# Real estate developers, REITs and InvITs — sector playbook

Use this when: the company's primary business is creating, owning or monetising real property or long-life infrastructure concessions — Indian listed residential and commercial developers, Indian REITs and InvITs, US equity REITs and REOCs filing on EDGAR, European/Asian property companies under IAS 40, and homebuilders and land-banking companies anywhere.

Three facts govern everything below. Reported profit is an accounting artefact — depreciation on appreciating buildings, valuer opinions booked as income, and revenue recognised on projects sold three to five years ago. The balance sheet is carried at the wrong basis — historic-cost land understates developer equity, fair-value marks inflate REIT equity. And negative free cash flow is frequently the bullish signal, because a developer buying land looks identical on the cash-flow statement to a developer bleeding out. Replace the generic ratio set entirely; do not adjust it.

The three sub-sectors here share a physical asset class but almost nothing else analytically. **Developers** are serial project underwriters with lumpy, backward-looking accounting. **REITs** are stabilised rent-collecting vehicles judged on cash distribution per unit. **InvITs** are finite-life concession portfolios where the headline yield is partly return of capital. Never apply one framework to another, and never put them in the same peer table.

## Contents

- [Why the generic ratio set fails here](#why-the-generic-ratio-set-fails-here)
- [The metrics that actually matter](#the-metrics-that-actually-matter)
- [How to value companies in this sector](#how-to-value-companies-in-this-sector)
- [Peer set construction](#peer-set-construction)
- [Sector-specific red flags](#sector-specific-red-flags)
- [Cycle and structural context](#cycle-and-structural-context)
- [India vs global notes](#india-vs-global-notes)
- [Checklist](#checklist)

## Why the generic ratio set fails here

If a screener hands you these, state that they are inapplicable rather than reporting them with a caveat. A reported number gets used downstream.

**P/E and EPS — close to meaningless, in four separate ways.**

1. *REIT depreciation.* IFRS/Ind-AS and US GAAP force straight-line depreciation on buildings that in practice hold or appreciate in value. A stabilised office REIT can report near-zero or negative EPS while generating large and growing cash distributions. This single distortion is the entire reason NAREIT invented FFO.
2. *Fair-value accounting.* Under IAS 40's fair-value model (common in Europe, UK, Singapore, Hong Kong), unrealised revaluation gains run through the P&L. "Profit" is a valuer's opinion, not cash — earnings can double in a year with zero change in rent, and collapse the next with zero change in occupancy.
3. *Ind-AS 115 for Indian developers.* From FY19, percentage-of-completion was replaced by completion-based recognition. Reported revenue reflects projects **sold three to five years ago** and has almost no relationship to current sales momentum. Two identical developers can show wildly different EPS purely on hand-over timing.
4. *InvIT amortisation.* Toll-concession intangibles amortised under Appendix A/D to Ind-AS 115 routinely push consolidated InvIT results to a loss while the trust pays a 9–13% cash yield.

**OPM / EBITDA margin — not a measure of operating skill for developers.** Cost of sales carries land at historical acquisition cost. A 45% gross margin usually means land bought a decade ago in a different price cycle; a 22% margin may mean freshly acquired land at market. Margins are also structurally different by model: outright-purchase development books full revenue and full cost, joint-development agreements (JDA) and development-management (DM) mandates book only the developer's revenue share, and plotted development carries far higher margins than high-rise. Worse, interest is capitalised into inventory and released through cost of sales, so "EBITDA margin" silently varies with the financing structure. Cross-company and cross-period OPM comparison here is close to noise.

**D/E and Net debt/EBITDA — misleading in both directions.** Developer equity is understated because land sits at historic cost, so D/E is *overstated*. IFRS fair-value REIT equity is inflated by revaluations, so D/E is *understated* and moves with valuer assumptions rather than with borrowing. Developer gross debt also needs customer advances treated separately — they are pre-sold cash, not creditors, and under RERA 70% is escrowed and legally ring-fenced. EBITDA is lumpy and completion-driven, so Net debt/EBITDA oscillates violently for a business whose cash flows are actually quite forecastable at project level. For REITs and InvITs the correct denominators are asset value and cash flow: **LTV and DSCR**, never equity or EBITDA.

**ROCE / ROE — structurally wrong.** Capital employed includes land and work-in-progress that will not generate revenue for three to seven years. A developer in an aggressive land-buying phase shows collapsing ROCE precisely when it is creating the most value; a developer liquidating old inventory shows excellent ROCE while its business shrinks. For REITs, ROE is depressed by non-cash depreciation and, under fair-value accounting, the denominator is marked to market, so ROE mechanically compresses in a bull market.

**FCF and cash-conversion — inverted.** A developer's operating cash flow is negative when it buys land and launches (growth) and positive when it stops investing (decline). Negative FCF is often a launch cycle, not distress. Interest paid is partly capitalised, and its classification between operating and financing differs across companies, so headline OCF is not comparable without normalisation.

**Working-capital ratios — undefined in spirit.** Inventory (land, WIP, unsold finished units) turns in years yet is classified current. Inventory turnover, current ratio and the cash-conversion cycle flag every developer on earth as distressed. Debtor days are meaningless because most receivables are construction-linked and unbilled.

**Dividend payout ratio — undefined or nonsensical.** REIT/InvIT distributions come out of net distributable cash flow, not accounting profit. In India they flow up from SPVs as a mix of interest, dividend and repayment of capital, each taxed differently in the unitholder's hands. Payout on EPS is routinely above 100% or negative. The correct denominators are **AFFO** (developed markets) and **NDCF** (SEBI regime).

**P/B — unusable for developers, tautological for REITs.** Developer book carries land at historic cost, so P/B of 3x may be cheap. Fair-value REIT book equals appraised NAV roughly by construction, so P/B just restates price/NAV. Use the mandatory independent valuation's NAV per unit, not accounting book value.

**Interest coverage — understates the true burden.** P&L finance cost excludes capitalised interest. Use cash interest paid from the cash-flow statement, or DSCR at the asset/SPV level.

**Revenue and PAT growth — lagging indicators for developers.** Pre-sales (bookings) and collections lead reported revenue by several years. Ranking developers on revenue or PAT growth systematically buys the previous cycle's winners at the top of the current one.

## The metrics that actually matter

Ranges are **indicative only**. They vary by market, sub-sector, asset class, cycle stage and period, and any of them can be wrong for a specific company in a specific year. Comparison against a tight peer set and against the company's own history overrides every absolute band below. Metrics marked **[D]** apply to developers, **[R]** to REITs and rental portfolios, **[I]** to InvITs; several apply across.

| Metric | Definition / how to compute | Indicative healthy range | Why it matters |
|---|---|---|---|
| **Pre-sales / bookings — value, area and realisation per sq ft [D]** | Value of units sold in the period, both gross **and net of cancellations**; area sold in msf; implied realisation = value ÷ area. This is the true top line, preceding Ind-AS 115 revenue by 3–5 years. | Sustained double-digit YoY growth in a normal cycle; cancellations under ~5–7% of gross bookings; realisation per sq ft rising at or above construction-cost inflation. | The only forward-looking demand signal. Reported revenue tells you about the market of 3–5 years ago. Decompose growth: value growth driven by *area* (cheaper geographies, plotted land) is a structurally different and lower-quality business from growth driven by *realisation*. |
| **Collections and collection efficiency [D]** | Cash actually received from customers under construction-linked or time-linked plans, expressed against pre-sales value. Pair with operating cash flow before land payments and interest. | Collections roughly 75–90% of pre-sales value over a rolling 4–8 quarter window; persistently below ~65% suggests subvention/deferred-payment schemes or execution slippage. | Bookings can be manufactured with soft payment schemes; cash cannot. A widening pre-sales-to-collections gap is the earliest reliable warning of channel stuffing, construction delay or a coming cancellation wave. |
| **Operating cash surplus and net debt / operating surplus [D]** | Collections − construction spend − overheads − approval costs − cash interest, *before* new land investment. Then net debt (excluding RERA-escrowed advances) over that surplus. | India large caps post-2020: net D/E 0.0–0.5x and net debt / annual operating surplus below ~2.5x. Net D/E above 1.0x *with* negative operating surplus is the classic pre-distress profile. | Real estate defaults are cash-flow-timing events, not P&L events. This pairing is what separates good negative FCF (investing in land) from fatal negative FCF (funding overheads and interest with new borrowing). |
| **Business development: GDV added and land cost as % of GDV [D]** | Gross development value of projects added in the period (outright, JDA or DM), the land-plus-approval cost as a % of that GDV, and the owned-land vs asset-light JDA split. | India: land + approvals ~20–30% of GDV for a viable project; below ~20% is strong; above ~35% usually destroys project margin. Pipeline replacement should at least match annual pre-sales. | A developer is a serial underwriter. Land bought at the wrong percentage of GDV locks in poor returns for a decade regardless of management quality. A developer selling faster than it replenishes is liquidating, not compounding. |
| **Unsold inventory overhang and ready-inventory value [D]** | Unsold saleable area ÷ trailing sales run-rate, expressed in months; split between under-construction and completed (ready) stock. | India: 15–24 months healthy; above 30–36 months signals oversupply. Ready unsold inventory should be a low single-digit % of portfolio value. | Completed unsold stock carries maintenance, property tax and full interest with no offsetting construction-linked collections — the single largest destroyer of developer returns. Overhang also predicts pricing power: low overhang raises prices, high overhang discounts. |
| **Project-level cash margin and embedded surplus [D]** | Expected cash surplus per project (sales value − land − construction − approvals − marketing − interest), aggregated across ongoing and planned pipeline and discounted. Effectively the order-book economics. | India residential: 25–35% project-level cash margin on new underwriting is typical; 18–22% signals thin underwriting. Compare aggregate embedded surplus to current market cap. | Replaces company-level OPM, which is contaminated by historic land cost and completion timing. It is also the direct input to NAV, the primary valuation method for developers. |
| **FFO and AFFO **per unit**, and AFFO payout ratio [R]** | FFO (NAREIT) = net income + real-estate D&A − gains (+ losses) on property sales. AFFO further deducts recurring maintenance capex, tenant improvements, leasing commissions and the straight-line rent adjustment. | AFFO payout 70–90% for developed-market REITs (below 70% is growth-retaining, above 95–100% unsustainable). FFO/AFFO per unit growth 3–6% p.a. in developed markets; higher in an Indian office upcycle. | The direct replacement for EPS. Always per unit — externally managed REITs grow *total* FFO by issuing units while per-unit FFO stagnates or falls. AFFO is the honest number because it charges for the capex needed just to keep rents where they are. |
| **NDCF, DPU and distribution composition [R][I]** | The SEBI-mandated cash construct: cash generated at each SPV, adjusted per the SEBI NDCF framework, upstreamed as interest, dividend and repayment of capital/loans. DPU = distribution per unit. | SEBI requires ≥90% of NDCF distributed at least semi-annually (Indian practice is quarterly). Look for DPU growth of 4–8% p.a. and a stable or falling share of "repayment of capital". | NDCF is the Indian analogue of AFFO but regulator-defined, so it is genuinely comparable across trusts. Composition matters twice: a rising capital-repayment share means the yield is partly your own money returning and the asset base is depleting, and the post-tax yield differs materially from the headline. |
| **Same-store / same-property NOI growth [R]** | NOI (rental + recovery income − property-level opex, before corporate overhead, interest and depreciation) growth for assets owned and stabilised through both comparable periods. | 2–4% p.a. developed markets in a normal cycle; mid-to-high single digits for Indian Grade-A offices given contractual ~15% escalations every 3 years (~4.7% annualised) plus re-letting mark-to-market. | Strips out growth bought with acquisitions and unit issuance. Aggregate NOI growth flatters serial acquirers; same-store NOI is what a private buyer would underwrite. |
| **Occupancy, committed occupancy, WALE and the lock-in expiry ladder [R]** | Physical vs committed occupancy (including signed-not-occupied); weighted average lease expiry in years; the schedule of both lease expiries **and lock-in expiries** by year; tenant and sector concentration. | Indian Grade-A office: 85–95% committed occupancy, WALE 6–9 years, no tenant above ~8–10% of gross rentals, no single year above ~15–20% of expiries. Retail: 95%+ occupancy, occupancy cost ratio 12–18% of tenant sales. | The lease book *is* the REIT's cash-flow contract. WALE alone is deceptive: Indian leases run 9–15 years but with a 3–5 year lock-in and a tenant exit option thereafter, so the **lock-in ladder, not the lease ladder**, is the real risk schedule. |
| **Mark-to-market gap and realised re-leasing spread [R]** | Contracted in-place rent per sq ft vs prevailing market rent for comparable space; plus the rent spread actually achieved on renewals and re-lettings in the period. | Positive MTM of 10–25% is a healthy embedded growth reserve. Negative spread means rent was over-marked or the micro-market turned. Realised re-leasing spreads should roughly track the stated MTM. | The best measure of organic future growth not yet in the numbers — and a truth test on the valuer. If stated MTM upside never converts into realised spreads, the appraisal and therefore the NAV are overstated. |
| **LTV, DSCR/ICR, cost and maturity profile of debt [R][I]** | Net debt ÷ independently appraised gross asset value; debt service coverage; weighted average cost of debt; % fixed-rate; maturity ladder; SPV-level cash traps. | SEBI caps consolidated REIT/InvIT borrowings at 49% of asset value, with conditions biting above 25% (InvITs need AAA and unitholder approval to go beyond 49%, up to 70%). Prudent Indian REITs run 20–30%; US/EU REITs 30–40%. DSCR >1.8–2.0x, ICR >3x, majority fixed-rate, no single year above ~20–25% of maturities. | LTV is correct because the collateral is an appraised, income-producing asset, not equity book value. The regulatory caps are hard constraints: a trust drifting toward 49% loses acquisition flexibility and may be forced to issue units at a discount. Bullet maturities plus floating-rate exposure is how yield vehicles blow up in a tightening cycle. |
| **Maintenance capex, TI and leasing costs as % of NOI [R]** | Recurring capital spend needed to hold current rent-earning capacity: base-building capex, tenant fit-out contributions, leasing commissions, free-rent periods. | ~10–20% of NOI for offices over a cycle; lower for industrial/warehousing, higher for older Grade-B stock and retail re-tenanting. Consistently under 5% of NOI is almost certainly deferral or capitalisation. | The line most often understated to inflate AFFO and make the distribution look covered. Chronic under-spend surfaces years later as falling occupancy and negative re-leasing spreads — the asset is being harvested, not managed. |
| **Development pipeline: under-construction area, pre-leasing %, yield-on-cost vs cap rate [R]** | Size of on-balance-sheet development (large in Indian REITs), proportion pre-leased, stabilised NOI yield on total development cost, and the spread over the cap rate at which completed assets trade. | Development spread of 150–300 bps over market cap rate justifies the risk. Under-construction area 10–20% of portfolio is manageable; above 30% makes the vehicle part developer. Pre-leasing above 50% before topping out is comforting. | Development is where REIT value is created or destroyed, and it is funded partly by withholding distributions. A thin or negative development spread means unitholders take construction and leasing risk for no premium — better to buy the finished asset. |
| **InvIT asset KPIs: volume/availability, residual life, MMR funding [I]** | Roads: toll traffic growth (PCU), WPI-linked toll escalation, annuity/HAM receipts, funded status of the major maintenance reserve. Transmission: line availability (tariff is availability-linked, no volume risk) and counterparty receivable days. All: weighted average residual concession life. | Transmission availability 98–99%+ (incentives kick in around there); road traffic growth 4–7% p.a. plus WPI escalation; MMR fully funded against the concession's periodic overlay cycle; weighted residual life 15+ years — treat under 10 years as a wasting asset. | InvIT assets are finite-life. A 13% yield on a road with 8 years of concession left is largely return of capital, not income. Residual life, volume risk (toll) vs no volume risk (annuity/HAM/transmission), and honestly funded major maintenance separate a real income stream from a liquidation schedule dressed as a dividend. |
| **NAV per unit, premium/discount to NAV, implied cap rate [D][R][I]** | GAV from the mandatory independent valuation (SEBI: full valuation at least annually, half-yearly updates) less net debt, per unit; market price relative to it; implied cap rate = stabilised NOI ÷ (market cap + net debt). | Developed-market REITs oscillate between roughly a 20% discount and 20% premium. A persistent discount above ~25% means either the market thinks valuations are stale or there is a governance/leverage problem. Compare implied cap rate to actual transactions — Indian Grade-A office roughly 7.5–8.5%; US office far wider than industrial. | The anchor valuation for the sector and the arbitrage check. If the market implies a cap rate far above private transactions, the vehicle should be selling assets and buying back units; if far below, issuing units and acquiring. Management's behaviour against that signal is a direct capital-allocation test. |
| **Per-unit / per-share discipline and dilution history [D][R][I]** | Track pre-sales per share, FFO per unit, DPU and NAV per unit across every equity raise, QIP, institutional placement and sponsor infusion, with the price/NAV at which each was done. | Per-unit metrics compounding at least as fast as aggregate metrics; no material issuance below NAV. | Growth funded by unit issuance is the standard illusion in this sector. Aggregate NOI, FFO and DPU can all rise while the existing unitholder is worse off. Issuing below NAV to buy assets above the implied cap rate is direct value transfer. |
| **Contingent liabilities, JV/associate debt and corporate guarantees [D]** | Project debt in equity-accounted JVs and associates, guarantees given to lenders of SPVs and JDA partners, and litigation/title contingencies — from the notes, not the face of the balance sheet. | Guarantees and JV debt should be small relative to consolidated net worth; disclose and add them to net debt when they are not. | Consolidated D/E for developers routinely omits the leverage that actually sinks them. Equity-method JVs hide project debt; guarantees convert to real obligations exactly when the cycle turns. |

## How to value companies in this sector

There is no single multiple. Three sub-sectors, three frameworks, and P/E belongs to none of them.

### Developers — NAV / sum-of-the-parts is primary

Build bottom-up, project by project:

1. Forecast each **ongoing project's** remaining cash flows: remaining collections less remaining construction, approvals, marketing, tax and interest.
2. Do the same for the **planned pipeline** on assumed launch dates, haircut for approval risk.
3. Discount at a project-appropriate rate — India roughly 12–15% real; developed markets WACC or 8–12% depending on risk.
4. Value the **unlaunched land bank** at either a per-acre market rate or a heavily discounted NPV. Land under MOU/LOI or without approvals gets a severe haircut or zero.
5. Add the **capitalised value of annuity/rental assets** at an appropriate cap rate.
6. Subtract **net debt** and the **NPV of corporate overheads**.

That is NAV. Indian listed developers have historically traded between roughly 0.6x NAV at cycle troughs and 1.5–2.0x at peaks. The premium is justified by brand, execution speed and business-development capability — NAV assumes only one turn of the land, whereas a developer that reliably converts fresh land into 25%+ margin projects compounds. Judge the premium against evidence of that conversion, not against reputation.

**Secondary cross-checks:** EV / GDV of the pipeline; market cap / annual pre-sales (Indian large caps have traded roughly 2–5x); price per sq ft of embedded saleable area vs physical market prices; EV / embedded EBITDA; replacement cost and land value per acre for land-heavy legacy names.

**Do not use:** P/B (historic-cost land). P/E is defensible only where revenue recognition has stabilised and the mix is annuity-heavy, and even then cross-check against NAV.

### REITs — FFO/AFFO multiples, cap rates and NAV, in that order

The working multiples are **P/FFO and P/AFFO** (developed markets: office historically 12–18x FFO, industrial and data centres far higher, with wide dispersion by property type and cycle) and EV/EBITDA. Above both sits the **cap rate framework**: value = stabilised NOI ÷ cap rate, with the cap rate taken from actual private transactions in the same micro-market and asset grade.

Then compute the **implied cap rate** from the market price and compare it to the private-market cap rate. That gap is the entire public-versus-private arbitrage and the single best sanity check on whether the appraised NAV is credible. Finally, build NAV = (portfolio NOI capitalised + development at cost or risk-adjusted value + cash) − net debt, and assess the premium/discount.

**For Indian REITs the practical framework is yield-based.** Distribution yield versus the 10-year G-sec: Indian REITs have generally been underwritten to a spread of roughly 150–300 bps over the 10-year. Two refinements are essential. First, a large part of the distribution is tax-advantaged or tax-deferred (the capital-repayment component), so compare **post-tax** yields, not headline yields. Second, add expected DPU growth — contractual ~15%/3-year escalations, plus mark-to-market, plus committed development — to get an expected total return. The rigorous version is a discounted-NDCF or dividend-discount model over ten years with a terminal cap rate.

### InvITs — total-return DCF on a finite-life asset, never headline yield

Because road and many other InvIT assets have finite concession lives, discount the DPU stream over the residual concession life with little or no terminal value and solve for the **unitholder IRR**. A 12% headline yield on a road with nine years of residual life may be a 7% economic return once you recognise that part of the distribution is return of capital.

Compare that IRR to the G-sec plus an equity risk premium of roughly 400–600 bps for toll assets (volume risk) and 250–400 bps for annuity/HAM and transmission assets (availability-based, no volume risk). Perpetual-style InvITs with reinvestment mandates and acquisition pipelines can carry a partial terminal value — but only where the sponsor has a credible ROFO pipeline **and** a demonstrated record of per-unit-accretive acquisitions.

### Cross-cutting rules

- **Always value per unit / per share, never in aggregate.** Growth funded by unit issuance is the standard illusion in this sector.
- **Test every acquisition for DPU/AFFO-per-unit accretion after financing cost**, not for NOI accretion.
- **Compare the entity's own cap rate assumptions with observable transactions.** When rates move and stated cap rates do not, the NAV is stale and everything derived from it is wrong.
- **For developers, judge the cycle explicitly.** Returns are dominated by where you sit in the price/inventory cycle. Low overhang + low leverage + a replenishing pipeline at a low land-to-GDV ratio matters more than any single multiple.

## Peer set construction

A valid comparable shares the **cash-flow shape and the accounting regime**, not merely the SIC/NIC code. Never mix across these splits:

- **Sub-sector.** Developers, REITs and InvITs are three different businesses. A developer with a growing annuity portfolio is a hybrid — split it in the SOTP and compare each leg to its own peer set.
- **Asset class within REITs.** Office, retail malls, industrial/warehousing, data centres, hotels, healthcare, residential/multifamily, self-storage and net-lease trade at materially different cap rates, growth rates and capex intensity. A 12x FFO office REIT is not cheap relative to a 25x industrial REIT.
- **Residential vs commercial vs plotted development.** Plotted development has far higher margins, minimal construction risk and fast cash cycles; high-rise residential is the opposite. Commercial-for-lease is a capital-consuming annuity business masquerading as development.
- **Business model within developers.** Outright land purchase vs JDA/JV vs pure development management. Reported revenue and margin are not comparable across them — normalise to GDV, pre-sales and project cash margin.
- **Geography and micro-market.** Real estate is local. An MMR/NCR/Bengaluru/Hyderabad developer faces different absorption, approval regimes and price cycles. In the US, sunbelt vs coastal, and state-level rent regulation, dominate outcomes.
- **Accounting regime.** IAS 40 fair-value REITs are not comparable to US GAAP historic-cost REITs on any equity-side metric; compare on FFO/AFFO, NOI and cap rates instead. Ind-AS 115 completion-based developer revenue is not comparable to pre-FY19 percentage-of-completion figures — a developer's own history breaks at that transition.
- **Management structure.** Externally managed vehicles (fee on AUM or GAV) have structurally worse incentives than internally managed ones. Adjust the multiple, and never compare per-unit growth records across the two without noting it.
- **Concession type for InvITs.** Toll (volume risk), annuity (no volume risk), HAM (hybrid), and transmission (availability-linked) are different risk assets. Also split by weighted residual life — a 20-year portfolio and an 8-year portfolio at the same yield are not comparable at all.
- **Consolidation basis.** Some developers consolidate JV projects, others equity-account them. Restate to a consistent basis (usually economic-interest share of GDV, debt and surplus) before ranking.
- **Cycle position.** Comparing an Indian developer's current metrics to its FY13–FY19 downturn history is valid and useful; comparing it to a US homebuilder in a different rate cycle is not.

State the peer set and the exclusions explicitly in the output. If fewer than three genuine comparables exist, say so and lean harder on absolute NAV and cap-rate analysis.

## Sector-specific red flags

**Demand and bookings quality [D]**

- **Pre-sales growing while collections stagnate.** The gap almost always resolves through cancellations, construction delay or subvention, never through a cash catch-up.
- **Bookings propped up by 10:90, no-EMI-till-possession, subvention or assured-return schemes.** These are financing offers booked as demand; they convert to cancellations when possession slips.
- **Only gross bookings disclosed**, with cancellations netted quietly or not at all. A cancellation rate rising above ~7–8% of gross bookings is a leading indicator of a downgrade cycle.
- **Area growth without value growth**, or mix shifting to lower-realisation geographies and asset classes while headline growth looks intact — a volume story dressed as a pricing story.
- **One-time gains presented as run-rate:** land parcel sales, plotted-development windfalls, FSI/TDR monetisation and "other income" bulking up a weak core quarter.

**Accounting and disclosure**

- **Interest capitalised into inventory:** P&L finance cost far below cash interest paid in the cash-flow statement. This simultaneously inflates gross margin and flatters interest coverage.
- **Fair-value revaluation gains driving profit (IAS 40).** Check whether the valuer is genuinely independent and rotated, and whether cap rate assumptions moved when the bond market moved. Cap rates held flat through a 200 bps rate rise is a valuation that has not been marked.
- **Company-defined "adjusted" or "normalised" FFO** with a bespoke, drifting definition, or "one-off" exclusions that recur every quarter. Insist on the NAREIT FFO bridge and, in India, the SEBI NDCF reconciliation.
- **Growing gap between accounting rental income and cash rent.** Straight-lining of stepped rents, rent-free periods and lease incentives inflates NOI on assets that are not yet paying.
- **Land bank quoted at full GDV** when the land is under MOU/LOI only, lacks approvals, carries title or litigation issues, or sits in a market where the developer has never sold. GDV without approvals is a press release, not an asset.
- **Stalled projects carried for years with no inventory write-down**, rising RERA complaints, and repeated delivery deferrals.

**Distribution sustainability [R][I]**

- **Distribution not covered by AFFO/NDCF** — funded instead by new debt, asset sales, sponsor support, or a rising "repayment of capital" component. A steadily rising capital-repayment share of DPU means flat underlying performance being masked while the asset base depletes.
- **Suspiciously low maintenance capex, TI and leasing commissions relative to NOI**, or reclassification of recurring capex as "growth/enhancement capex" to lift AFFO. Deferred capex surfaces years later as occupancy loss.
- **Long headline WALE masking a near-term lock-in expiry cliff** (India), a single year with 20%+ of leases expiring, or one tenant/one sector above ~10–15% of gross rentals.

**Balance sheet and structure**

- **Leverage drifting toward the SEBI 49% cap or covenant limits**, heavy floating-rate exposure, bullet maturities clustered in one or two years, refinancing needed into a tightening rate environment. Check SPV-level cash traps and whether covenants restrict upstreaming to the trust.
- **Off-balance-sheet leverage:** JVs and associates on the equity method with project debt and corporate guarantees invisible in consolidated D/E. Read the contingent-liability and guarantee notes in full.
- **Reliance on continuous equity raises** (QIPs, promoter infusion, institutional placements) to fund negative operating cash flow. Check pre-sales *per share*, not just pre-sales.
- **Fungibility of customer money** — advances from one project funding land or interest for another. In India, verify RERA 70% escrow compliance project by project; escrow breaches precede insolvency.

**Governance and related party**

- **Sponsor conflicts:** assets acquired from the sponsor at or above independent valuation, ROFO pipelines with no price discipline, and management fees based on AUM or GAV rather than per-unit performance — all reward dilutive empire-building.
- **Total FFO/NOI/DPU rising while per-unit FFO/DPU is flat or falling**, with equity issued below NAV to buy assets above the implied cap rate.
- **Promoter share pledging, frequent auditor or CFO changes, multi-layered SPV/holding structures**, and land held in promoter-owned entities transacted with the listed company.

**InvIT-specific**

- Consultant traffic forecasts persistently above actuals; under-provisioned major maintenance reserve ahead of a periodic overlay; short residual concession life presented as a high perpetual yield; stretched receivables from NHAI, discoms or any single counterparty.

## Cycle and structural context

**The cycle dominates everything.** Residential real estate runs a long inventory-and-price cycle — typically 7–10 years — and returns are determined far more by entry point in that cycle than by company selection. The sequence is reliable: absorption improves → overhang falls → prices firm → developers bid aggressively for land → land-to-GDV ratios deteriorate → supply arrives → overhang rises → prices stall → leveraged developers fail → consolidation. India's FY13–FY19 downturn (compounded by demonetisation, RERA and GST) followed by the post-2020 upcycle is the canonical recent example: the surviving listed developers gained share precisely because unorganised and leveraged players could not access funding. Locate the company in that sequence explicitly before applying any multiple. Buying developers on trailing earnings growth at the top of the cycle is the most common way this sector destroys capital.

**Rates are the sector's single biggest exogenous driver, and they hit twice.** On the demand side, mortgage rates set affordability and absorption. On the valuation side, cap rates move with the risk-free rate — a 100 bps cap rate expansion cuts asset value by roughly 12–13% at an 8% cap rate, and because REITs are levered, the equity impact is multiples of that. Any REIT thesis must state what cap rate is assumed and stress it. For InvITs, the DPU is contractual but the discount rate is not; unit prices move inversely with the G-sec almost mechanically.

**Structural threats to score explicitly.**
- *Office:* hybrid and remote work have permanently reduced space per employee in developed markets, hollowing out older Grade-B stock while Grade-A stays tight. India's office demand is driven by global capability centres and offshoring, which is a different — and so far more resilient — demand engine than domestic white-collar headcount, but it concentrates tenant risk in a handful of sectors and in the outsourcing decision itself.
- *Retail:* e-commerce penetration continues to compress marginal mall economics; judge malls on tenant sales per sq ft and occupancy cost ratio, not on occupancy.
- *Industrial/warehousing:* the structural winner of the same shift, but cap rates have already compressed to reflect that.
- *Residential:* affordability ceilings, urban land availability and construction-cost inflation cap volume growth; demographic tailwinds in India (household formation, urbanisation, falling household size) are genuine but slow.

**Regulation is a first-order value driver.** India: RERA (registration, project-wise 70% escrow, delivery penalties, complaint disclosure — it structurally favoured large organised developers), GST on under-construction property versus none on ready inventory (which distorts buyer behaviour toward completed stock), stamp duty changes at state level (temporary cuts have visibly pulled demand forward), FSI/TDR and development-control regulation, land-title uncertainty and litigation, environmental and approval timelines, and the SEBI REIT/InvIT regulations including leverage caps, mandatory valuation frequency, minimum distribution and the small-and-medium REIT framework. Globally: zoning and entitlement regimes, rent control (a live equity risk for US multifamily in several states), building-decarbonisation mandates (a real capex liability for older European and US office stock), and the REIT tax regime itself — REIT status is conditional on asset, income and distribution tests, and losing it is catastrophic.

**Liquidity and funding regime.** This sector is the most credit-sensitive in the market. Developer distress historically follows a funding-channel closure rather than a demand collapse — the Indian NBFC/HFC funding freeze after 2018 is the reference case, qualitatively: developers dependent on wholesale construction finance failed while those with pre-sales-funded cash cycles gained share. Always ask which funding channel this company depends on, and what happens if it closes.

## India vs global notes

| Dimension | India | US / global |
|---|---|---|
| Regulator / framework | SEBI (REIT Regulations 2014, InvIT Regulations 2014, plus the SM REIT framework); RERA at state level for developers; NHAI/state concessioning authorities for road InvITs | SEC (10-K/10-Q on EDGAR); REIT status under IRC — 75% asset and income tests, 90% taxable income distribution requirement; EPRA guidance in Europe; SGX/HKEX regimes in Asia |
| Accounting | Ind-AS. Ind-AS 115 completion-based revenue for developers (from FY19 — breaks the historic series). Ind-AS 40 investment property is **cost model only** — no fair-value P&L gains, unlike IFRS. Concession intangibles amortised under Appendix A/D to Ind-AS 115 | US GAAP: historic cost, no revaluation, so FFO is essential. IFRS/IAS 40 elsewhere: fair-value model common, revaluation gains through P&L, which is why European REITs report EPRA earnings and EPRA NTA alongside statutory |
| Distribution construct | **NDCF**, defined by SEBI — ≥90% distributed at least semi-annually (quarterly in practice). Distribution splits into interest, dividend and repayment of capital, each taxed differently in the unitholder's hands | **FFO/AFFO**, NAREIT-defined but not mandatory; company-adjusted variants proliferate. US REIT distributions are ordinary income, capital gain and return of capital for tax |
| Leverage rules | SEBI hard cap: 49% of asset value consolidated, with conditions above 25%; InvITs can go to 70% with AAA rating and unitholder approval. Prudent Indian REITs run 20–30% | No statutory cap; discipline comes from covenants, rating agencies and unsecured bond markets. US/EU REITs typically 30–40% LTV; net debt/EBITDA is a common rating-agency metric here |
| Valuation disclosure | Mandatory **independent valuation at least annually with half-yearly updates**; valuer rotation rules; NAV per unit published | Appraisals not mandatory for US REITs; NAV is analyst-estimated from cap rates. IFRS jurisdictions publish balance-sheet fair values, so NAV is more directly observable but valuer-dependent |
| Developer disclosure | Pre-sales, collections, area sold and business development are disclosed in quarterly investor presentations and the **concall** — treat the concall Q&A as a primary source for cancellations, launch timing and land pipeline. RERA portals give project-level registration, timelines and complaints. CARO 2020 reporting covers title deeds, loans to related parties and default in repayment | Homebuilders disclose net new orders, backlog, cancellation rate, community count and gross margin in the 10-Q/10-K; REITs publish a supplemental package with property-level NOI, lease expiry schedules, same-store metrics and an FFO/AFFO bridge — always read the supplemental, not just the 10-K |
| Lease conventions | Typically 9–15 year leases with 3–5 year lock-ins and a tenant exit option; ~15% escalation every 3 years; rents quoted per sq ft per **month**; security deposits of 6–12 months are a material cash item | US office leases 5–10 years with annual escalations of 2–3% or CPI-linked; rents quoted per sq ft per **year**; triple-net vs gross leases change the NOI definition — check which before comparing margins |
| Units and reporting | ₹ crore/lakh; msf for area; fiscal year April–March; per sq ft on carpet/saleable/chargeable area — **confirm which**, because saleable-to-carpet ratios differ by 20–35% and quietly change every per-sq-ft metric | $ millions; square feet; calendar year typical; rentable vs usable area with a load factor — same trap, different vocabulary |
| Ownership and governance | Promoter holding is central; check pledging, promoter-owned land entities and related-party transactions. REITs/InvITs have a sponsor, a trustee and a manager — sponsor lock-in and ROFO arrangements matter | Widely held; internal vs external management is the key governance axis; UPREIT/OP-unit structures create tax-driven lock-ins for insiders that can block asset sales |
| Taxation of the vehicle | REIT/InvIT is a pass-through; SPV dividends, interest and capital repayment are taxed differently in the unitholder's hands — compute a **post-tax** yield before comparing to a G-sec or a bank deposit | US REITs avoid entity-level tax if the distribution and asset tests are met; unitholders taxed on distributions; foreign investors face withholding and FIRPTA considerations |

## Checklist

- [ ] Classify first: developer, REIT, InvIT or hybrid — and if hybrid, split it and value each leg separately.
- [ ] Delete P/E, OPM, ROCE, D/E, P/B, current ratio, inventory turnover and FCF from the analysis, and state in the report why each is inapplicable here.
- [ ] Developer: pull pre-sales (gross **and** net of cancellations), area, realisation per sq ft, and decompose value growth into area vs price.
- [ ] Developer: compute collections ÷ pre-sales over a rolling 4–8 quarters; investigate any persistent gap.
- [ ] Developer: compute operating cash surplus before land spend, and net debt ÷ that surplus, excluding RERA-escrowed advances from net debt.
- [ ] Developer: check GDV added vs annual pre-sales (is the pipeline replenishing?) and land+approval cost as % of GDV.
- [ ] Developer: months of unsold overhang, split under-construction vs ready; value ready unsold stock separately.
- [ ] Developer: build project-level NAV bottom-up; value land bank separately with an approval-status haircut; subtract net debt and NPV of overheads.
- [ ] Developer: reconcile P&L finance cost against cash interest paid; quantify capitalised interest.
- [ ] REIT: compute FFO and AFFO **per unit** from the NAREIT bridge; check AFFO payout coverage of the distribution.
- [ ] REIT: same-store NOI growth, not aggregate NOI; strip acquisition-driven growth.
- [ ] REIT: occupancy vs committed occupancy, WALE, and the **lock-in** expiry ladder plus tenant/sector concentration.
- [ ] REIT: MTM gap vs realised re-leasing spreads — do the claimed upsides actually convert?
- [ ] REIT: maintenance capex + TI + leasing costs as % of NOI; flag anything under ~5% as deferral or reclassification.
- [ ] REIT: LTV vs the SEBI 49% cap (India) or covenant limits, DSCR/ICR, fixed vs floating mix, maturity ladder, SPV cash traps.
- [ ] REIT/InvIT: NDCF reconciliation and the composition of DPU — flag a rising repayment-of-capital share.
- [ ] InvIT: weighted residual concession life, volume risk vs availability risk, MMR funding status, counterparty receivable days.
- [ ] InvIT: model DPU over residual life with little/no terminal value and solve for unitholder IRR; never quote the headline yield alone.
- [ ] Compute the implied cap rate from market price and compare it to observable private-market transaction cap rates.
- [ ] Check whether stated cap rate assumptions moved when the bond market moved; if not, treat the NAV as stale.
- [ ] Test the last three acquisitions for per-unit AFFO/DPU accretion after financing cost, and the price paid vs independent valuation (sponsor deals especially).
- [ ] Track per-unit/per-share metrics across every equity raise; flag issuance below NAV.
- [ ] Read the contingent-liability, guarantee and related-party notes; add JV project debt and guarantees to economic net debt.
- [ ] India: check RERA project registrations, delivery timelines, complaints and 70% escrow compliance; read CARO on title deeds and defaults; read the concall Q&A.
- [ ] Confirm the area basis (carpet/saleable/chargeable, or rentable vs usable) before using any per-sq-ft figure.
- [ ] State where in the price/inventory cycle and the rate cycle this sits, and what regulatory change is in flight.
- [ ] Peer set: same sub-sector, asset class, geography, accounting regime, management structure and consolidation basis — stated explicitly, with exclusions named.
