十七 Asset Valuation Alternative Investments.docx
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十七 Asset Valuation Alternative Investments.docx
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十七AssetValuationAlternativeInvestments
十七AssetValuation:
AlternativeInvestments
1:
RealEstateandOtherTangibleInvestments
a:
Describehowrealestateinvestmentobjectivesareset.
Settinginvestmentobjectivesinvolvestwosteps:
Considerthedifferencesintheinvestmentcharacteristicsofrealestate.
1.Considerthetypesofrealestateinvestments:
a.Equityholdings:
Thisisthephysicalownershipofrealestateproperties.
b.Debtinstruments:
Thisisthepurchaseofrealestatemortgagesanddeedsoftrust.
2.Realestatepropertiescanbeclassifiedas:
a.Incomeproperties:
Herethereturnscomemainlyfromrentalincomewhichincludesresidentialproperties(houses,duplexes,andapartments)andcommercialproperties(officebuildings,shoppingcenters,andfactories).
b.Speculativeproperties:
Herethereturnscomemainlyfrompriceappreciation.
Youshouldestablishyourinvestmentconstraintsandgoals.
1.Toconsideryourfinancialgoalsandconstraints,youneedtodetermine:
1.therisk-returnrelationshipofrealestate.
2.howmuchofyourportfolioshouldbeinrealestate(assetallocation).
3.howyoushouldquantifythegoalsoftheselongterminvestments.
2.Toconsideryournonfinancialgoalsandconstraints,youneedtodetermine:
1.thetechnicalskillsneededtomaintaintheproperty.
2.themanagerialtalentsnecessarytocontroltheproperty.
b:
Describethefactorsthatareimportantinrealestateanalysis.
∙Identifyingandanalyzingthephysicalproperty.Determinethequalityandquantityofassetstobereceived.
∙Understandingthelegalpropertyrights.Youmustdoalegalinvestigation,aswellas,aphysicalone.
∙Considerthetimehorizonandthevolatilityofrealestateprices.Analysisofshortterminvestmentsisdifferentfromlongtermones.
∙Considerthegeographicarea.Realestateisaspatialcommodity,whichmeansitsvalueislinkedtowhatisgoingonaroundit.
c:
Identifythedeterminantsofrealestatevalue.
Demandfortheproperty:
Whydopeoplewanttobuyorrentthispieceofproperty?
Thedemandforapieceofpropertyisinfluencedby:
1.Theeconomicbaseofthecommunityinwhichthepropertyislocated.
2.Thepopulationcharacteristicsofthecommunityinwhichthepropertyislocated.Thisincludesdemographics(age,sex,householdsize,occupation)andpsychographics(personality,lifestyle,etc.)
3.Theavailabilityofmortgagefinancing.
Supplyofproperties:
Sizeupthecompetitor’sofferingstothepieceofpropertyyouwanttorentorsell.
1.Competitioncomesfromsimilarassetsandsubstitutableassets(e.g.,peoplejudgepropertiesassetsofsubstitutablebenefitsandcosts).
2.Inventoryanalysis.
Thepropertyitself:
Todevelopaproperty'scompetitiveedge,theinvestormustconsiderthefollowingfivepoints:
1.Userestrictions.
2.Locationanalysis.Convenience,socioeconomic,andfiscal.
3.Sitecharacteristics.
4.Improvements,suchasbuildingsizeandfloorplanandamenities,style,andconstructionquality.
5.Propertymanagement.
Thepropertytransferprocess:
Themarketforrealestateisnotefficient.Thereisnocentralizedmarketfortradingandnoorganizedmethodtodisseminateinformation.Thismeansresearchpaysoff.Also,successinthesaleandtransferofpropertygoestothosewhocanpromotetheirpropertyandnegotiatethebestdeal.
d:
Describehowdemographicchangescanaffectsupplyanddemandforrealestate.
Asaregions'demographics(i.e.,familyincome,age,householdsize,sex,andoccupation)change,sowillthevalueoftheregions'realestate.
e:
Describevaluationtechniquescommonlyusedtoestimatethemarketvalueofrealestate.
Thecostapproach.Thisapproachvaluesthepropertyatthecosttorebuilditusingtoday'sprices.Thisworksbestfornewertypeproperties.
Thecomparativesalesapproach.Thisapproachvaluesthepropertyrelativetocomparablepropertiesthathaverecentlysoldinthemarketarea.
Theincomeapproach.Thisapproachvaluesthepropertyasthepresentvalueofallfuturecashinflows.Onesuchmethodisthedirectcapitalizationapproach.Thismethodtreatsnetoperatingincomeasifitwereaperpetuity.
Usinganexpert.Thisapproachjusthiresaprofessionalrealestateappraiser.
f:
Calculatethevalueofproperty,usingtheincomeapproach.
Thisapproachvaluesthepropertyasthepresentvalueofallfuturecashinflows.Onesuchmethodisthedirectcapitalizationapproach.Thismethodtreatsnetoperatingincomeasifitwereaperpetuity.
Annualnetoperatingincome,NOI,istheproperty’sgrosspotential,lessvacancyandcollectionlosses,lessoperatingexpensesincludinginsuranceandpropertytaxes.YoushouldnotethatNOIisbeforefinancingandtaxes.Themarketcapitalizationrate(R)istheratecurrentlyrequiredbyinvestors.
Example:
Anapartmentbuildingwouldearn$100,000iffullyoccupied.Thebuildinghasa5%vacancyrateandhasoperatingexpensesof$20,000.Ifyouwant10%onthisinvestment,whatvaluewouldyouplaceonthebuilding?
NOI=$100,000-(.05)($100,000)-$20,000=$75,000
MV=75,000/.10=$750,000
g:
Explainthedifferencebetweenpositiveandnegativeleverage.
Ifthepropertyearnsreturnsinexcessofthecostofborrowedfundstheinvestor'sreturnswillexceedthereturnsonanallcashdeal.ThisiscalledPOSITIVELEVERAGE.
Iftheinvestmentreturnsfallbelowthecostofborrowedfunds,NEGATIVELEVERAGEoccurs.
h:
Outlinetheframeworkforrealestateinvestmentanalysis.
Investorobjectives.
a.Investmentcharacteristicsandconstraintsandgoals.
Analysisofimportantfeatures.
a.Physicalproperty.
b.Propertyrights.
c.Timehorizon.
d.Geographicarea.
Datacollectionanddeterminantsofvalue.
a.Demand:
Whowillbuythisproperty?
1.Economicbase-population,wealth,andincome.
2.Buyer/tenantpreferences.
3.Targetmarketpotential.
4.Mortgagefinancingconditions.
b.Supply:
Whatisthequantityandqualityofcompetingproperties?
1.Marketstructure.
2.Sourcesofcompetition.
3.Inventoryingcompetitors.
c.Theproperty:
Whatdoesthisspecificpropertyoffer?
1.Restrictionsonuse.
2.Location.
3.Improvements.
4.Propertymanagement.
d.Propertytransferprocess:
1.Methodsofpromotion.
2.Negotiationpressuresandtechniques.
3.Leaseprovisions.
Dataanalysis:
valuation.
a.Marketvalue.Howdoesthesellerdeterminetheaskingprice?
1.Costapproach.
2.Comparativesalesapproach.
3.Incomeapproach(NOI/R).
b.Investmentanalysis.Howdoesthebuyeranalyzetheproperty’svalue.
1.Netpresentvalueanalysisbasedonaftertaxcashflows.
2.Internalrateofreturnanalysis.
Synthesisandinterpretationofresults.
i:
Calculatethenetoperatingincomefromarealestateinvestment.
Thisapproachvaluesthepropertyasthepresentvalueofallfuturecashinflows.Onesuchmethodisthedirectcapitalizationapproach.Thismethodtreatsnetoperatingincomeasifitwereaperpetuity.
Annualnetoperatingincome,NOI,istheproperty’sgrosspotential,lessvacancyandcollectionlosses,lessoperatingexpensesincludinginsuranceandpropertytaxes.YoushouldnotethatNOIisbeforefinancingandtaxes.Themarketcapitalizationrate(R)istheratecurrentlyrequiredbyinvestors.
Example:
Anapartmentbuildingwouldearn$100,000iffullyoccupied.Thebuildinghasa5%vacancyrateandhasoperatingexpensesof$20,000.Ifyouwant10%onthisinvestment,whatvaluewouldyouplaceonthebuilding?
NOI=$100,000-(.05)($100,000)-$20,000=$75,000
j:
Illustratehowdepreciationaffectstaxesandafter-taxcashflow.
Depreciationexpensereducestaxesbyanamountequaltotheproductofdepreciationandthetaxrate.Ifthedepreciationexpenseis$50,andthetaxrateis40percent,taxeswillbereducedby$50x40%,or$20andtheafter-taxcashflowwillalsoincreasebythesameamount,i.e.,$20.
k:
Calculatetheafter-taxcashflowfromarealestateinvestment.
Aftertaxcashflow=(Revenue–Cost–Depreciation)(1–t)+depreciation
l:
Calculatethediscountedcashflowandnetpresetvalueofarealestateinvestment.
NPVequalsthepresentvalueofallthecashflowstobereceivedfromtherealestateinvestment(calledthediscountedcashflows)lessthecostoftheinvestment.Youshouldnotethatthecashflowsusedinthenetpresentvalueprocessarenetofincometaxes,butbeforefinancingcost.
NPV=PVofcashflows-investmentcost.
whereCFn=therentplustheterminalvalue,r=thediscountrate.
1.NPVis+,youearnarateofreturnontheinvestmentgreaterthanthediscountrate.Youarehappy!
2.NPVis0,youearnarateofreturnontheinvestmentequaltothediscountrate.Youarehappy!
3.NPVis-,youearnarateofreturnontheinvestmentlessthanthediscountrate.Youaresad!
m:
Describethemajorcharacteristicsofrealestateinvestmenttrusts(REITs)andrealestatelimitedpartnerships(RELPs).
RealEstateInvestmentTrusts(REITs):
REITsareclosedendinvestmentcompaniesthatsellsharestothepublic.Themoneysreceivedplusborrowedmoneysareusedtopurchaserealestateinvestments.REITswereestablishedundertheREITActof1960.REITsallowinvestorstoownaportfolioofrealestateassetsandatthesametimehavelimitedliabilityandnomanagementresponsibility.Typically,REITsyield1or2%abovemoneymarketfundsandaboutthesamereturnashighgradecorporatebonds.REITsarerequiredbylawtopayout95percentofincomeasdividends,keep75%ofassetsinrealestateinvestments,earnatleast75%oftheirincomefromrealestate,andtoholdeachinvestmentforatleastfouryears.
RealEstateLimit
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