Equity REITs: Industry overview and valuation methodologies

An investor willing to obtain exposure in real estate must understand the multitude of factors that influence real estate prices. These will inherently include the relationship between cap rates and long-term real interest rates, but also the specificities of demographics and government policies. He should also comprehend the various types of investment vehicles available. This paper’s, main objective was to clarify the main aspects an investor must consider, with an emphasis in defining REITs as an asset class. Due to their minimal investment requirement and highly liquid nature, we argue that REITs provide the most democratic investment vehicle currently available. We also provide a REIT-specific layout to implement various types of valuation methodologies, including: Public Comparables, Precedent Transactions, Net Asset Value,Discounted Cash Flow analysis, Dividend Discount Model and Replacement Value. We find, through a case study of Equity Residential (a U.S. based Equity REIT), that all methods possess their merits and drawbacks, but that the Net Asset Value can be considered the most prominent valuation tool available