Property valuation is based on income during recession and based on replacement value during prosperity;
Definition of valuation:
The price that the buyer and seller agree on for an asset and the transaction on this asset is done at this price.
Definition of boom and bust:
Prosperity means an increase in transactions and, in other words, an increase in asset liquidity
Recession means a decrease in transactions, and in other words, a decrease in asset liquidity
Replacement value:
Let me explain with an example. To build a residential unit, costs are necessary, which include the cost of buying land, preparing plans, building permits, materials, wages, etc. If you add up all these costs, you can get the replacement value of that unit. residential
Earning value:
Take the same example of a residential unit in mind. Now we don’t have anything to do with the costs of building housing, what matters is how much money we can make from our capital (housing). How can you earn from this residential unit? By renting out this residential unit. My calculations show that for a newly built residential unit in an average place in Tehran, the ratio of the apartment price to the monthly rental price of the same apartment should be around 220. Assuming that the monthly rent of this residential unit is 3 million tomans, its price should be 660 million. tomans. We call this method valuation based on earnings
It seems that now that the stock market is booming, the valuation of listed companies should be based on the replacement value. The replacement value of almost all large listed companies is much larger than their earnings value. As a handful of examples, the replacement value of refining companies is tens and maybe hundreds. It is equal to their earning value. During the recession, the earning value should be considered, and during the boom, the replacement value can also be considered.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
Link to the audit accounting clinic
https://t.me/joinchat/BnzBsTuioTshiXBwf9bBPQ