There is a bit of a discussion on this on a UK forum - what is the intrinsic value of a property.
First let's assume that the property is a standard sort of residential property with no unique and rare features such as views, beachfront, subdivision potential etc. In other words a commodity type shelter.
When a company is valued, it is on the basis of current and future earnings basically. A residential property can be compared to a mature, steady blue chip company as earnings (rent) is stable and is extremely unlikely to exceed inflation over the long term. It is also unlikely to underperform inflation as well.
What would be a fair PE ratio for such a company? The assumption on the UK forum is about 16 times, so net earnings of about 6.25%.
As a residential properties only earnings (not capital gain - earnings) are from derived from rent, we must use actually realizable rent on the open market (this figure is also imputed in OO property as well).
An estimate of costs to subtract range fro 20-25% of gross rent, so net rent is assumed to be 75-80% of gross rent.
The property I was renting in Geraldton before I came over here was $250 dollars per week which comes out at a valuation as per follows:
substitute $ where £ is
Yet would have sold all day long at $350,000
Typically of the UK, there are new houses in the development where I am selling (infrequently) at a reduced price of about £200,000 for which the realizable rent is £775pcm;
I mentioned on another thread, a friend just bought a flat in Basingstoke for £120,000 with a realizable rent of £800pcm. This is how the valuation comes out:
NOT A BAD DEAL! These were selling for £180,000 or more last year.
This is closer to where the property market should be and I believe is the shape of things to come.
That is, commodity property will return to a more intrinsic valuation.