'Future valuation of land can impact mkt cap'

After market regulator Securities and Exchange Board of India (Sebi) sounded a warning about futuristic valuation of land by real estate companies in their draft prospectus, the globally acclaimed Royal Institute of Chartered Surveyors (RICS) of the United Kingdom has now endorsed the view that future valuation of land could impact the market capitalisation of real estate companies negatively.

"Value your land as it stands today. Future valuation of properties is a dangerous thing. Do not book profits which have not occurred because markets tend to take realistic picture of your assets. However, profitability and business potential of realty companies can be treated differently," said Graham F Chase, president of The Royal Institution of Chartered Surveyors.

Graham's word of caution assumes significance since scrips of most of the Indian real estate companies have shed 20 to 30 per cent in recent months. The government is also planning to allow mutual funds to invest in real estate, which are equivalent to Real Estate Investment Trusts (REITs) in the UK, Singapore, Australia.

Graham says that REITS all over the world are trading 5 to 10 per cent below their asset value due to improper valuation. He believes that in India, the discount could be higher since there are problems with valuation.

"Do not assume that you will get market capitalisation above your asset value. If market thinks that your valuation is bloated, the share prices will definitely be impacted," Chase said.

Chase said concerns over valuation and fears of slowdown in property market had impacted realty companies listed on the AIM of the London Stock Exchange.

Concerned over IPO-bound real estate firms showing futuristic projections of property, the Sebi stated in a note on real estate companies: "There should not be any disclosure of land values based on the future developed value of the land."

As of February 14, there are seven draft offer documents of real estate companies filed with the Sebi. These issues are likely to raise an estimated Rs 17,400 crore. Real estate major DLF got the Sebi nod for an IPO one year after it filed the draft prospectus in May 2006.

A Sebi official recently said that the regulator was trying to bring guidelines for valuations of real estate companies in association with the Institute of Chartered Accountants of India and other autonomous bodies.

"While on the one hand, a string of issues by real estate companies reflects on the ability of Indian primary market to support such huge need for funds, on the other hand, it also perhaps reflects on a tendency on the part of issuers to ride on the real estate boom, thereby pointing to the need for overall caution," the note said.

It was in this context, the Sebi said that a need was felt for a closer scrutiny of disclosures by such companies, especially relating to land bank and its valuation.

According to the Sebi, disclosures by real estate companies showed that there were no standards. At times, valuations included certain futuristic assumptions, while there were no future valuations in other cases.