporate the above valuation and management risks of the respective companies.
