Real Estate Valuation

Duration:
2 days
Location:
Prague, NH Hotel Prague
    Top 5 Learning Objectives:

  • Understand the most widely-practiced property income and capital valuation techniques
  • Identify the cost of capital for real estate
  • Successfully implement discounted cash flow valuation frameworks
  • Acquire the ability to value a range of different types of properties
  • Appreciate international differences in valuation approaches
Course Overview

This course covers the methods, concepts and application of real estate valuation. At this course, you will learn to value most typical forms of real estate using a variety of techniques and methods, in the same way as a chartered surveyor.

The focus is on properties and market conditions in central Europe, but with plenty of international examples, including land, properties with development potential, and different classes of property such as offices, retail, hotels, and warehouses as well as residential property valuation.

Who Should Attend

This course would be of interest to professionals who develop, finance, manage, buy or sell real estate, and especially:
  • Real estate investors and analysts
  • Real estate developers
  • Real estate fund managers
  • Planning and development professionals in real estate businesses
  • Bankers and lenders

09.00 - 09.15 Welcome and Introduction

Real Estate as an Investment Class

Property Performance Analysis

  • How is property measured?
  • Identifying what makes a good property
  • Problems and issues with performance evaluation
  • Sources of data
  • Evolution of data measurement
  • International comparisons of performance
  • Current issues in performance management

Case Study: Best international practice in property performance measurement

Property in the Investment Portfolio

  • Concept of Modern Portfolio Theory (MPT)
  • Measuring variance (Beta and equivalents)
  • Constructing a portfolio
  • Property correlation with other assets
  • Best international practice on property in a portfolio
  • International trends in property correlation

Case Study: Pension fund and private equity investment in European property

Commercial Property - Assessing Income

  • Appraisal of income property – RICS Valuation Practices and international comparisons
  • Comparison with corporate finance valuation
  • Reporting according to IFRS standards

Case Study: Important aspects of the RICS Valuation Standards (including valuer independence)

Residential Property – Assessing Capital Value

  • Why buy residential real estate?
  • Does rental income matter for residential property?
  • What are the main problems?
  • Measurement criteria for residential real estate – hedonic approaches
  • Qualitative issues, competition, style and marketing

Case Study: Residential price trends in Europe – comparative analysis

Discounted Cash Flow for Real Estate Investments

Net Operating Income (NOI)

  • Gross and net income
  • Differences in calculating NOI
  • Overall capitalisation rate
  • Capital expenditure issues
  • Differences between property types
  • Approaches to the cap rate

Case Study: The band of investment approach

Projecting Cash flows

  • The dynamic behaviour of the 4-Q model: stability versus oscillations
  • Real estate pricing behaviour: backward or forward looking?
  • Forecasting markets: univariate analysis, vector auto regressions, structured models.
  • Forecasting examples
  • The definition and evaluation of “risk”

Case Study: Forecasting techniques

Creating and Using a Detailed Discounted Cash Flow (DCF) Model

  • Debt service and pre-tax cash flow
  • The sinking fund
  • Lease variations
  • Differences between sectors
  • Estimating resale value
  • Terminal capitalisation rates

Exercises: Delegates will use a number of real world examples to create and use spreadsheets for DCF valuation

Day Two

Land Prices

  • Should land prices be calculated separately?
  • How cyclical are land prices?
  • Modelling land prices
  • Empirical evidence on land prices
  • Forecasting land prices
  • Land price issues in Europe

Case Study: Data availability on land prices

The Cost Approach

  • Type of costs
  • Methods of evaluating costs
  • Sources of cost estimation
  • Incurable and curable depreciation
  • Market extraction method

Exercises: Delegates will use spreadsheet models to calculate a range of cost estimates for individual properties

The Sales Comparison Approach

  • Value, worth and price
  • Sources of comparable data
  • Identifying points of comparison and difference
  • Sales comparison approach example

Exercises: Using the sales comparison approach in practice

Highest and Best Use Approach

  • Definitions of HBU
  • Site value
  • Improved value
  • Calculating HBU

Case Study: Business Plan for a major project analysed

Leasing Analysis

  • Introduction to leases

Exercises: Stop calculations, lease valuation and feasibility rents

  • Analysing comparables
  • Analysing rental prospects

Exercises: Depreciation, net operating income and yield calculations

  • Securing tenants in relation to valuation and finance
  • Quality control and finance
  • Forecasting and limiting operating costs
  • Leases in Europe – issues, the law and values

Introduction to Cost of Capital Theory

  • What is the significance of the cost of capital?
  • Differentiation between debt and equity
  • Hybrid products
  • The pecking order theory of cost of capital
  • The role of debt in corporate management

Case Study: Economic Value Added (EVA™) as applied to real estate companies

  • Dividend pricing model
  • The Capital Asset Pricing Model (CAPM)
  • CAPM and corporate leverage (equity/asset betas)

Exercise: Leveraging and de-leveraging equity cost

  • Criticisms of CAPM
  • Sources of beta and market risk premia
  • Uses of CAPM in practice
  • CAPM and project (individual property) financing

Case Study: Arbitrage pricing theory in real estate SPV finance structures

  • Bank debt as a corporate funding tool
  • The concept and application of the mortgage
  • Prevailing mortgage rates, terms and conditions
  • Funding a property company through debt
  • Islamic funding instruments and characteristics

Case Study: Mortgage lending criteria for typical banks

  • Calculating and using WACC
  • Target vs. actual capital structure
  • Adjusting capital structure
  • WACC information for property companies

Case Study: Analysing a proposed development financing methodology

Introduction to Real Options

  • How to calculate real option value
  • Comparing the Black-Scholes and Binominal Expansion model
  • Real world examples
  • Problems with real option calculation
  • Application to distressed firms’ equity and other financial Applications

Exercise: Delegates will study a range of real option calculations using customised spreadsheet models

  • Does property possess real options?
  • Examples of possible real estate real options
  • Call Option approach to land value
  • Samuelson-McKean approach
  • Difficulties of measurement
  • Potential benefits

Exercise: Delegates will value a potential development on the basis of conventional DCF and real option analysis

Valuation in Practice

  • How is valuation practiced by chartered surveyors?
  • What are the key elements of the RICS valuation guidelines?
  • What is the evidence on valuation practice in Central Europe
  • Is valuation in Central Europe adhering to best international practice?
  • What are the differences between countries?

Evaluation and Termination of the Seminar

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