Transcript Valuation and Development in the Management of Organizations

Valuation and
Development
Business
Professor Mikhail Soloviev
Co-author Richard Grover
State University - Higher School of Economics
& Oxford Brookes University
Valuation & Development Business
(PLAN)
1. Valuation & Development Business in Market
Economy & Management of Organization … 03-63
2. Legal Environment of the Valuation &
Development activities
… 64-106
3. Valuation in Real Estate Business
... 107-167
4. Development: risk analysis, valuation and
regulations.
…168-187
5. Business Game “Auction: City Site for
Development Project”
…188-214
6. Presentation of Independent works.
2
Valuation &
Development Business
1. Valuation & Development
in the Market Economies &
Management of Organizations
Plan
I. Valuation & Development: preliminary definitions.
II. Valuation & Development in Market Economies:
– Real Estate signs in Globalization & Welfare.
– Economy and RE waves and volatilities.
– Crisis: Real Estate drops of the 2008-2009.
– Crisis and Development.
III. Valuation & Development in Management of
Organizations:
– Valuation & Development: roles in the strategic
and operative management of organizations.
– Potential of the Real Estate Development.
– Investment & Development Projects.
– Valuation in the projects’ management.
4
Preliminary definitions
and remarks
• Development is activity for purposeful and
qualitative alters of RE (real estate) objects:
structure, characteristics, kind of using.
• Valuation is activity for cost estimating the
business, commercial & residential RE, etc.
=============================================================================================================================================
* Both terms: the valuation & development have
more wide (besides the real estate) using, e.g.
for mobile and intellectual property valuation,
alters of organizations, technologies, etc.
5
The Development Business
defines opportunities and ways for the real
estate resources’ purposeful changes in
concern with the general strategies and
main targets of organizations both for:
• the so named “Non-Property” Companies
(with any profile business besides real estate)
and
• the Companies with the real estate business
as a main source of income.
6
The Valuation provides the real estate
business-processes and proprietors by
cost value analytical data in concern with:
• the real estate development plans & results,
• appraisal of the development and investment
projects efficiency and risks;
• real estate objects’ capitalization (market
value) for current and future market conditions,
• taxation payments, conditions of insurance
contracts, credit guarantees, and etc.
7
• The valuation profession belongs to the labor
market (services segment) closely connected
with the main real estate markets activities
(renting, investments and development).
• Developers are complex professionals and
connected with “neighbor” markets: building,
facility & project management, town planning.
• So the valuators and developers are among
the very actual and perspective professions
for future business carrier.
8
Why do we accent onto the Real
Estate Valuation & Development
• Valuation and Development Business are
in a base of the Real Estate markets &
activities.
• Real Estate is one of the Infrastructural
Basis of Economy, its “Fifth” resource.
• Conditions (dynamics and trends) of the
Real Estate markets reflect general
conditions of economies and welfare of
society, national and family richness.
9
Valuation & Real Estate Development
in contemporary market economies
1. Real Estate signs in Globalization &
Welfare.
2. Economy and RE waves and
volatilities.
3. Crisis: Real Estate drops during the
2008-2009.
4. Crisis and Development
10
Процессы глобализации
GLOBALIZATION
PROCESSES
1
Глобализация движения трудовых и финансовых ресурсов
FREE
FLOWS
of
FINANCES, INVESTMENTS,
Глобализация информационных потоков (мировые и
LABORS,
MIGRATION,
and Real Estate activities
межрегиональные
статистики)
11
Real Estate – space resource, place for
work & life, space for production, social
and business activities, shopping and rest.
12
Economy conditions and the Real
Estate markets & activities (samples)
• One of the remarkable signs of the
economy health is a commercial real
estate (and in partially office) occupancy.
• High level of the occupancy stimulates the
real estate active development.
• Stable economy is in correspondence with
low risks, higher capitalized value of the
commercial real estate, etc.
13
Pre-Crisis (before 2008) welfare:
reflection on the world and
national Real Estate markets
• High level of the commercial real estate
(offices, etc.) occupancy.
• Decreasing the yield (risk) dynamics.
• Investment growth (incl. investment into the
real estate development projects).
• Real Estate (commercial and residential RE)
average cost increasing.
14
Moscow Office Market Characteristics
Average Vacancies, %
“A”
“B”
15
Pre-crisis
WORLD
Statistics
2008/2007:
Growth!
OFFICE
markets
Rank COUNTRY City
$ / workstation
€ / workstation
16
Pre-crisis growth of the Moscow Commercial
Real Estate market: Investments & Yield (world)
800
%
%Yield
15
Data of
CB RE Noble Gibbons
RF
East
Eur.
10
300
West
Eur.
5
100
100
2003
2004
2005 2006
2001
2002 2003
2004
2005
17
2006
Pre-crisis Average Cost Increasing:
Moscow Residential (elite): [$/m²]
18
2
Economy and Real Estate
waves and volatilities
In general the Real Estate market
dynamics and trends are connected
and correlated with the general
economy dynamics and trends
both for the World / European and
national (Russian) economical and
real estate markets characteristics.
19
World Economy start of the Crisis
2008/2009
Brent (Oil)
Index Dow Jones
10400
~77
II quarter
III
IV
II
II
20
World Real Estate market waves
Growth
1970 – 1973
Growth
1978 - 1979
Growth
1985 - 1989
Recession
1973 - 1977
Recession
1980 - 1984
Recession
1990 - 1993
Wave 4
1994 – 2001
2001-2004
Wave 5
2004 – 2008
2008 - …
Wave 1
Wave 2
Wave 3
21
European Real Estate Market –
Rent Index Long Dynamics
%
+30%
0
2009
1993
22
World crisis reflection to RF economy
& real estate market is stronger. Why?
• A whole the Russia is a part of the world
economical, social and financial environment.
• Less diversification of RF economy a whole.
• Mining predominance and dependence on
minerals market prices dynamics.
• More volatility of rent/yield dynamics of
the RF real estate markets – more risks:
- stronger growth during positive periods,
- stronger decreasing during recession periods.
23
INVESTMENTS
EUROPE
Prosperity of
the 2007-2008
Investment
Prospects
CITIES
&
City Risk-Free
RISK-FREE
Moscow: both
extreme ranks
24
Russia: Industrial Branches Indexes
2006-2009 (trends and volatility)
2006 2007
Annual 100%
data
(trends)
Monthly min
Monthly max
2008
2009
104-108 %
stable
growth
97% (Jan)
110-107 %
98-95 %
IV q.-start of recession
decreasing wave - ½
118%
116%
102% (Nov) 85% (Jan)
100%
25
Moscow offices vacancies [%]
Data of Colliers International
~17%
1- 4%
II-2009
IV-2000
26
Moscow shop bargain costs [$/m²]
Different types of shops
Average cost
27
Moscow store market:
vacancies and yield
28
Dynamic of the Russian Stock Exchange
& Residential Market (waiting / fact)
Значение индекса РТС
01.01.02-28.11.08
Last period
29
Residential Housing
(in Kiev, Ukraine) [1000 m²/year]
Prognosis
Similar Real Estate crisis processes –
in other transiting economies
30
3
Crisis: Real Estate drops of
the period 2008 (IV)–2009(II)
• Sharp influence of the world financial crisis
start period during the 4th quarter of the
2008 and the 1st half-year of the 2009 in
the World and Russia
• Deep decreasing the minerals prices
during the period and economy recession
• Drops of characteristics for all the
segments of the Real Estate Markets
31
Typical world structure of
Commercial RE markets data for
statistic and dynamic analysis
Functional structure:
• Offices
• Shops
• Industrial
(class distribution)
Data:
•
•
•
•
•
•
Rent
Yield
Vacancies
Supply / demands
Development projects
Incomplete objects
32
Office rent: 2008-2009 [$/m²/year]
Quarters
Class “A”
Class “B”
Class “C”
33
Offices Supply and Vacancies
[mln m²]
[%]
34
Shop rent: 2008-2009 [$/m²/year]
Shopping Centers
Quarters
Different types of shops
Average rent value
35
Vacancies of shop premises [%]:
Less sharp decreasing dynamics
2 quart.
3 quart.
4 quart.
1 quart.
2 quart.
36
Industrial (Store) rent: [$/m²/year]
37
Store market
Planned & fact building: m²
Supply: mln m² & Vacancies %
38
Similar Real Estate crisis processes –
in other transiting economies
Shop Rent (Ukraine, Kiev)
[$/m²/month]
Twice decreasing in 50 days
39
4
Crisis and RE Development
• Decreasing the building activities.
• Vacancies growth - decreasing the “prime”
commercial real estate demands.
• Decreasing the payable demands in the
residential real estate markets
• Stopping development projects
(especially on the starting steps)
• Incomplete real estate building growth
40
Office building process decreasing dynamics a whole
x1000 m²
“B”
“A”
41
Planned & Fact offices delivery
[m²]
Prognosis
42
Incomplete Building
Incomplete real estate objects
building quantity growth –
visible symbols of the general
economy and real estate
market crisis
43
Image of the incomplete
building – stopped process
44
45
Planned Dates of
Start – II quart. 2007
the building process: Finish – IV quart. 2009 46
Normal building tempo:
3-4 frame storey / month
Half year stopping
on the 8th (of Σ19) level.
After the building process
revival its finish will be
much more later than
the planned IV q.-2009.
47
Valuation & Development in
Management of Organizations
1. Valuation & Development: roles in the
strategic and operative management of
organizations.
2. Potential of the Real Estate Development.
3. Investment & Development projects.
4. Valuation in the Investment & Development
projects management.
48
Valuation & Development:
roles in the strategic & operative
management of organizations
• Two kinds of companies
1) Non-property companies
2) Companies with RE as main source of income
• Valuation of the RE objects
– Accounting for Tax payments, Insurance (1,2)
– Bargains/Sails, Renting (1),
– Sails/Bargains, Letting (2), etc.
• Real Estate Development
– Investment projects (1),
– Development projects (2)
49
1) Real Estate as one of providing
resources of organization
Management System
Organization
of
HUMAN,
GOODS,
Materials,
FINANCE,
SERVICES
components, etc.
INFORMATION,
REAL ESTATE
- space resource,
CONSUMERS
SUPPLIERS
other RESOURCES
ENVIRONMENT
50
2) Real Estate as a main
source of income
Management System
Organization
REAL ESTATE
OBJECTS FOR
COMMERCIAL
USING
BUILDERS,
INVESTORS,
DEVELOPERS
REAL
ESTATE
PORTFOLIO:
MANAGEMENT,
FORMING and
DEVELOPMENT
of
OFFICES,
SHOPS,
INDUSTRIAL,
RESIDENTIAL
TENANTS,
BUYERS,
other RE Users
REAL ESTATE MARKET
51
Investments to Commercial Real Estate:
Moscow RE Market
Multi-Functional
Centers 27%
Hotels 7%
Stores 1%
Shopping
Centers 8%
Offices 57%
52
Distribution
of the Moscow Offices Users
Финансы
Banks, и
консалтинг
Consulters
4%
12%
34%
Добывающ
Extractingие и
производ.
companies
Компании
Торговля
Trade & и услуги
19%
Services
31%
IT
ITкомпании
companies
Другие
Others
53
Real Estate in the strategy
of organizations
Main problem - providing the RE flexible
correspondence to the strategic policy (RE
demands) of organization:
• Functional mobility
• Physical mobility
• Financial mobility
54
Potential of the Real Estate
Development
The RE Development Potential is an
opportunity for future efficient RE business.
Three levels of the potential restrictions:
(1) RE Legislation, town-planning regulations:
rules, restrictions, permissions.
(2) RE Market (payable) demands.
(3) Opportunities of developer (proprietor) to
realize the development potential.
55
Maximum potential,
maximum
opportunities,
without limits and
restrictions
1. Potential after
calculation of legal
(town-planning)
regulations,
standards
2. Potential
value according
to the market
demands
3. Potential value
according to resource
opportunities of
developer
56
The Development Real Estate
potential realization
The RE potential are realized through
different types of projects:
– Investment projects
– Development projects
=======================
Basic role of a pre-project (feasibility) step
and valuation for both type of project.
57
Development Business
• To acquire rights for the land site (or other kind of
real estate objects which are possible for
improvement).
• To elaborate the project - development project.
• To find a source of financing the project.
• To realize the project (to build/improve the object).
• To realize the project results efficiently: to sell the
built/improved object.
• To pass to the next object – the next project.
=============================================================
Valuation role for every step of the D-business
58
Objects for improvement:
cleared town site, waste ground,
uncompleted or reconstructed real
estate, etc. - for development
59
Samples of Development results
(improvements)
60
FINANCIAL
INSITUTIONS
CONSUMERS
DEVELOPMENT
BUSINESS
BUILDERS
SOCIETY,
AUTHORITUES
61
Value of the Development
Business Efficiency
Efficiency: E = (A – B) / B
A future sale price of the development
A = A {rent, size (m²), yield (for capitalisation),
maintenance costs, tax-payments, …}
B expenditures for the development
B = B {cost of site purchase, building costs,
professionals’ fees, developer’s profit, cost of
borrowing, marketing, planning consent, taxes}
62
Development INCOME (Capitalization Value)
A = A (r - rent, S – rented m², k - yield, M maintenance, TP- tax-payments …)
A = [r * S – (M+TP)] / k
Development EXPENDITURES
B = B (D-site purchase, BP - building process,
C – developer’s costs, p - cost of
borrowing, MM - management & marketing …)
B = (D + BP + C + MM) * (1 + p)
63
Valuation &
Development Business
2. Legal Environment of
the Valuation &
Development activities
Questions of Western Businessmen to Moscow
Real Estate regulations in 90s
Reasons
Questions
- Purchased buildings can have
1. What about principles and rules
insufficient parameters and need of Moscow Town-Planning?
different improvements.
2. Is there planning permission
- Real estate life cycle is longer
for development (which order)?
than prime business-plan. So the 3. Responsibility of municipal
real estate can need development. authorities for town-planning
- There are number of risks, e.g.
decision making.
negative influence of neighbors,
4. Is there a memorial regulation?
compulsory purchases,
5. Rules & procedures of compullocal authority voluntarism, and etc. sory purchases & compensations.
- Concepts and principles of
6. What is an appeal system?
RE valuation can be different
7. Financial mechanism for Planin comparing with market value.
ning Gains, Capital Gain Tax?65
Legal Environment of Valuation &
Development Activities: plan
1. RE Legislative base for the Valuation and
Development regulations.
2. Valuation activities regulations.
3. Real estate Development and its public
regulations.
4. The International Professional
recognition in the Real Estate fields.
66
Legislative & other regulations
a whole
I
• Legislative regulations
– Opportunities (incl. commercial potential)
– Duties of proprietors (maintenance, taxes)
– Restrictions, permissions, etc.
• Economical (market) regulations
– Demands/supply
– Price dynamics
– Resources (in/out) …
• Ecology, social and other regulations
67
Maximum potential,
maximum (free)
opportunities,
without limits and
restrictions
1. Potential after
calculation of Legal
(town-planning)
regulations,
standards
RE POTENTIAL MEASURE
2. Potential
value according
to the market
demands
3. Potential value
according to resource
opportunities of
developer
68
The RF Real Estate Legislation a whole
Two level of the Russian Federal legislation a whole:
1. Level of RF Constitution, Codes, Federal Acts
All the documents of the level are laws.
2. RF President and Government decrees
The decrees regulate unsolved problems before/between
Parliament (RF State Duma) approval procedures
Ministries and other authorities’ orders and
instructions (they detail rules & procedures for the
legislative acts and decrees realization)
** Others normative documents of the vertical, e.g.:
–
–
–
State and branches’ norms, rules and standards
Standards of professional associations
Corporative standards & norms
69
The RF Real Estate Legislation:
FEDERAL Legislative Base
Like to the world practice the Russian legislation includes the
following two basis areas for the Real Estate regulations:
1. Town-Planning regulations (from federal to local level),
see the RF Town Planning Code
2. Landlord & Tenant regulations (for all types of
proprietors and Real Estate objects), see the RF Civil Code
(chapters), Land Code (chapters), Financial Lease Act,
Concession Act, etc.
• Other Laws (Acts) for Real Estate legal regulations, e.g.:
Laws (Acts) for Memorials, Natural Resources, Mortgage,
Valuation, Land Cadastre, Tax Code, Privatization, etc. 70
The RF Real Estate Legislation:
REGIONAL Legislative Level
The federative structure of the Russian Federation defines
opportunities for the regional legislative regulations.
The Regional Legislation must strictly follow to all
the RF Federal Legislation concepts and principles.
At the same time the Regional Legislation:
- reflects local national, economical and social
peculiarities, such as: protection of “small nations”,
regional demography problems, cultural traditions;
- details rules & procedures for the legislative acts
and decrees local realization.
71
INTERNATIONAL Real Estate:
Legislative Regulations
for Development & Valuation activities
• What does it mean – the legislative regulations
for the Development & Valuation activities a whole:
– concepts & principles, and content of the regulations;
– roles of laws and professional standards;
– place of the state and professional associations.
• In the International context - which are parallels
and contrasts in the legislative regulations:
– in my country / region;
– in the country / region of my possible professional activity,
– in the national and international professional societies (in
72
global aspects)
General Ways of Regulations
Areas of the State and Professional regulations
Licensing the professional activities.
Legal / Statutory regulations, norms, permissions &
restrictions, procedures, register systems, etc.
State / Independent professional associations’ roles.
Professional Standards:
Methods, terminology, technique & IT means,
Ethics standards, contracting, report & business-plans,
Professional education and CPD-system.
Checking: quality services & professional negligence.
Responsibility, Insurance.
73
Arbitrary system.
RE Regulations for different companies types
Opportunities –
Criteria
- Restrictions
Duties / Responsibility
RE Business: letting, invest-
RE - Space Resource:
ments, management, development buying-selling, renting,
Where, what, why
maintenance, insourcing,
Town-Planning
economy strategy, mobility
Market abilities
Letting, selling
Investment risks
Registering, Cadastres
Insurance, Mortgages
Valuation, Audit …
I
II
74
Basis regulations for the RE Development &
Valuation activities are in Civil and Land Codes.
+ Specialized Laws & Standards:
Valuation Regulations
- Valuation activities Law
- Statutory norms in other
laws (e.g. Tax Code &
Book–keeping, Mortgage,
Privatization, Insurance,
State Register, Insolvency
(bankruptcy), etc.
- Professional standards:
valuation, accounting,
investment projects,
estimating, etc.
Development Regulations
– Town & Country Planning.
– General plans, zoning, etc.
– Ecology, Nature protection.
– Architectural, building &
construction regulations.
– Memorials regulations.
– Projects documents, incl.
Estimating.
– Efficiency regulations and
75
other professional standards.
Valuation activities
regulations
Regulations in the
Russian Federation
- Federal Law for Valuation
activities (1998 / 2007ed.*)
- Statutory norms in other
Federal codes and laws
- Regional regulations
- Professional standards
II
International & National
regulations in different
states and associations
- Special state regulations:
(Yes or Not)
- Statutory norms in codes
and laws
- Municipal regulations
- Professional standards
76
Regulations for Valuation activities
Are there legislative regulations for valuation in principle?
• There are countries with the special legislative regulations
just for the valuation activities:
– More detail – e.g. as the special Valuation Law in the Russian
Federation (because of absence of the valuation profession during
previous long-term social-economical formation)
– For some important areas – as licensing in USA (after big real estate
market crisis in the 80s).
• In principle there are areas with the special statutory
regulations, e.g. as valuation for property taxation.
• In order to compensate an official absence of the legislative
regulations it is necessary to have well-developed
mechanisms for the valuation qualitative services, e.g. as:
– Experienced professional associations of appraisers (RICS)
– Recognition by society and authorities, international associations.77
Valuation regulations in the RF
Regulations in RF laws
BASIS: The Federal Law for
Valuation activities.
- Book-keeping and taxation
- Privatization
- Compulsory purchases
(Land Code)
- Mortgage and Insurance
- Payments for Land & Depth
using
- Inheritance
- Cadastre & Mass appraisal
- Property debates, etc.
78
Federal Law for Valuation activity
1998 (2007 ed.) main aspects:
• Market Value definition (similar world definitions)
• Basis role of the Market Value
• Main principles: valuation subjects & objects, rules,
contract, report, trustworthiness & recommended using,
obligatory insurance, standards forming, etc.
• Areas for obligatory valuation
• State regulation role**
• Self-government associations’ activities and
responsibility (for quality services)
============================================================================================
** (2007 ed.): licence abolition, state role decreasing,
accent onto the professional self-regulated bodies.79
Market Value – DEFINITION
(International Standards)
“Market Value is the estimated amount for which a
property should exchange on the date of
valuation between a willing buyer and a willing
seller in an arm’s-length** transaction after
proper marketing wherein the parties had acted
knowledgeably, prudently, and without
compulsion” (IVSC)
------------------------------------------------------------** without any relationships between
participants of the dealing
80
Market Value – DEFINITION
(Federal Law)
“Market Value is the most probable amount for a
valued object realization on the open market in
competed conditions,
participants act reasonably & completely informed,
the bargain price does not depend on extreme
circumstances, e.g.:
- both participants have no obliges or compulsion for
selling or buying,
- both participants act according to own interests,
- the bargain price is reasonable fee, and payment is in
money form.”
81
Federal Law for Valuation activity
Areas for Obligatory Valuation
• Operations and bargains with the State and
Municipal property, such as:
–
–
–
–
–
–
Privatization
Sales and Purchases
Trust management
Letting
Using on the security of credits
Deposit into Joint Ventures, Joint Stock Companies.
• Compulsory purchases & compensation
• Arbitrary procedures concerned with property
division
82
Valuation in Book-keeping (RF)
• It is a sample of the Statutory Valuation
• Principles of the Book-keeping valuation
1. Purchased property – according to all the expenditures
of the bargain.
2. Property obtained free – according to the market value
for the date of the first record into the book-keeping
documents
3. Property built (created) independently in the organization
– according to estimating the direct expenditures
• Other methods are possible according to special
statutory regulations
• Amortization – according to approved rules, and
83
independently on the company financial conditions.
Valuation for Taxation
• Book-keeping valuation records are
estimating basis for Tax calculations.
• Taxation Concepts & Basis are regulated by
the Federal (State, Central) authorities.
• Concrete tax indexes are regulated by the
municipal authorities.
• Destinations of the Tax payments flows (RF):
- Land use payments – to the municipal budget.
- Real Estate taxes - to the regional budget.
84
Efficiency Valuation
• Effectiveness – Efficiency – Quality
– Effectiveness as a measure of the purposes’
achievement.
– Efficiency as a function of results and expenditures.
– Quality as a correspondence to standards.
• Multitude of the efficiency (results)
content: social, economy, ecology, complex
(integral), budget, private participants, etc.
• Indexes of Investment Projects
efficiency: NPV, IRR, PBP, etc.
85
Computer means for the
Investment Projects’ analysis
• CAMFAR (70s) – the UNIDO basis concept and
instrument for the Investment Projects analysis.
• Sample of the RF means – “TEO- Invest”:
– Investment analysis and technical-economical
foundation of investment projects.
– Business-plans standard forming (two languages).
– Choice and optimization of financing schemes:
• Sensible analysis
• Risk analysis
• Scenario analysis
86
Development regulations
III
Development definition:
“The carrying out of building, engineering, mining
or other operations in, on, over or under land, or
the making of any material change in the use of
any buildings or other land” (UK T&C PA 1971).
DEVELOPMENT REGULATIONS
RE OPERATIONS
CHANGE IN RE USING
building, mining & other
functional, life’s work &
branches professional
vital activity space
regulations.
regulations.
TOWN & COUNTRY PLANNING ACT (CODE in RF)
87
The main ways of the Real Estate
and the RE Development regulations
1. Civil Code general regulations.
2. Town & Country planning regulations
(legislative regulations).
3. Taxation and other statutory regulations
in the economy environment (market and
state economy regulations).
4. Others (ecology and nature protection,
public opinion, etc.)
88
Town-Planning as the main basis for
the Development regulations
- The Real Estate Development has the most
significant influence onto the living space in
towns and country settlements; economy,
ecology and social environment.
- So the Town-Planning is a basis for the space &
place, conditions, ways, restrictions &
opportunities of the Real Estate Development
regulations.
- The Town-Planning regulations can have
country peculiarities because of the remarkable
national, regional, cultural and so on differences.
89
Proprietor – Society
Proprietor (owner) is not free with his operations
concerned with his real estate property.
There are definite restrictions (regulations) from society.
Proprietor Influence types
(Owner)
Positive
Negative
Appeal
System
Society
Kinds of influences
Permissions
Compulsion
Sanctions
Capital Gain Tax
Compensations
90
Development of the Real Estate object
AUTHORITY - who
gives permissions
AUTHORITY - who
approves
classes of using,
rules of changes,
restrictions, etc.
ARBITRATION
Permission for Development
Development regulations
Permission
is necessary
No needs
for permission
OPERATIONS
CHANGES IN USE
Kinds of Development
REAL ESTATE OBJECTS
PROPRIETOR
91
Town-Planning
Town and Country Planning Act (UK) executes
adequate functions in compare with the TownPlanning Code (RF):
– GENERAL PLANS for towns and territories’
development.
– Territorial ZONING (with similar principles for
the differentiation).
– Regulation mechanism through local authority
permissions: “construction permission” (in RF)
(compare with “planning permission” - in UK).
92
Town& Country Planning and
Development
GENERAL PLANS TOWN PLANNING
of towns & territories
DOCUMENTS
ways & concepts of
sustainable development,
structural proportions,
zoning, memorials and
nature protection,
resources rational using
project documents, rules,
building regulations,
planning permissions,
building standards
93
The RF new regional strategy:
2008
Regions (zones) profiling
& Transport corridors
#
Zones typological profiling:
1.New Economy 2.Processing
3.Agro-industrial 4.Recreation
5.Nature extraction
##
94
ZONING
• Zoning defines:
– Ways for land sites & real estate objects using for the zone.
– Restrictions for the using.
• Types of zones (RF):
– Residential
– Public-Business
– Industrial
– Engineering and transport infrastructure
– Agricultural using, etc.
• Zoning for cost data:
– Payment indexes for land sites using.
- Start price for auction procedures concerned with municipal
land sites (renting, privatization, other commercial using). 95
Zoning map
of Moscow:
There are
69 main
zones
96
Permitted using document*
(Moscow Act “Land site using & development”)
• Demands and restrictions for the land site (and real
estate objects on it) using:
– Permitted functional using,
– Building / construction restrictions (heights,
compactness, others),
– Legal rights regulations such as license,
restrictions for using, etc.
• List of legislative acts and regulations approved for
the land site concerned with its using.
____________________________________________________________________________________________________
* The data are for every developed land site.
97
Memorial Regulations. Variants
Variants of the Memorials protection and rebuilding
1. Conservation and protection (historical researches
and building construction analysis).
2. Restoration with some modern improvements:
• underground garages,
• landscape restoration.
• addition space, e.g. penthouse,
3. Rebuilding (full copy with modern materials and
improvements).
4. New building with former classical facade’s
protection.
_______________________________________________________________________________________________
Both the Memorials Owners & Users must follow
special regulations in maintenance and using 98
Classical (detail) restoration
of the memorial building
Restoration (landscape) with some
improvements: underground garage
99
Restoration with additional
space (penthouse)
Rebuilding (full architectural
copy with modern materials
and improvements:
underground garage,
congress-hall, etc.)
100
Memorial restoration
Variant - facade protection
FACADE
BACK
INSIDE: building in progress
101
The International Professional
recognition in the Real Estate
IV
• To have a recognized professional education in the Real
Estate Management areas and follow to the Continuing
Professional Development (CPD) demands.
• To have a good command for methods, techniques,
technologies, and etc. in the RE management areas (eg:
valuation, development, etc.).
• To understand general concepts and principles of high
quality RE management, and at the same time to
understand peculiarities of different cultures, countries,
investment projects, and etc.
• To follow to professional and general ethic principles.
• To be a member of a recognized national (international)
professional association in the Real Estate areas (such as
102
RICS, IVSC, etc.).
Value Quality and Guarantees
The Valuation Professional Standards
following is a guarantee:
- for users in concern with the valuation
results quality,
and
- for valuers as a professional protection
in possible arbitrary processes.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Negligence or Risk-inaccuracy in the
analytical data & estimating process?
103
Professional mutual understanding
and recognition for quality work
Professional Valuation standards (harmonized or
exactly translated from approved International
standards) are reliable way for the mutual
understanding and recognition through all the world:
1. Higher professional education;
2. Methodology (concept & principles, terms,
methods, guides and notes)
3. Measurement technique & technology;
4. Ethics (code of conduct).
The main demand and problem are in the
standards strictly following (enforcement).
104
Code of Conduct
• DEFINITIONS: assumptions, limiting conditions,
valuers (internal, external, independent).
• ETHICS
• COMPETENCE: experience & knowledge, outside
assistance, efficiency & diligence.
• DISCLOSURE: clear assignment, inform. providing
& restrictions, valuer position & relationships.
• REPORTING contents: valuer, date, purpose, basis,
assumptions, references to standards, disclosures,
signature
• ================================================================================================================================================================================
* In the RF the regulations are both in the RF Law and
the Valuation professional standards.
105
Code of Conduct: Ethics
– Integrity / honesty
(as must not: use false, inaccurate
data, act in fraudulent manner.…, and must: act legally & comply with
laws & regulations).
– Conflict of interest (must not act for other parties in
the same matter).
– Confidentiality
(discretion & confidentiality
with inside information but in compliance with legal rules).
– Impartiality / justice (strictly independence,
objectivity, without personal interests, argued hypothetical
conditions, fee is not function of value result, etc.).
•===================================================================================================================================================================================
* For the national conditions / mentality the Ethics
standards are the most difficult to be followed –
106
ENFORCEMENT(?) PROBLEM.
Valuation &
Development Business
3. Valuation
in Real Estate
Business
Valuation in the Real Estate
Business: plan
1. Concepts and principles of the valuation
activities. Definitions
2. Value basis - market value and others.
3. Valuation Methods: classifications and
analytic review, calculations and tests.
4. Issues of valuation for different types of
real estate objects.
108
1. VALUATION - General
Concepts and Principles (IVSC)
• Fundamentals of valuation, methods & techniques
are generally similar throughout the world.
• General Valuation Concepts & Principles include
definitions and commentaries for following:
– Land & Property Concepts (Definitions).
– Real Estate, Property, and Asset Concepts.
– Price, Cost, Real Estate Market, and Market Value.
– Highest and Best Use Principle.
– Utility (usefulness, worth).
– Others (eg: market & fair value, depreciated costs).
• Valuation approaches (market & non-market, etc.).109
Terms closed to the Valuation
• Valuation (1), Appraisal (2), Assessment (3),
Estimation (4), Surveying (5).
• It is difficult to define strict boundaries between the
mentioned terms, especially in everyday using.
• The following differences can be marked:
– The Valuation (1) and Appraisal (2) are mainly used as
synonyms.
– The Assessment (3) is more often used for the real estate
taxation and similar statutory procedures.
– Estimating (4) is a term mainly connected with direct
calculations.
– Surveying (6) is an integrating term for the real estate.
110
professional activities, including all the mentioned (1)-(4)
Value, Worth, Cost, Price
• Worth is the most wide term (not only financial,
but possible social, philosophy, etc. character).
• Value is some money equivalent of the worth.
It reflects a valuator professional opinion.
• Cost can be interpreted as a symbol of direct
expenditures, quantity estimation / calculation
(e.g. for a building project quantity surveying).
• Price is an information from concrete bargains,
deals: confirmed or already realized.
======================================================================================================
We’ll use all the terms in our course just in their
financial meaning, and as a result of professional
analysis and using corresponding methods.
111
The Highest and Best Use (HBE)
• The HSE is the most probable use of the real
estate which is physically possible, appropriately
justified, legally permissible, financially feasible,
and which results the highest value of the
property object being valued.
• The HBE concept is a fundamental and
integrated part of Market Value estimating.
• The HBE value is closely connected with the
earlier considered concept and measure of the
real estate object development potential.
112
Valuation Profession
Valuation is a professional activity for cost (in
financial* units) value of business, commercial &
residential real estate objects, other kinds of property
objects and property rights.
The valuation profession belongs to the Labor
Market (as one of its services segments) closely
connected with the main real estate markets
activities: renting, investments and development.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
*In a wide content the valuation can take place in
some non-financial areas, e.g. for seeking and setting
the following results: expert ranking (for countries,
companies, etc.), quality levels data, physical and moral
obsolescence of objects and systems, etc.
113
The Valuation provides business- processes
and participants by value data in concern with
the RE deals & ways of using:
• possible (planned, waited) market deals with the
valued objects: selling/buying, renting, investments,
mortgage, trust management;
• real estate objects’ capitalized value data for
current and prognostic market conditions;
• taxation payments;
• real estate cadastre filling;
• conditions of insurance contracts;
• credit guarantees on behalf of real estate assets;
• the real estate development plans & results;
• appraisal of the development and investment
114
projects efficiency and risks;
etc.
Segments of the Valuation market
(according to property types)
Real Estate types (RF Civil Code)
= Real estate* objects & property rights, incl.:
land sites, mining plots, buildings & constructions,
premises, incomplete objects.
= Property complexes**
of
enterprises & institutions, memorials, nature
protected zones, infrastructural objects.
---------------------------------------------------------------------------------------------------------------------
* Exceptions – ships (naves): cosmos, air, sea, river
** Also there are standards for business, shares,
transport & equipment, intellectual property.
115
Property types (IVSC)
- Real Property
as bundle of rights for fixed (real estate) longterm assets.
- Personnel Property
tangible & intangible, non-realty fixture & fitting,
machinery & plants.
- Business:
Operating and holding companies, going concern,
etc., incl. Goodwill.
-Financial interests
in partnerships, joint ventures, options, etc.
116
Segments of the Valuation market
activities (according to types of deals)
Types of deals with property objects which demand
professional valuation:
Buying / Selling
Renting (lending, letting, leasing, concession)
Development
Investments
Accounting and Taxation
Cadastre and Register forming and actualization
Insurance
Mortgage
Privatization and Compulsory purchases
Trust, Maintenance, Facility management
Business-plans, liquidation and property sale
Exchange, Succeeding, Presentation, etc.
117
Detail Definition of the Valuation
Valuation is estimating a cost equivalent
(financial amount) for the concrete object
according to the concrete order for the
definite type of dealing with the object.
And besides the valuation result is
definitely corresponding with the date of
valuation.
118
Characteristics of the Valuation
process and results
•
•
•
•
•
Address character of the Valuation.
Dependence on type of the planned
deal (operation) with the valued object.
Principle role of the valuation customer.
Time of valuation – important factor.
Valuation process and results
presentation are following to definite
regulations.
119
Characteristics (I)
Address character
Synonymous identification of valued objects:
• Synonymous attachment to place of location –
in concrete town-planning coordinates e.g.: city
name, quarter, street, house NN, etc.).
• Definite attachment to functional RE type (e.g.
according to well-known world statistic division:
office, shop, industrial, residential, etc.).
• Attachment to detail classification group of the
valued object type (e.g.: residential economy-class,
elite-class; offices or shops of classes “A”, “B”, etc.).
120
Characteristics (II)
Dependence on type of dealing
The same RE object can have different
valuation results in dependence on planned
operation with the object, e.g. for:
– Selling (market selling or clearance)
– Compulsory purchases
– Insurance contract (oblige or voluntary
insurance)
– Guarantees for credit contract
– Taxation
121
Characteristics (III)
Principle role of valuation consumer
Commercial Real Estate Valuation results can
be different for consumer-seller and consumerbuyer, e.g.:
Seller’s criteria – to receive payment not less than
all the previous expenditures for the object.
Buyer’s criteria – to pay not more than waited
income in future business in concern with the object
-----------------------------------------------------------------------------------------------------------------------------------------------
Σ Different criterions – different methods of
valuation – different value results for the deal.
They will need compromise.
122
Characteristics (IV)
Important role of the time factor
Valuation result is fixed according to the time (date)
of the valuation contract execution.
So: “Valuation result is today – and the
planned RE deal will take place in a future”.
And number of the RE deals will be in a far future
(as in mortgage or guarantees for credit contract).
Valuer is responsible (incl. financial responsibility)
for quality of fulfilled valuation.
Two consequences:
1) Obligatory insurance of the valuation activity.
2) Accent onto the current time of valuation result. 123
Characteristics (V)
Regulations of the Valuation
Valuation activities are strictly regulated by
legislative norms and professional standards:
- Market Value recognized definition and rules of using.
- Demands for valuers (education, confidence, ethic, etc.).
- Interacting with neighbor spheres professionals.
- Conditions and spheres for obligatory valuation.
- Conditions of order and contracts.
- Content and form of valuation result report.
- Professional associations of valuers (conditions of
forming, responsibility, standards, insurance), etc.
124
Market Value – DEFINITION
(International Standards)
“Market Value is the estimated amount for which
a property should exchange on the date of
valuation between a willing buyer and a willing
seller in an arm’s-length* transaction after
proper marketing wherein the parties had acted
knowledgeably, prudently, and without
compulsion” (IVSC)
-----------------------------------------------------------------------------------------------------------------
* without any relationships between participants
of the dealing
125
The most important details in
the Market Value definition
Valuation is a cost (financial) quantity
equivalent of object.
Result is on the date of valuation.
Willing character both for seller and
buyer.
Consumers acting is knowledgeable,
prudent, and without compulsion.
126
Universality of the Market Value
definition
In principle the Market Value definition
(with small deviations) is recognized through
all the world
incl.: the RF Valuation Law, standards of the
national and international professional
associations, e.g. RICS, TEGoVA USPAP, etc.
Market Value is a main basis for majority
of valuation tasks and issues.
127
Valuation Bases other than
Market Value (IVS)
•
•
•
•
•
•
•
•
•
•
Value in Use (continuing the same using in a future)
Limited Market Property (in supply/demand sense).
Investment Value (for particular investors interests).
Going Concern Value (value of a business a whole).
Insurable Value (for insurance contract or policy).
Assessed, or Taxable Value (statutory valuation).
Depreciated Replacement (Reproduction) Cost.
Salvage Value (components of salvaged property).
Liquidation or Forced Sale Value (in time frame).
Specialized, Special Purposes, or Specially
Designed Property, Special Value, etc.
128
Market and Fair Value
• Market Value is a characteristic of an “ideal”
real estate market with “ideal” (willing and
free and full informed) sellers and buyers.
• At the same time there are some difficulties
and restrictions, but both the seller and buyer
are ready follow to reasonable arguments in
order to value the object of their dealing. It will
be the fair value.
• So if the Market Value setting is difficult the
Fair Value can be its argued substitution.
• The fair value is recognized as the possible
data for accounting.
129
VALUATION
METHODS
• Classification groups of valuation
methods.
• The methods analytical review,
samples & tasks.
• Logic of the methods choice.
130
Classification groups of
Valuation Methods
(0) Normative methods
(1) Expenditures basis
(2) Analogous approach
– market comparing
(3) Income methods –
capitalization of profit
(Σ) Combine methods
=======================================================================================
Which approach is closer
to the real market value?
Recommendations for
method choice.
• Statutory valuation
• Depreciated
replacement cost
• Comparative methods
(market value approach)
• Discount cash flow
methods
• Others – according to
other bases of valuation
(value in use, limited
market, liquidation, etc.)
131
(0) Normative Methods
of Valuation
• Normative valuation methods follow to
definite rules and algorithms approved by
legislative and other official documents.
The rules and algorithms are obligatory for
conditions indicated in the documents.
• Foreign (English language term) analogue
is – Statutory Valuation
132
*Normative Methods – national samples
1. Valuation for accounting (book-keeping)
- Price of the object acquisition
- Prime cost of building (creation) process
- Market value on the date of the object
present (1st book-keeping record)
- Linear amortization for every object.
=========================================================================================
WAITING FOR SAMPLES FROM OTHER
NATIONAL REGULATIONS
133
**Normative Methods – national samples
2. Valuation for Property Taxation.
3. Free Privatization (in the RF) for the
Residential Real Estate.
4. Algorithms of the start auction price for:
- State Property selling
- Municipal City Sites renting, etc.
==========================================================================================
WAITING FOR SAMPLES FROM OTHER
NATIONAL REGULATIONS
134
(1) Expenditures basis valuation:
DRC methods
1. Depreciated Rebuilding Cost
(DRbC)
(The valued object “rebuilding” with exact analogy).
2. Depreciated Replacement Cost (DRpC)
(The valued object whose “replacement” is mainly
with a functional analogy).
================================================================
A whole the Depreciated Cost is a reflection of
an obsolescence (physical and/or moral)
process during the valued object lifecycle. 135
*Depreciated Rebuilding Cost
The necessary cost data are possible from the exact
analogous object building project (prime estimate).
Depreciated rebuilding (rebuilt) cost – is the object’s
value according to its accumulated obsolescence on
the valuation date.
Basis formulas for Depreciated Rebuilt Cost:
{Со * (T-t) / T} if the obsolescence function is linear;
{Co * F(t,T)} if the function is non-linear one;
Co – prime rebuilt cost, defined from:
- full analogous object project estimate documents,
136
- statistic data for the object type building (eg in [$/m²])
**Depreciated Replacement Cost
The necessary cost data are possible from the
functional analogous object project (prime estimate).
Depreciated replacement cost – is the functional
analogy value with calculation of its accumulated
obsolescence on the valuation date.
Basis formulas for Depreciated Replacement Cost:
{Соf * (T-t) / T} if the obsolescence function is linear;
{Cof * F(t,T)} if the function is non-linear one;
Cof – prime functional analogy cost, defined from:
- functional analogous object project estimations,
- statistic data for the functional type objects, eg in [$/m²]
137
Problems of the DRC-methods
Argued definition of the lifecycle T duration.
Type and characteristics of the valued
object’s obsolescence function.
Exact analogies absence (excl. some mass and
other standard building & premises):
• for building analogies – size, location, etc.
• for functional analogies – in content and
quality of functional components.
Main reason – individual character of real
138
estate objects in principle.
Ways for the DRC problems solving
• Quantitative corrections of the prime value according
to exposed deviations
Сх = [Со*(T- t)/T] * ∏(ki), e.g. through:
– corresponding coefficients ki for every deviation i;
– combine algorithms (with special functional combinations
of the coefficients i influence).
• Expert conclusion of experienced valuer in concern
with the duration T or integrated obsolescence F.
• Using the statistic (specific, average) data for the
valued type of objects, eg: Со = q(£/ m²)*S(m²)
• Exclusion of over-functional components ∑Ci from
139
compared objects: Сх = (Co-∑Cj) * (T- t) / T.
Depreciated Rebuilding Cost – Task 1
The task conditions
To define the DRC for office with characteristics:
S=2,000 m², lifecycle T=60 years, age t=12 years,
statistic data for the type office building is $350/m²
The task solution
1) Estimation for the new analogous building Co:
Co = 350 $/m²* 2,000 m² = 700,000 $.
2) The Depreciated Rebuilding Cost is defined by
calculation of the object linear obsolescence
during 12 years of the object lifecycle 60 years:
DRC = $700,000 * [(60 – 12) / 60] = $560,000
Result:
DRC = $560,000.
140
Depreciated Replacement Cost – Task 2
The task conditions
To define the DRC for a hospital with characteristics:
t=20 years, improved by some shops (incl. books,
drugs, flowers) for $300,000, lifecycle (here - defined
by experts) T=80 years.
Analogous hospital (functionally, scale, etc.) prime
cost is Co=$4500,000
The hospital obsolescence function is linear.
Solution:
DRC=($4500,000 - $300,000)*[(80-20)/80]=$3150,000
Result:
DRC = $3150,000
141
Preferences and opportunities of
the DRC-methods
• Simplicity and clarity of the DRC concept and
estimating algorithms.
• Instrument for express-valuation and
operative value results.
• Opportunities for some alternative using the
building project and statistic (market) data.
• Summary the DRC-methods can be used:
– as a preliminary express-value before detail
valuation by other more sophisticated methods,
– as opportunity to have the value result if all the
other opportunities are absent.
142
(2) Analogous (comparative)
methods – market approach
The object value is defined from completely
analogous market data
What does it mean exact (full) analogy:
1) analogous objects with analogous characteristics:
functional,
physical,
economical,
property rights, etc.
2) analogous conditions of deals / operations, incl.:
type of dealing
dates factor
143
environmental and other conditions, etc.
Conceptual preferences
of the analogous methods
• The analogous methods value is
the very close approach to the Market
Value of the valued object because of
market data are in the information base of
the valuation methods.
• If the market information exists in the
sufficient quantity and quality the
analogous methods value results are the
most argued.
144
Conceptual problems
of the analogous methods
The analogous / comparative methods’
problems follow to the main demands
of the complete analogies – the information
limits (difficulties, insufficiency, etc.)
because of:
– small representative groups of completely
analogous objects (real estate objects are mainly
individual objects with non-coincident location,
physical characteristics, property rights, etc.).
– coincidence of deal conditions are seldom too.145
Ways of the problems
overcoming and new problems
of the analogous methods
The limited representative market data are
artificially widened through:
– direct data of more widen classification groups;
– specific/statistic indexes from the widened
classification groups;
– separate correcting coefficients: Сх = Сa * ∏(ki);
– using sophisticated calculations algorithms.
==========================================================================================
Subjective character (difficulty proved) of the data
base widening, and used calculating algorithms.
146
Analogous method: Paired Comparison
VALUATION OF THE INDUSTRIAL OBJECT
CHARACTERISTICS \ OBJECTS
Valued Object
ANALOGY 1 ANALOGY 2
ANALOGY 3
1.
SATISFACTORY
GOOD
SATISFACTORY,
SATISFACTORY
2. TOWN PLAN ZONE
(LIMITS)
3. PROPERTY RIGHTS
MIXED
YES
FREEHOLD,
INDUSTRIAL,
NO,
FREEHOLD
INDUSTRIAL
NO
LEASEHOLD,
MIXED
YES
LEASEHOLD
4. INFRASTRUCTURE
GOOD,
GOOD
SATISFACTORY
GOOD
180
150
LOCATION
Σ SPECIFIC PRICE of DEAL [$/m²]
Х=?
200
INFLUENCE DISTRIBUTION (of 100%)
PRIME VOLATILITY = 200-150 = 50 [$/m²],
QUALITY of LOCATION
TOWN PLAN ZONES LIMITS
PROPERTY RIGHTS
INFRASTRUCTURE
(BECAUSE OF DIFFERENT CHARACTERISTICS)
= 30% (0,3)
= 20% (0,2)
= 40% (0,4)
= 10% (0,1)
==========================================================================
COMPARISON with ANALOGY 1: 200 – 50*0.3 – 50*0,2
= 175
DECREAISNG VOLATILITY
COMPARISON with ANALOGY 2: 180 – 50*0,2 + 50*0,4 + 50*0,1 = 195
(TWICE):
COMPARISON with ANALOGY 3: 150 + 50*0,4
= 170
[170-195] [$/m²].
NEXT DECREASING: 147
e.g. by WEIGHED AVERAGE
(3) Income (future profit) methods
•
•
Basis concept of the income approach
and its estimating algorithms are future
profits provided by the valued object*.
The future profits information includes
necessary prognostic (prospected) data
about incomes and expenditures in
concern with the valued object.
=================================================================================
*The valued objects are commercial.
148
Income methods assumptions
1) The used prospected profit data are
determined as some average meanings
of future periods (mainly
as average
annual data).
2) The future profit data have a stable
character during all the prospected
period steps.
149
Basis algorithm of the income
methods
Capitalization algorithm (1)-(3):
(1) to determine (to find the corresponding
data) the future operational profit - Net
Present Income - NPI;
(2) to determine (to find the reliable
professional information) the capitalization
rate / yield - Y;
(3) to estimate the object Capitalization Value:
CV = NPI / Y
150
Operational profit NPI determining
- Future operational (average annual) income
data – PI, e.g. because of the real estate rent
business in concern with the valued object.
- Future operational (average annual)
expenditures – PE, incl.: maintenance and
management, protection, taxation and insurance
payments, etc.
- Future profit (net present income) – NPI
NPI=PI-РЕ
151
Rent payments and profit
– Earlier rent contracts tendency was to provide the
rent income as a net profit of owner. The tendency
was to replace majority of the operational payments
onto the real estate object tenant.
– New tendency in the rent business is a flexible
redistribution of the operational payments in depend
on preferences of owner and tenant (e.g. in the
Sale-Leaseback & Public-Private Partnership).
==========================================================================================
Σ
Rent index statistic data (what is its content):
We must be very attentive to lease contract conditions
such as operational payments distribution.
152
Capitalization rate Y calculation
Capitalization algorithm: CV = NPI / Y
Direct calculation concept:
– to use all the market purchases and rent data
during the year;
– to divide the integrated net rent incomes (as
NPI) onto the integrated prices of bargains SPi
for all the sold objects i = 1, … Q
Y = ∑(i) (NPIi / SPi) / Q
153
Capitalization rate cumulative
approach
Capitalization algorithm:
CV = NPI / Y
Cumulative Approach - Expert Approach
It is a consistent increasing the basis nonrisk rate Yo (e.g. state bonds rate) by
definite portions in correspondence with
different type of risks j=1…J
Y = Yo + ∑(j) Yj
154
Risk factors in the Cumulative
approach (e.g. by portions [0%-5%])
•
•
•
•
Quality of management and personnel.
Scale and different ranks of company.
Incomes and profitability of company.
Diversification of activities, goods & services,
consumers & producers.
• Resources suppliers stability.
• State and regional risks, e.g.: the general
financial data: GDP, inflation, etc.
Y = Yo + ∑(j) Yj
155
%Yield
Sample of the Yield
(Capitalization rate)
comparative dynamics
15
dependently on
different level of risks
(political, economy, etc.)
for the European states
10
and Russia
RF
East
Eur.
West
Euro
5
Data of
CB RE Noble Gibbons
2002 2003
2004
2005
2006
156
Sample of the Capitalization
algorithm using (rent business)
CHARACTERISTICS / DATA
DESIGNATIONS
RENT (annual)
RENTING SQUARE
USING SQUARE
OPERATIONAL INCOME
g
S
I
giS
($/m2)
(m2)
(%/100)
($)
400
2000
0,8
640 000
MAINTENANCE (annual)
OTHER FACILITIES (annual)
OPERATIONAL EXPENDITURES
J(S)
F
F+J(S)
($)
($)
($)
100 000
60 000
160 000
giS-(F+J(S)) ($)
480 000
FUTURE PROFIT
CAPITALIZATION RATE (yield)
CAPITALIZATION VALUE
k
MEANING
(%/100)
A=(giS-(F+J(S))/k
($)
0,12
4 000 000
157
Capitalization and Discount Rates:
Y (yield) and k
Capitalization of the Profit (Net Present Income)
Capitalization Value CV is defined according to data
of Net Present Value NPI and Capitalization Rate Y:
CV = NPI / Y
Future Incomes Discounting:
Current Value PV0 (t=0) for the future income Cn
(of the date t=n) is PV0 = Cn * [1 / (1+kn)ⁿ],
k – discount rate.
The Capitalization rate and Discount rate are identity
for stable net incomes on the endless interval t→∞.158
Proof the Y (yield) and k (discount
rate) identity
If the k and C (annual income) are constant,
the Present Value: PV0 = C*∑(n)(1/(1+k)ⁿ) =
= C*(1/(1+k) + 1/(1+k)(1+k) + 1/(1+k)³ +…)
Multiplying both parts of the equality onto (1+k):
PV0(1+k) = C*(1 + 1/(1+k) + 1/(1+k)² + 1/(1+k)³ + …)
PV0(1+k) – PV0 = C (subtraction for endless interval)
PV0 * k = C
PV0 = C / k
159
Negative & Positive factors in
the Capitalization algorithm
Using the cumulative concept
of the capitalization rate definition:
= inflation «q» and other negative factors
PV0 = C / (k + q)
= positive factors «m»
PV0 = C / (k – m)
160
Combined Methods
RESIDUAL METHOD
Used for a valuation of argued expenditures (D) in
concern with land site purchase for development.
Essence of the Residual Method’s algorithm
D ≤ A – (B+C) [deducting; so the D is a “rest”]:
А – market value of the development project result
(waited cost of the developed object selling);
В – project expenditures (excluding land site bargain),
С – developer’s needs (as salary, etc.) during the project.
The method combines income method (A estimating)
and expenditures approach (B calculations).
161
Residual Method’s variations
(i) For an argued future value of the developed
object market selling (e.g. if the land site price is
known and fixed)
A≥D+B+C
(ii) For express-estimating the building and
other development project expenditures
B ≤ A - (D+C)
(iii) For express-estimating the own “scale of
salary” during the project realization
C ≤ A – (D+B)
162
Contractor’s Method
Essence of the Contractor’s Method
The contractor’s cost of the valued object (CC) is
defined as a sum of:
MVL – the value of land site with existing use, and
DRC – the current cost of constructions as the
depreciated rebuilt cost of the building on the site:
CC = MVL + DRC
The contractor’s method is considered as a very
approximate and used in situations with real estate
market data absence, and if the building and land
site separate value is possible in principle.
163
Sample of the Combined Method Task
Office complex (1000 m²) is in lease contract, built 10 years
ago. Its lifecycle is 50 years.
Analogous offices: rent rate is $200/m², yield k=0.2(20%),
specific building expenditures are $750/m².
To define: the complex capitalized value (CV), depreciated
rebuilt cost (DRC), and land site residual cost (LRC).
Solution:
The capitalized value (assumptions: rent is a clean profit of
owner, and the office average filling percent is 90%)
CV = $200/m² * 1000 m² * 0.9 / 0.2 = $900,000.
The depreciated rebuilt cost (DRC) (assumption – linear
character of the obsolescence function):
DRC = $750/ m² * 1000 m² * (50-10)/50 = $600,000.
So the land site residual cost (LRC) will be
LRC=CV-DRC = $900,000 - $600,000 = $300,000.
164
RESULTS: CV=$900,000, DRC=$600,000, LRC=$300,000.
General remarks about different
value approaches combining
In general context the different approaches
combinations take place in the majority of
used algorithms, e.g.:
• In normative and expenditures and analogous
methods – we use specific coefficients which are
defined mainly from market (statistic) data.
• In DRC – we use characteristics of analogies in
order to define the replaced / rebuilt objects data.
• In analogous methods – we use some norms for
165
correcting differences & compares, etc.
Valuation Methods - Choice Logic
1. If there are Statutory regulations (for the definite type &
objects dealing) – it is necessary to use the corresponding
Normative Methods. Differently it will be law infringement. It
is a LAW-ABIDING rule.
2. If the statutory norms are absent, and we look for the
market value – the best way is to use Analogous Methods
as the market approach in principle.
3. If the necessary market data and other conditions make
difficult to use market approach – there are two alternatives
dependently on the valued object and bargain types:
- for commercial objects – Income Methods,
- for non-commercial objects – Expenditures Methods.
166
Valuation Purpose,
type of Objects and Bargains
1. Legislative Base: YES
Statutory regulations
NORMATIVE
METHODS
NOT
2. Market Data Base
YES
ANALOGOUS
METHODS
NOT
3. Commercial
conditions
YES
INCOME
METHODS
NOT
EXPENDITURES
METHODS
167
Valuation &
Development Business
4. Development: Risk
Analysis, Valuation
and Regulation
Development Risks: Analysis,
Valuation and Regulation: plan
1. Risks – main definitions and concepts.
2. Sensibility Methods for the risk analysis
and valuation.
3. Risk policy.
4. Business Game “Auction: Land Site for
Development Project”.
169
Principle role of Risk
characteristics
• The Pair “Risk – Profitableness (Income)” main characteristics for Securities Market,
arguments for optimal portfolio forming.
• Yield data – integral risk reflection in Real
Estate Market statistics: the pair “Rent-Yield”.
• The Pair “Investment Potential – Risks” one of the main regional characteristics for
investment attractiveness and future intensive
development.
170
Pre-crisis growth of the Moscow Commercial
Real Estate market: Investments & Yield (world)
800
%
%Yield
15
Data of
CB RE Noble Gibbons
RF
East
Eur.
10
300
West
Eur.
5
100
100
2003
2004
2005 2006
2001
2002 2003
2004
2005
171
2006
INVESTMENTS
EUROPE
Prosperity of
the 2007-2008
Investment
Prospects
CITIES
&
City Risk-Free
RISK-FREE
Moscow: both
extreme ranks
172
High
Potential
TOP REGIONS:
Moscow
Moscow region (oblast)
S-Petersburg
Ural regions
Khanty Mansy (Oil-Gas)
Volga regions
Rostov-Krasnodar (Sochi)
Low Risks
& Potential
High Risks
173
90s-2005
LOCO &
GROWTH
RF REGIONS’ ranking:
investment potential & risks
POTENTIAL
PROBLEMS
SPECIAL ATTENTION
174
Development Risks:
basis definitions and concepts
Risk is a probable loss.
Waited development results may be
worse because of different negative
factors influence.
So the Development Risks are the
probable losses because of the negative
factors acting.
175
Risks’ sources
Sources of the development risks
are concerned with insufficiency /
inadequacy of the project and
environment information, e.g.:
(1) inaccuracy or non-correspondence,
(2) uncertainty,
(3) absence or not in time,
(4) non-synonymous (diapason), etc.
176
Valuation Reasons for RiskManagement
Risks can be valued (measured):
Probabilities [0,1]
Losses
- can be valued.
- can be valued.
Risks can be under checking & control.
Sources of the necessary data:
- Market information.
- Expert analysis.
- Simulation of the rick-factors influence onto
the characteristics of development project.
177
Sensibility Risk-Analysis
Concept
∆Y (∆Xi) – deviations of results
WAITED RESULTS
xim
Y=Y(xi, … xj)
xjm
Ym
Ym
MODEL of Interacting
FACTORS of INFLUENCE
178
Sample of the information uncertainty
influence for the capitalization value
CHARACTERISTICS / DATA
DESIGNATIONS
RENT (annual)
RENTING SQUARE
USING SQUARE
OPERATIONAL INCOME
g
S
I
giS
($/m2)
400-360
(m2)
2000
(%/100)
0,8
($)
640000 - 576000
MAINTENANCE (annual)
OTHER FACILITIES (annual)
OPERATIONAL EXPENDITURES
J(S)
F
F+J(S)
($)
($)
($)
FUTURE PROFIT
CAPITALIZATION RATE (yield)
CAPITALIZATION VALUE
giS-(F+J(S)) ($)
k
(%/100)
MEANING
100 000
60 000
160 000
480000 - 416000
0,12
A=(giS-(F+J(S))/k ($) 4000.000-346.667
- 13.33%
179
Risk Factors
in the Capitalization value
1. Operation Incomes
•
•
Rent payment (-10% → -13.33%)
Squares under renting (measure of filling)
2. Operation expenditures
•
Management, Maintenance and other
Facilities
(+10% → - 3,33%)
3. Capitalization rate (reflecting the rent
business risk) (+10% → - 9.09%)
Σ → ~ - 24.3%
180
Development Project
expenditures
•
•
•
•
•
•
•
•
Land site purchase
Territory preparing
Infrastructure providing
Building projecting and realization
Register and other statutory payments
Management and marketing
Own expenditures of developer
Credit payments
__________________________________________________________________________________________________________
Are there risks among the preliminary valuations
181
Risk express-value for the
development project profitability
Capitalization Value
(or future Market Value)
Project expenditures
А
F
[if (-10%)]
[if (+10%)]
----------------------------------------------------------------------------------------------------------------
Profitability
E=(A-F)/F
Wished profitability (e.g.: А*=1.5F) E=50,0%
Profitability because of risk factors acting,
e.g.: 10% project result A decrease and
10% expenditures F increase )
E = (0.9A-1.1F)/1.1F = (1.35-1.1)/1.1 = 22.7%
182
So - more than twice losses
Sensibility Risk-Analysis
Concept
∆Y (∆Xi) – probable characteristics
of the results’ deviation
xim
WAITED RESULTS
Y=Y(xi, … xj)
xjm
Ym
Ym
MODEL of Interacting
FACTORS of INFLUENCE: probable
distribution
183
Project 1
Project 2
Probable image of different projects NPV
184
Risk policy and regulations
Risk Avoiding
Risk Decreasing
→0
→min
Probability
Losses
Development projects’ (profitability)
risk influence fields & risk policy
Operation incomes
Operation expenditures
Building process
Developer expenditures
…
Better Marketing
Outsourcing
Best contracting
Economy
…
185
Risks value and regulations in
the management of organization
•
Development projects (and their risks)
take place among other acts, operations &
decision making of the organization.
• Development risks take place and are
regulated together with other risks fields.
• Development risk policy is chosen and
realized together with other policies (as
economy policy, social responsibility, etc.).
186
Pass to Business Game “Auction: Land
Site purchase for its Development”
• A whole: Decision Making in the market
(stochastic) information environment and
different start potential.
• Land site Auction – Win for development project
realization – Providing the project efficiency.
• Choice and following to own risk and economy
policy in order to provide the project necessary
efficiency in the market conditions.
• Decision Making as the argued and purposeful
choice on the project efficiency value basis. 187
Valuation &
Development Business
5. Auction:
City Site for
Development Project
Business Game
188
Concept of the Business Game
• Understanding Decision Making problems
in the market stochastic environment.
• Argued choice & using valuation methods.
• Understanding the development project
efficiency concepts and factors influence.
• Understanding risk and economy policy in
the market stochastic environment and
conditions of the auction procedure.
• Operative calculations and competitive
definition of bidding price boundaries.
• Checking the winner (and own) final results.
189
Objectives of the Business Game
To make maximum profit as a developer.
This is achieved by following:
• acquiring the city site for the best price (lower
as possible in the auction competition with
other developers);
• site development according to the bidding
conditions: expenditures’ possible economy;
• project result selling for max market price.
190
Means of achieving objective
• Each team (development company) is a price taker.
• It has not control over the full costs of development or
the market price of the completed development. As an
experienced developer it understands the parameters
of these variables.
• It has control over whether to bid for a site and what
price to bid.
• Each team must determine its risk and economy
strategy in order to win and at the same time: to avoid
bankruptcy and give the best chance for profit.
• Teams compete against each other to obtain the
available city site.
191
Image of the completed development
site and the object of commercial
development
192
START: cleared city site, waste
ground, uncompleted or old real
estate, etc. - for development
193
RESULTS
Industrial & Office
“A” Office Centre
The objects
are for sale
194
Purpose of Auction Competitors
Development Business
(1) to win the auction (i.e. to buy the site).
(2) to build a commercial object (e.g. an office
or shopping or industrial or residential
complex) for the future RE rent business of
other company than the developer )
(3) to sell the object to the company in order to
recover expenditures and generate own profits.
195
t=T
t=0
196
Business Efficiency
Efficiency (“E”) is a function of income
(“A”) and expenditures (“B”), e.g.:
E = (A – B) / B
or
E = ((A – B) / B)*100%
This formula gives the rate of return
(or yield) on the capital employed.
197
Development Business Efficiency
Efficiency: E = (A – B) / B
A future sale price of the development
A = function {rent, size (m²), yield (for capitalized
value definition), maintenance costs, taxes, etc.}
B expenditures for the development
B = function {cost of site purchase, building costs,
professionals’ fees, developer’s needs, cost of
borrowing, marketing, planning consent, stamp
duties, etc.}
198
Income & Expenditures Formula
Development INCOME (Capitalisation Method)
A = A (r - rent, S – m² rented, k - yield, M maintenance, TP- tax-payments)
A = [r * S – (M+TP)] / k
Development EXPENDITURE
B = B (D-site purchase, BP - building process,
C – developer’s costs, p - cost of borrowing,
MM - management & marketing …)
B = (D + BP + C + MM) * (1 + p)
199
MODEL for Efficient Decision Making
A
E = (A-B) / B =
Rent,
Yield,
…
= A/B – B/B = A/B - 1
Building,
E = A/В - 1
Cost of
credit,
…
Site cost
(auction)
E>0 or E≥E`
A>B or
A≥B(1+E`)
B
200
What does it mean: A ≥ B*(1+E`)?
A ≥ (D + C + BP + MM)*(1+p)*(1+E`)
• The future selling price of the built object
“A” must be more (or at least equal to)
than the sum of the development
expenditures and the cost of borrowing
*(1+p) and planned profit *(1+E`)
• In order to calculate “D” (the bidding price
for the site at auction), the formula above
can be reversed:
D ≤ A /(1+p)/(1+E`) – (C + BP + MM)
• Infringement the limit D≤ above can lead to
201
bankruptcy of the developer.
D ≤ A(r,k)/ (1+p)/(1+E`) – (C + BP + MM)
rent
yield
credit cost
RISK policy
ECONOMY INTERNAL
policy
potential
Future
Today
E`>=0?
Today
uncertainty search
C>=0? level
Market
result
influence
Internal characteristics
OPPORTUNITIES 202
Model & Behavior of Competitor (i)
D ≤ A / (1+p)/(1+E`) – (C + BP + MM)
Start opportunities
(done before bidding):
BPi, MMi
Economy policy:
Ci
0
E`i
0
Di – chosen
site cost for
the auction
bidding
Risk policy: Ai (r, k)
Choice - before
Check - after bidding
203
Example for Bidding Calculation (T = 1 year)
D ≤ A(r,k)/(1+p) / (1+E`) – (BP + MM + C)
r = [480-540] $/m². The range reflects future uncertainty
S = 2000 m²
M+TP = 0.6 mln$
k = 0.1
A=(r*S-(M+TP))/k = [3.6-4.8]mln$. Here is Risk choice
p=0.2
(1+p)=1.2
BP+MM = [1.0 - 1.5] mln$ It will be result of Draw1
C=[0-0.5], e.g. C=0.2 mln$ Here is Economy Policy
E`=[0-0.3], e.g. E`=0.1
=================================================================================================
Dmax < ([e.g.4.0/1.2]/(1+0.11)-[eg.1.2]-0.2) = 1.6 mln$
The choice will be checked by market imitation Draw
204 2
“RISK POLICY”
D ≤ A/(1+p) / (1+E`) – (C + ВР + MM)
• The waited rent diapason r=[480-540] $/м² reflects
future market situation and risk choice of Developer.
• We calculate our bidding price Dbid today in waiting
for future rent market data “r” – and correspondingly
for future market sale the development result “A (r)”.
• The future market price Amarket can be different
from our waiting. And the difference can be onto
the negative direction. It is our risk.
• Extreme risk takes place if we calculate D bid with
max positive waiting: A=Amax (or A = 4.8 mln$). 205
What does it mean the “Economy
Policy” for Auction participants
• The economy policy is defined by purposeful
decreasing:
– own expenditures of developer until zero, eg.:
C = [0-500000] $
0
– planned value of efficiency E inside of some
expedient diapason, eg. E`= [0-0,3] – until zero.
• So the extreme value of bidding price “Dmax”
will take place in the “zero” event: (C=0, E=0).
D ≤ A / (1+p) / (1+E`) – (BP + MM + C)
206
The Business Game Procedure
Start
data:
Appraisal Auction
Checking
for bids: mechanism: winner’s
different
by every open/closed results
for players player
one/multi-step
t
Drawing 1: Economy Bidding &
(BP+MM)i & Risk
Behavior.
politics
Ways
(C,E`,A)i to win.
Drawing 2:
(Future market
data for “A”).
Rules for awards.
207
Distributions of competitors’ opportunities:
BP+MM=[1-1.5] mln$: building, managing & … skill,
Tour by tour random definition for each competitor
Draw 1 - Distribution of start opportunities (BP + MM)i
1000,000
10
9-12 (10)
1100,000
11
7&8 (11)
1200,000
9
5&6 (9)
1300,000
3
4 (3)
1400,000
1500,000
2
Cards
1 =36
2+1 (2)
2Cube
[2-12]
1+1 (1)
D =< A/(1+p) / (1+E`) – (C + BP+MM)
208
Draw 2 - Random search of "A"
as a value of real market selling price
on the tomorrow market (Sample)
Cube
[1/2/3/4/5/6]
1
2
3
4
5
6
3600000 3800000 4000000 4200000
4200000
4800000
Amarket = [3.6-4.8] mln$
Probable distribution of the future selling prices “A”
209
Types of auctions (according to
the UK and RF practice and norms)
• 1-stage (a closed auction) – invited or
preferred bidder
• Multi-stage with a fix step increase
in the auction price. The step is fixed by
the auctioneer.
• Multi-stage with free conditions for
increasing the auction price. Steps are
determined by bidders.
210
1-stage Auction
Draw 1: (BP+MM) random distribution:1st payments (-1)
Calculation of efficient bid by each player: Dbid (i)
Bring Dbid (i) data to tutor
(closed way)
Compare and claim winner of the tour: his Dbid = Max
Applauses to winner
His 2nd payment (-3)
Draw 2 – Amarket drawing through Cube [1/2/3/4/5/6]
Checking winner’s balance: his waited A# ≤? Amarket
If yes –
Premium (+10).
If not –
Penalty (-1).
Demonstration of current results for each team.
So: 5-6 rounds for the 1-stage closed auction
211
Information about extreme data
for bidding price calculation
[BP+MM] (mln$): 1.0 1.1
1.2
1.3
1.4
1.5
Economy style
E`=0 & C=0.2mln$
Min risk: A=3.6mln$ 1.8 1.7
1.6
1.5
1.4 1.3 [mln$]
Max risk: A=4,8mln$ 2.8 2.7
2.6
2.5
2.4 2.3 [mln$]
Extreme Economy
E`=0 & C=0
Min риск:A=3.6mln$ 2.0 1.9
Max риск:A=4,8mln$ 3.0 2.9
1.8
2.8
1.7
2.7
1.6 1.5 [mln$]
2.6 2.5 [mln$]
212
Multi-step auction (open)
Main differences from one-step closed auction:
- auctioneer claims a start price of the city site;
- the auction process is open;
- participants claims their participation for every step
(confirmation to pay the announced price) by raised hand;
- auctioneer increases the announced price by equal
portions until the final situation – step with a single
participant, who confirmed the last announced price.
* ANOTHER VARIANT:
- participants claim increasing bidding prices (by permitted
portions) until final situation – step with a single participant,
who will claim the biggest price.
--------------------------------------------------------------------------------------------------------------------------------------------------------------------
213
Winner is a last participant continuing the competition.
Multi-step auction - procedure (2-3 rounds)
• Draw N1: (BP+MM) random distribution:
• Calculation of efficient bid by each player: D bid (i).
• Auctioneer claims a start price of the site D bid (t=0).
• Participants (who are ready to continue the competition) claim
their confirmation with the announced price by raised hand.
• Step by step Auctioneer increases the price D bid (t).
• The auction participants confirm or leave the process.
• Auctioneer continues the price growth until a final situation with a
single participant (last player confirming announced price D bid*).
• This will be winner with the bidding price D bid*. Applauses.
• Draw N2 – A market
by the Cube [1/2/3/4/5/6]
• Checking winner’s balance (his waiting A# ≤? A market)
214
If yes – Bonus!
If not – Penalty.