Typical debt-to-equity (D/E) ratios for the real estate sector

The sincere estate sector comprises different groups of companies that own, develop and operate properties, such as residential land, constructions, industrial property, and offices. Since real estate companies usually buy out the entire property, such transactions call for large upfront investments, which are quite often funded with a large quantity of debt.

One metric that investors pay limelight to is the degree of leverage the real estate company has, which is measured by the debt-to-equity (D/E) ratio.

The D/E ratio for companies in the real estate sector on standard in the main is approximately 352% (or 3.5:1). Real estate investment trusts (REITs) come in a little higher at around 366%, while true estate management companies have an average D/E at a lower 164%.

Real estate companies represent one of the most attractive investment choices due to their stable revenue stream and high dividend yields. Many real estate companies are incorporated as REITs to yield advantage of their special tax status. A company with REIT incorporation is allowed to deduct its dividends from taxable return.

Real estate companies are usually highly-leveraged due to large buyout transactions. A higher D/E ratio indicates a higher oversight risk for the real estate company.

The D/E proportion is a metric used to determine the degree of a company’s financial leverage. The formula to calculate this ratio divides a companions’s total liabilities by the amount of equity provided by stockholders. This metric reveals the respective amounts of debt and even-handedness a company utilizes to finance its operations.

When a company’s D/E ratio is high, it suggests the company has taken an aggressive wart financing approach with its debt. One issue with this approach is additional interest expenses can often give rise to volatility in earnings reports. If earnings generated are greater than the cost of interest, shareholders benefit. However, if the expenditure of debt financing outweighs the return generated by the additional capital, the financial load could be too heavy for the company to upon.

D/E ratios should be considered in comparison to similar companies within the same industry. One of the major points why D/E ratios vary is the capital-intensive nature of the industry. Capital-intensive industries, such as oil and gas refining or telecommunications, require significant monetary resources and large amounts of money to produce goods or services.

For example, the telecommunications industry has to make very sound investments in infrastructure, installing thousands of miles of cables to provide customers with service. Beyond that prime capital expenditure, necessary maintenance, upgrades and expansion of service areas require additional major capital costs. Industries such as telecommunications or utilities require a company to make a large financial commitment prior to delivering its firstly good or service and generating any revenue.

Another reason why D/E ratios vary is based upon whether the nature of the point means that it can manage a high level of debt. For example, utility companies bring in a stable amount of gains; demand for their services remains relatively constant regardless of overall economic conditions.