十七 Asset Valuation Alternative Investments.docx

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