Is It Possible to Invest in Real Estate stock and Get Profits?

If you want to invest in real estate stock, you should first understand that the real estate markets fluctuate a lot and the stocks also follow the same patterns. In the same country, the real estate markets may be booming in one period and sagging within a short time. The real estate stocks to buy are determined by the market conditions at that particular moment. When you consider investment in real estate stocks, several factors have to be carefully analysed, such as lack of demand for real estate or the present supply and demand conditions, over leveraging or under leveraging, high or low interest rates, diversification of real estate companies into unrelated areas, sectors or industries, etc. These will affect the profitability and revenues of the real estate companies and the stock prices will also get impacted strongly by these factors and variations in them.

Analysing Real Estate Companies and Their Stocks

The operators in real estate industry are normally classified into three categories or sub-industries.

  • Real estate developers of residential properties
  • Real estate developers of commercial and other mixed use properties
  • Real estate developers of industrial properties

Real estate developers of residential properties are highly dependent on one major factor, economies of scale, since land prices continue to increase steadily irrespective of the state of the economy of any country and rates of interests also play a vital role in people flocking to real estate market to buy homes or apartments. The land prices are usually much higher in developed countries and hence the price increases are usually marginal. On the other hand, the land prices are comparatively cheap in developing countries and home property developers have a better chance of higher profits. As such, brand images and good management are main factors in deciding whether a particular real estate company is worth investing or not.

Real estate developers of commercial and other mixed use properties are increasingly finding it difficult to identify and develop prime properties in central business districts. Hence, there has been a paradigm shift from the approach by real estate companies in developing commercial properties and selling them en masse. Nowadays, they rent the developed properties so that the properties remain in their control and management, apart from yielding a steady and substantial rental income from such properties. If such developers wish to free the capital amount invested in a commercial property, they usually sell it to real estate investment trusts (REITs).

Real estate developers of industrial properties are also operating much like developers of commercial properties, concentrating more on rental incomes rather than outright selling.

Valuation of Real Estate Developers

The most common method of valuing real estate companies to invest in real estate stock is Revalued Net Asset Value (RNAV) method, which estimates the net asset value of the real estate companies as ‘changes in values of the total investment properties of the company + surplus property values held for future developments by using the method of discounted cash flow + the net asset value along with other necessary adjustments in valuation’. Analysts multiply this basic RNAV value with other factors such as branding, management capabilities, track record, etc., using them as premium or discount percentages for multiplication of the RNAV. Even though this method is conventional and accurate, only trained analysts will be able to use this effectively to decide which real estate stocks to buy. Standard investors have to use usual value evaluation approaches like P/E multiplies. Still a combination of these methods will be highly helpful in deciding how to invest in real estate stock that will provide higher yields in short-term as well as long-term investment plans.