Investment Property is a broad term used to describe a number of different public firms which are collectively termed as Firm Investments. In a nutshell, Firm Investments are those assets, which when properly managed and invested, can increase in value, making them an attractive proposition for prospective investors. More often than not, there exists a misimpression amongst investors that investment property comes with a higher risk factor attached to it. However, this is not the case, with good management and prudent investment practices, Firm Investments can be a lucrative venture for any investor.
Investment Property is broadly divided into two categories, namely, Firm Owned by a third party. A firm owned by a third party is one, which has been acquired by another company for the purposes of conducting business. As for Firm Investments, misvaluation is the result of a deviation from the underlying asset’s fair market value, or a decrease in value due to a number of reasons. Below are some of the most common reasons for investment misvaluation:
Income capital assets, especially those, which have the potential for realization, are often at a premium. As such, they are under-utilized, leaving behind an appreciating value for the company’s shareholders. Income-based valuation on the other hand, considers current income and future income and therefore, is calculated with appropriate factors. The deviation of this process from the fair value of the underlying property can be termed as misvaluation-induced investment property.
Growth-based valuation, on the other hand, requires consideration of factors like profitability, the quality of future earnings streams and the cost of capital for each firm in terms of dividends. This process however is also prone to the above-mentioned factors. The valuation of firm investment is also affected by changes in political, economical and social conditions. Any of these factors can lead to a fluctuating market which may affect the value of a firm investment.
Timing-based valuation refers to the evaluation of value by the firm’s actual sales price, discounted to a later date. As such, it takes into account the value of the firm’s total revenue over a specified period of time, discounted to a later date, and attempts to approximate the change in value of total revenue over this period. The use of estimated value and historical value are therefore used to determine the valuation of firm investment properties.
These three factors mentioned above are the main factors that lead to a firm misvaluation. The importance of these factors means that, in order to avoid investment property misvaluations, consideration must be made of all of them when making an investment decision. The process of valuation therefore, involves a combination of several important factors. If a suitable investment is identified through the use of these factors, then the chances of getting a good return on investment increase. Thus a balanced investment portfolio can be successfully achieved. To learn more about these factors and other important considerations, you can check out Commercial Investment Property Learning Center.