Property company: why the formula falls short
Companies holding real estate as their main asset are poorly served by the equity plus four times EBITDA formula. What a proper valuation looks at instead.
A property company holding real estate as an investment, rather than operating a trading business, typically generates rental income rather than substantial EBITDA, so the statutory formula of equity plus four times EBITDA tends to produce a value disconnected from the actual worth of the properties held. An independent valuation instead centres on the value of the real estate itself.
- Property companies often show low EBITDA relative to the value of their assets.
- The formula's EBITDA multiple does not reflect how real estate is valued.
- A valuation centres on the underlying property values, net of related debt.
The mismatch between rental income and the formula
A company that holds one or more properties for rental or investment purposes typically reports rental income and related costs, resulting in an EBITDA figure that reflects the property's operating yield rather than its capital value. Multiplying that figure by four does not correspond to how real estate is actually valued in practice.
Real estate is generally valued based on its market value, informed by comparable transactions, location, condition and rental potential, not as a multiple of the income it currently generates through a company's accounts. The formula's approach and the property market's approach are simply different exercises.
Equity in a property company can also be misleading
The equity figure in a property company's accounts reflects the historical accounting value of the properties, which may have been acquired years or decades earlier and recorded at cost less depreciation, rather than at current market value. This can leave a substantial gap between book equity and actual worth.
Where the accounting value of a building is well below its current market value, relying on equity as reported understates the company's actual position, compounding the distortion already introduced by the EBITDA multiple.
How a valuation approaches a property company instead
A valuation of a property company generally starts from an assessment of the market value of each significant property held, which may draw on independent property appraisals, then works from there to the value of the shares, taking into account any debt secured against the properties.
Other balance sheet items, including cash, receivables and other liabilities not directly tied to the properties, are then incorporated to arrive at a net value for the company as a whole, distinct from the value of the properties considered in isolation.
Mixed companies with both operations and property
Some companies combine an operating business with real estate held on the same balance sheet, for instance a business that owns the building it operates from. In these cases, a valuation needs to separate the value attributable to the operating activity from the value attributable to the property itself, since a single formula or method rarely captures both accurately.
Why this distinction matters for the 31 December 2025 reference date
Shareholders of property companies or mixed companies with significant real estate holdings are among those for whom the gap between the statutory formula and an actual valuation tends to be largest, making the choice between the two routes particularly consequential for this category of company.
Questions on this
Why is EBITDA a poor measure for a property company
EBITDA reflects rental income and operating costs, not the capital value of the properties themselves, so multiplying it by a fixed factor does not correspond to how real estate is actually valued.
Does book equity reflect the real value of the properties
Often not. Properties are typically recorded at historical cost less depreciation in the accounts, which can be well below their current market value, especially for properties held for a long period.
How are mixed companies with operations and property handled
The value attributable to the operating activity is generally assessed separately from the value attributable to the property, since each requires a different valuation approach.
Open a file
Enter your details and we will get in touch shortly.
Read next
This information is general. It does not take your specific situation into account and is not tax advice.