The property sector has always liked to do things differently. While other sectors debate price/earnings ratios and enterprise value to Ebitda, real estate investors wax lyrical about discounts to net asset value (NAV) and loan-to-value (LTV).
This approach made sense in the old world of declining yields and interest rates, says Tim Leckie, an analyst at Panmure Liberum. Falling rates meant shifts in portfolio valuation were a large component of returns. But now that rates are higher and valuations unsteady, Leckie says the focus must be on cash flow generation. Reits need to be able to generate enough cash to pay down increased interest costs and grow. For the low-yielding, low-risk portfolios of times gone by, this is a problem.
Yet for Reits, just as when it comes to valuing companies more generally, no valuation metric should be taken in isolation.