Land Banks are crucial to valuing realty companies..

with real estate companies increasingly going public or bidding to raise institutional or bank funding for fast-track growth,the veil around their land banks is slowly being lifted........this is crucial as the worth of these land banks are crucial to the evaluation of these real estate companies

investors are now moving towards an asset-based or the sum-of-the parts(NAV) valuation approach for real estate stocks....

How does one assess large land banks? Typically , big indian developers have large land banks usually acquired at extremely low prices.This is unique in asia......In HongKong land banks last between 3-6 years......In India's case current land banks of Unitech and Mahendra Gesco ,for example,will last an average of 8-10 years.....So how does one value apiece of land that may not be developed for another 8-10 years ?....the answer is by taking the NAV of future profit for all projects until land supply is exhausted....taking into account long term changes in construction costs and residential prices..

A model for evaluating real estate companies can be as follows:

Land Bank Quality(40% weightage)

Management(25% weightage)

Asset Turnover(20% weightage)

Gearing(15% weightage)

for instance ,in evaluating land bank quality,SEZ-related land is seen as inferior to separately acquired non-SEZ land and there is a great deal of uncertainity and legal hassles surrounding around SEZ development..location(tier-I or II cities)and scale of projects planned also impacts determination of quality of land...

The 'Management' factor includes the ability to add value,management of capital,and vertical integration of business...

'Asset turnover' weighs the speed of asset turnover and how far the vagaries of market changes can be avoided and cash recycled faster...

On the above basis of evaluation..well-regulated and profitable property companies have a cheaper valuation compared to similarly to similarly placed stocks in IT,telecom,pharma,commodities and banks