Several factors affect the value of a REIT’s share price, beginning with the earnings, which are tied to generally predictable and growing streams of rental revenue, as well as a price-earnings multiple that is determined by the market.
The dollar amount and growth of rents are primarily determined by the economic fundamentals of supply and demand in real estate markets. Chief among these fundamentals are demographics, such as population size, population growth, employment growth, construction and the overall amount of economic activity. These fundamentals vary by region, but they all typically influence rents and occupancy rates, which in turn affect projected earnings and property values.
Another determining factor of REIT valuations is net asset value (NAV). NAV represents net market value of all a company's assets, including but not limited to its properties, after subtracting all liabilities and obligations. When divided by the number of common shares outstanding, the net asset value per share is a useful guideline for determining a REIT’s appropriate share price.
Additionally, enhancements to a REIT’s property portfolio through consistent capital expenditures can positively affect a company’s valuation. Strategic property portfolio enhancements help to maintain or increase NAVs and can provide the basis for price appreciation of a REIT’s shares.