4 - Real Estate Valuation

1. Executive summary

2. Preamble

3. Description of the property

4. Market analysis

5. Valuation

6. Conclusions

7. Appendices & annexes

• Identification of the subject property

• Purpose of the valuation

• Bases of the value

• Valuation date

• Location

• Technical description (physical characteristics & quality assessment)

• Dimension

• Rental status

• Land registry

• Building and zoning compliance

• Presence of restrictions

• Delay in the availability of data

• Lack of transparency

• Quality of information varies depending on the market cycle (volume before value)

• Values are less reactive to market conditions

• Reliability

• Recentness

• Uniformity

• Specificity

• Direct sources

• Indirect sources

• Market approach

• Cost approach

• Income approach

• Depreciated cost approach does not provide a market value

• Market approach & Income approach are both based on comparative data

• Sales comparison methodologies

  • Direct comparison approach

  • Hedonic pricing model

  • Multipliers & Rule of thumb

• Income capitalisation comparison methodologies

  • Direct capitalisation approach

  • Discounting cash flow approach

• Substitution principle

• Equilibrium principle

1. Selecting the comparables

2. Standardising the transaction price of the comparables

3. Estimating adjustments

• Physical features

• Regulatory use

• Economic and financial characteristics

• Standard properties: Investment market with owners and users exists

• Uniform properties

• Frequent transactions

Substitution principle

-> Gives a maximum price

+ Cost of construction (including cost of capital)

- Depreciation of the building

+ Cost of the land

• Difficult to determine the value of land

• Depreciation is difficult to determine, as it needs to be the “loss resulting from the obsolescence of the building and its physical deterioration”

• Insurance value of a building

• Market value: Only in a few selected cases

• There is a market of owners/users -> Sales comparison method

• There is a market of space -> Income capitalisation method

• There are no comparable transactions/information of rent (could mean that there is no market at all)

• Average for extraordinary maintenance

• Check sustainability of current rents

• Historical or current values

• Potential values

• Market values (when the other two options are not viable)

• HBU

• Location

• Age/quality of the building

• Building conditions (CAPEX)

• Economic and legal condition (lease agreement)

Cap rate: Directly extracting from the market

Discount rate: Not directly applicable

Cap rate: -

Discount rate: Based on relationship between IRR and income yield

Cap rate: Can be used

Discount rate: Expresses the discount rate as a function of the specific risk components

Cap rate: Based on the opinion of operators

Discount rate: Useful as a benchmark

1. Residential: Sales comparison methods

   • User = Owner

   • High number of transactions

   • Relatively uniform properties

2. Flexible commercial: Income Cap Methods

3. Non-flexible commercial: Depreciated costs OR based on rent that could be earned during the current users´ period

4. Trade-related commercial: Income Cap Method

5. Land:

   1. Comparables: Sales comparison

   2. No comparables: Multiple periods residual value

When comparable standard companies, such as hotels in medium/large cities, are being looked at

-> e.g., Value per room (NOT value per sqm)

• Technically achievable

• Financially sustainable

• Legally permitted

• Highest profitability

-> Allows the value to be maximized by a typical market player