Under investments in general, according to the Federal Law "On investment activities in the Russian Federation carried out in the form of capital investments", it is customary to understand monetary funds, securities, other property, including property rights, other rights that have a monetary value, invested in business objects and (or) other activities for the purpose of making a profit and (or) achieving another useful effect.
Investments in real estate are a particular case of investment. In turn, real estate objects can also be classified in application to the possibility of investing in them. The classification of real estate objects is shown in Figure 1:
Rice.
In accordance with this classification, investments in real estate objects can also be divided according to the type of real estate. Investment value specifies the definition, taking into account the type of investment and preferences. Investment value is based on the subjective assessment of a specific investor of a specific option investment project.
In the case of a typical sale and purchase transaction without the buyer's long-term intentions regarding the further extraction of income from the property, the market value is determined objectively from the point of view of standard approaches to valuation. The market value reflects the objective market situation, it is formed by the relationship between the volumes of supply and demand, that is, the final buyer cannot influence the change market value object, as it is dictated by the market.
At the same time, when the buyer purposefully purchases real estate in order to implement the principle of the best and most efficient use, that is, investment additional funds into the property and further extraction additional income from a reconstructed or converted object - into this case we are talking about the subjective investment value of a property for a given buyer. That is, in this case, the investment value is the value of the utility of this property for this particular buyer (investor).
Before proceeding with the assessment of the investment value and predicting the future data of any property, it is necessary to conduct a market analysis, on the basis of which the assessment will be made.
It should be noted that the concept of "analysis of the real estate market" in its daily use is quite general and combines at least two procedures:
- 1. Monitoring research of the real estate market for the purpose of identifying general and specific trends;
- 2. Research of the real estate market and its surroundings for the purpose of substantiating a specific investment decision.
Monitoring should mainly track those parameters that are necessary when justifying the adoption of specific investment decisions. As part of justifying investment decisions, it is necessary to conduct a study of the real estate market.
The ultimate goal of any study of the type under consideration is to measure the ratio of supply and demand for a specific type of product on the real estate market at a specific (usually future) point in time. The special characteristics of real estate as a commodity, along with the special place of real estate in a market economy, form a fairly wide range of socio-economic information necessary for positioning this commodity on the market. Current and retrospective macroeconomic characteristics of the national and regional economy, socio-demographic indicators of regional and local markets, parameters of regional and local real estate markets - these are the directions in which research should be carried out.
Thus, the main and only task of monitoring the real estate market is to provide all market participants with information about the structure and dynamics of changes in characteristics, showing both general trends in the real estate market and trends in individual indicators used to justify investment decisions.
Based on the monitoring of the real estate market, the investor, for whom the investment value is determined, forms the basic requirements for the real estate object.
The investor draws up a preliminary business plan for an investment project, containing clearly defined project goals and the expected ways to achieve them, and includes the following sections:
- · Description of the future object;
- · A description of the goods and services produced;
- · Market analysis and marketing plan;
- · Production plan;
- · Organizational plan;
- · Risk assessment;
- · financial plan;
The business plan of an investment project, in fact, represents the most efficient use of the property based on the individual requirements of the investor, that is, this is the option for using the property that provides the maximum investment value for the investor, taking into account all his wishes.
On the basis of such a business plan for an investment project, namely the nature of the proposed object, its specifics, parameters and operational characteristics, the requirements for the real estate object necessary for the implementation of the investment project are formulated. For construction real estate, this can be the required area of the object, the height, size, quantity and quality of premises, the presence of additional equipment (for example, elevators in buildings), etc. It is these requirements that form the basis of the future investment value of the object.
Market valuation does not imply the existence of any specific sellers or buyers; the valuer proceeds from a hypothetical transaction between a seller and a buyer who have the requirements and motivations that are typical of the market for the assets being valued. And in this case, it is essential to be able to distinguish between the usual conditions for the market (information, prospects, requirements, motivation) and individual specific requirements. Investor's individual requirements are formed, as a rule, due to:
- · Differences in estimates of the size of future income streams;
- · Differences in determining the level of risk and risk factors;
- · Required rate of return;
- · Differences in the degree of predictability;
- · Differences in the level of financial costs;
- · Differences in tax status;
- · Synergistic effect from the combination with other ongoing operations.
Such differences in the information used are due to the fact that the assessment of investment value assumes the use of reliable insider information, including forecasts of changes in the elements of cash flow.
In addition to the basic individual requirements of the investor, when determining the investment value, special attention should be paid to factors that have a direct impact on the assessment of the investment value.
Factors taken into account in determining investment value may not be the same as those that affect market value. To assess the investment value, specific investment criteria are required.
The criteria that are significant in determining the investment value of real estate for a potential buyer can be distinguished on the basis of the classification presented in Figure 2:
Introduction of investment criteria into financial model calculations can be carried out as follows, shown in Fig. No. 3.
Formulated on the basis of the business plan and design and technical documentation, the requirements for the property being evaluated are compared with the actual characteristics of this property, as a result of which the compliance or non-compliance of the property being evaluated with the above requirements is revealed.
If the investor's requirements coincide with the main characteristics of the real estate object, the market value is subject to assessment, which will be equal to the investment value. These values coincide only if the expectations of a particular investor are typical for a given market.
Rice. No. 3 Formation of investment value
When evaluating the real estate to be invested, it is necessary to solve 2 problems: to determine the value of real estate in the current use, since it is this value that should be taken into account when concluding a pledge agreement; and also determine its value after construction work (after investment) in order to assess whether the chosen type of investment and the size of the investment are appropriate.
It may be so (and this is very often not taken into account by investors) that after the construction work, the cost of real estate turns out to be lower than its cost without repair plus the cost of repair work plus size investment capital, which indicates the inexpediency or irrational investment strategy. Therefore, the investment value appraisal is usually accompanied by a market value appraisal in order to enable an informed investment decision to be made.
If the property being evaluated does not meet the requirements for it on the part of the investment project, the possibility of improving the relevant characteristics of the property to the required level is determined. If the above improvements are impossible for one reason or another, then the appraiser concludes that the property being evaluated is unsuitable for the investment project under consideration and, as a consequence, about the zero investment value of the property being evaluated within the framework of this investment project.
If such improvements are possible and physically feasible, the appraiser needs to make a preliminary assessment of the financial and time costs for their implementation.
Based on the data on additional financial and time costs for bringing the characteristics of the assessed real estate object in accordance with the requirements of the investment project, as well as on the results of comparing these data with the total duration of the project and possible restrictions external to the project (for example, of a legal nature), a choice is made variant (variants) of the assessed set of rights of project participants in relation to the real estate object. If at the second stage of this algorithm the conformity of the assessed real estate object to the requirements of the investment project is revealed, the specified choice is made immediately.
Taking into account the selected option of the assessed set of investors' rights in relation to the real estate object, adjustments to the business plan of the investment project are developed, provided that this particular real estate is used in the investment project, the values of additional material and other costs arising from the use of this particular object with this set of rights are calculated on it and not included in the primary business plan. This can be additional transport costs associated with the not very convenient location of the property, and additional operating costs due, for example, to the excessive size of the property, and other similar costs. It also takes into account the possible appearance of so-called refundable amounts associated, for example, with income from sales after dismantling equipment previously located in the building, etc.
To determine the investment value, a special role is played by the data of the financial and accounting statements of the investors - participants in the project, which makes it possible to draw a reasonable conclusion about the price and capital structure of each of them. Based on the data on the prospective investors in the project, the appraiser calculates the weighted average price of capital invested in the project.
So, based on the planned value of the income stream from the investment project, the appraiser, taking into account the price of capital invested in the project and the influence of the time factor, calculates the investment value of the assessed set of rights in relation to the considered real estate object.
Thus, to determine the investment value, the appraiser needs to analyze the following information:
- · Preliminary business plan of the investment project;
- · Design and technical documentation for the appraised real estate;
- · Financial and accounting statements of investors - project participants.
Based on the considered methodology for determining the investment value of a property, it can be concluded that the main direction practical application is seen in determining the investment value of a property in the form of an investment project for its construction. When determining the investment value, the project is considered as a generator of future income streams from the use of the facility. Therefore, to calculate the investment value of real estate objects, it is necessary to rely primarily on the income approach. Only this approach makes it possible to guarantee the most complete consideration of internal and external factors affecting the value of real estate as an investment resource. It is the current value of future income that we will take as the basis for determining the investment value of real estate objects. The "present value of future income" refers to the value of the "net" income from the property, reduced to the date of valuation. The need for just such a consideration is due to the fact that the investment value makes it possible to judge the investment potential, investment suitability of an object, which, in turn, are characterized by indicators of the maximum price for which this object can be purchased and at which investments in the object of assessment will be profitable ... As part of the income approach, it makes sense for the investor to make calculations using the discounting method cash flows... This best reflects that principle of expectation, and hence the investment criteria of a potential buyer (Investor). The most sensitive parameter when making calculations using the discounted cash flow method is the discount rate and the capitalization rate. The calculation of the discount rate by the cumulative construction method will take into account the characteristics of a particular investor, and therefore, get the investment value.
The use of a comparative approach to appraisal to calculate the investment value of most real estate objects in the current Russian economic conditions is inappropriate, primarily due to the fact that the best and most effective use of the appraisal object in its existing form and functional purpose is not considered, since it ( object), subject to these conditions, is not in demand either by the market or by its current owner. This situation leads to a significant underestimation of the cost if it is determined in this case on the basis of a comparative approach.
When calculating the investment value, in contrast to the market value, not a typical one is considered, but a specific investor and a specific investment project. In addition, such traditional restrictions on the use of a comparative approach to valuation, such as the underdevelopment of the considered segments of the real estate market, expressed in an extremely small number of transactions with a large discrepancy in the characteristics of objects, as well as the problematic collection of reliable information even about concluded transactions only confirm the conclusion about the impossibility of using valuation methods. based on a comparative approach.
The use of the cost approach to appraisal as a basis for calculating the investment value is also illegal, because for an investor planning to carry out an investment project that is long enough in time, the size of the book, replacement or residual value of the object is not of fundamental importance, the main thing is that the object has the utility necessary for the investor. and kept it throughout life cycle investment project. For the same reason, the degree of wear of the object does not matter.
Assessment of investment value is directly related to the assessment of the effectiveness of investment projects. Decision-making on investing in a project is based on a system of criteria that allow assessing the economic efficiency of an investment project. For investors, the basis for making such decisions is the indicators commercial efficiency investment projects, in the calculation algorithm of which the principles of economic assessment of investment efficiency are implemented. One of the main components of the analysis of investment projects is the calculation of their commercial efficiency. Until very recently, the calculation of the efficiency of capital investments was carried out mainly from the "production" point of view and did not meet the requirements of financial investors:
- · Firstly, static methods were used for calculating the effectiveness of investments, which do not take into account the time factor, which is of fundamental importance for a financial investor;
- · Secondly, the indicators used were aimed at identifying the production effect of investments, i.e. increasing labor productivity, reducing costs as a result of investments, the financial efficiency of which faded into the background.
Therefore, to assess the financial efficiency of the project, it is advisable to apply "dynamic" methods based mainly on discounting the cash flows generated during the project. The use of discounting makes it possible to reflect the fundamental principle “tomorrow's money is cheaper than today's money” and thereby take into account the possibility of alternative investments at the discount rate. The general scheme of all dynamic methods for assessing efficiency is basically the same and is based on forecasting positive and negative cash flows for the planning period and comparing the resulting cash flow balance, discounted at the appropriate rate, with investment costs.
Methods for evaluating investment projects can be divided into two groups.
- · Dynamic methods based on the principle of DCF - discounted cash flow, that is, taking into account the different value of money over time;
- · Static methods that do not take into account the different value of money over time.
The most progressive are the methods of the first type, based on the analysis of discounted cash flow using the functions of compound interest. Cash flow means the amount of surplus (lack) Money obtained by comparing receipts (inflows) and expenditures (outflows).
Grade investment attractiveness The project taking into account the time factor is based on the use of a group of indicators, of which the following are most commonly used:
- Net present value - NPV ;
- The index of return on investment (profitability index) - PI ;
- Internal rate of return - IRR ;
- Discounted payback period - DPP .
Static methods include: simple payback period PBP (payback period); simple rate of return ARR (accounting rate of return).
The main disadvantage of the criteria of the second group is that they ignore the different cost of money over time. Considering that almost all investment projects in construction are designed for several years, it is advisable to use the criteria of the first group. The main characteristics of profitable real estate as an investment product are its intended purpose for generating income and a fixed location. The efficiency of profitable real estate is determined by the future benefits from its use. At the same time, the need for rational use of a limited and most valuable resource - land, determines the need to maximize its value. In this regard, the main indicator of the efficiency of real estate objects is the net present value of future cash flows from the object ( NPV ). The profitability of real estate depends on the type of functional use and characteristics of the object, and a strictly defined net present value corresponds to each use. Therefore, it seems appropriate to introduce the concept of "net present value in use" of the object. Closely related concepts are investment value (value for a specific investor) and value in use (value for a fixed use). These values differ from the introduced concept of net present value in use in that the cost approach and the sales comparative analysis approach are also used to calculate them.
A universal mechanism for determining the investment value for a specific buyer (investor) is reduced to solving the following sequential tasks:
- 1. Identification of investment factors applicable in a particular case;
- 2. Determination of the degree of their influence on the property;
- 3. Determination of market value in current use;
- 4. Determination of the best and most effective use, due to the requirements of the buyer (investor);
- 5. Determine costs to achieve the best and most efficient use;
- 6. Determination of the value of real estate, taking into account the best use and taking into account the investment factors of the buyer (investor);
- 7. Carrying out risk analysis and correlating the results of market and investment values to form the buyer's investment decision regarding the feasibility of acquiring a property.
The investment potential of a property, defined as the difference between the investment and market value of this property in current use, allows us to judge economic efficiency investing in real estate. Indeed, if the market value of the existing set of investor rights in relation to the real estate object exceeds its investment value (the investment potential of the object will be negative), then this will indicate the inexpediency of using this real estate object in an investment project, within which the investment value of this object was estimated, so how the use case under consideration will lead to a decrease in its (object) value.
The main purpose of any assessment is to determine the value of the object. At the same time, the defining aspect of the appraiser's work is the specific type of value, the value of which must be calculated.
Market price
The most important concept of appraisal activity is the concept of market value. Federal Law 135-FZ "On Valuation Activity in the Russian Federation" gives the following definition of market value ():
"...under market value of the appraisal object is understood the most probable price at which this appraisal object can be alienated for open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and no extraordinary circumstances are reflected in the value of the transaction price, that is, when:
- one of the parties to the transaction is not obliged to alienate the subject of valuation, and the other party is not obliged to accept performance;
- the parties to the transaction are well aware of the subject of the transaction and act in their own interests;
- the subject of appraisal is presented on the open market through a public offer typical for similar appraisal objects;
- the price of the transaction is a reasonable remuneration for the object of valuation and there was no coercion to complete the transaction in relation to the parties to the transaction from any party;
- the payment for the item being evaluated is in monetary terms. "
According to this definition, it can be seen that the value of an object has a probabilistic nature, that is, it is subject to random fluctuations, and the value of the market value, determined by an independent appraiser, is only its most probable value. Simply put, if you order a valuation from different appraisers, you will most likely receive different values of the value. But how different are the results obtained by different evaluators, provided that good research is done? It all depends on the object and the specifics of the market sector to which the object of assessment belongs.
For example, the appraisal of the cost of an apartment in a typical house in the city of Moscow will not give large discrepancies in the value determined by different appraisers. As a rule, in this case, all discrepancies are within 2-4%. This is due to the fact that standard apartments in Moscow are unified objects in a developed market, i.e. in a market with a very large volume of transactions and offers for sale. Competition and information mechanisms of the market are doing their job and there are no large deviations in the evaluation results.
But we can give examples of objects, in the assessment of which these deviations can reach tens of percent. For example, such objects include rights to inventions. If the invention is not yet applied in production or other fields economic life, then the assessment of its cost will be based on assumptions about its future use, and the introduction of any assumption makes the assessment results more prone to fluctuations. Even if different appraisers strive to maximize the objectivity and validity of their assumptions, the introduction of assumptions will lead to greater discrepancies in the value than using actual market data.
Summarizing the discussion of the probabilistic nature of the market value, it should be noted that deviations in the value of the value are always present, but they are a consequence of the market uncertainty in relation to a specific object of assessment - the higher the uncertainty in the economic value of the object, the greater the fluctuations in the result of the market value assessment and the wider the interval in which can be the value of the total cost.
Note that Law 135-FZ "On Valuation Activity in the Russian Federation" () contains the following rule:
"In the event that ..... the specific type of value of the object of appraisal is not determined, the market value of this object shall be established. This rule shall also be applied in the case of the use in a regulatory legal act of terms that are not provided for by this Federal Law or valuation standards that determine the type of value object of appraisal, including the terms "actual value", "reasonable value", "equivalent value", "real value" and others. "That is, in all uncertain situations, the law gives preference to the market value and directly prescribes its preferential use in appraisal activities.
Types of value other than market value
In addition to the market value, the Federal valuation standard "The purpose of valuation and types of value (FSO N2)" provides a list of other main types of value used in valuation activities:
It should be noted that this list of types of value is not exhaustive. If necessary, the evaluator can determine other types of cost. In these cases, he is obliged to give an exact definition of the type of value used and justify the need for its application in this situation.
Investment value
Investment value is the cost of an object in a specific investment project for a specific investor, taking into account his investment goals.
The main difference between the investment value and the market value is that it is determined when the object is used in a certain given investment project with fixed purposes of use, that is, this value is not in exchange, but in use.
Investment value is most often used to assess the effectiveness of a project or to divide shares in investment projects, when the owner of the property and the investor are different persons and they want to settle their relationship on the basis of a fair division of future investment income.
How do the market and investment values compare? Generally speaking, the investment value should always be higher than the market value, because if it is less, then the owner of the object does not make any sense to participate in this project, it is easier for him to sell his object at the market price, in this case he will get more money faster. Of course, as a result of calculations, it may turn out that the investment value will be less than the market value - this means that an ineffective investment plan has been chosen.
Liquidation value
Liquidation value - this is, in fact, the market value, but calculated under two emergency conditions - the period of time allotted for the sale of the appraisal object is less than the average exposure period of similar objects on the market and the sale of the object is forced.
The application of the residual value is justified in cases where it is impossible to apply the standard exposure times for reasons of a physical or legal nature.
Consider a situation where a business is liquidated and sells used office equipment. If a decision is made to liquidate an enterprise within, for example, 1 week, then during this period it will clearly not be possible to sell office equipment at market value. In the conditions of strictly limited terms of sale, it is the liquidation value, not the market value of the property, that should be assessed.
Also, the calculation of the residual value makes sense if the quick sale of old equipment will save on rent of premises and salaries for employees, while these savings will be greater than the difference between the market and residual values.
Note that the liquidation value is always less than the market value, but for objects with very high liquidity, that is, requiring very little time to sell, for example, shares quoted on the exchange, the liquidation and market values can be equal - after all, the liquidity of shares on the exchange is almost instantaneous and the establishment tight sales deadlines here do not have time to have a negative effect on value.
Cadastral value
Cadastral value- This is the market value of real estate, which is determined en masse by order of state or municipal authorities for objects registered in the state real estate cadastre. We emphasize that only authorized state bodies have the right to order an assessment of the cadastral value, other customers will not be able to do this.
If you do not agree with the value of the cadastral value of your object, you can dispute (clarify) it - either in a special commission for the consideration of disputes over the value of the cadastral value, or in court. To do this, you will need to order an assessment of the market value of real estate from an independent appraiser and submit the required set of documents to the commission or court.
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FAQ
Question: Is it possible to determine the market value if there are no analogues of the subject of valuation on the open market?
Answer: Yes, it is possible - for this there are methods of profitable and cost-based approaches to assessing the cost - they allow us to establish what the most probable sale price of an appraisal object will be in the open market in a competitive environment, despite the fact that the prices of such objects on the market are not known to us.
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the most probable price at which the subject of valuation can be alienated in the open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and no extraordinary circumstances are reflected in the value of the transaction price.
The market value is determined if:
- a transaction is assumed to alienate the appraisal object, including when determining the redemption price, when the appraisal object is seized in the absence of state regulated prices, or for state needs;
- when determining the value of the company's outstanding shares acquired by the company by decision of the general meeting of shareholders or by decision of the board of directors (supervisory board) of the company;
- the object of appraisal is the object of collateral, including in the case of a mortgage;
- when making non-monetary contributions to the authorized (pooled) capital, when determining the value of property received free of charge;
- when determining the value of securities that either do not circulate at auctions of trade organizers on the securities market, or circulate at auctions of trade organizers on the securities market for less than six months;
- when deciding on the initial sale price of property in the framework of bankruptcy procedures.
Investment value
the value of the property for a specific investor or class of investors for the specified investment purposes. This subjective concept correlates a specific property with a specific investor, a group of investors or an organization with specific goals and / or criteria for investment. The investment value of the appraisal item may be higher or lower than the market value of that appraisal item.
The investment value is determined in the following cases:
- if it is supposed to make a deal with the subject of valuation in the presence of a single counterparty;
- if the subject of assessment is considered as a contribution to an investment project;
- when justifying or analyzing investment projects;
- in the implementation of measures for the reorganization of the enterprise.
Liquidation value
the most probable price at which the appraisal object can be alienated for a period insufficient to attract a sufficient number of potential buyers, or in conditions when the seller is forced to conclude a transaction for the alienation of property.
The liquidation value is determined when the property of a bankrupt enterprise is sold at an open auction, the property is seized as a result of legal proceedings, or at customs. The liquidation value can be determined in addition to the market value when lending against the security of property.
Utilization cost
the most probable price at which the appraisal object can be alienated as a set of elements and materials contained in it if it is impossible to continue using it without additional repair and improvement.
The utilization value is determined at the end of the useful life of the appraised item, or in the presence of significant damage, if further use of the appraised item for its intended purpose is impossible.
Replacement cost
(cost of reproduction and replacement) - the sum of costs in market prices existing at the date of the assessment, for the creation of an object identical to the object of assessment, using identical materials and technologies, or for the creation of an object similar to the object of assessment, using the existing ones on the date of the assessment materials and technologies.
The replacement cost is determined:
- when calculating tax base income tax, property tax;
- for purposes tax accounting when making a fixed asset as a contribution to the authorized capital;
- when revaluating fixed assets for purposes accounting;
- within the cost-based approach to property appraisal.
The replacement cost can be determined when insuring property.
Special cost
value that is additional to the market value that may arise due to the physical, functional or economic connection of an item of property with some other item of property. Special value is an additional value that may exist more for the buyer of special interest than for the market as a whole. In particular, the special cost can be calculated in order to determine the synergetic effect of the enterprise reorganization.
Investment price Is the value of a property complex or asset that is of interest to a specific investor who has goals in relation to an investment object. It should not be equated with the market price of the investment object. Market value is the calculated amount of money for which the complex would be exchanged on the date of valuation between the buyer and the seller as a result of the transaction.
The price of the investment capital can be either higher or lower than its market price. In the process of valuation activity, this price is identified with a special value, which refers to extraordinary elements above the market price. In other words, it reflects an additional price that plays a significant role for all owners.
The capital price of an investment project can only be applied to investors with a special economic interest. It develops due to the synergy effect, as a result of the process of merging a set number of business lines, considered in the broad and narrow sense of the word.
Considered in a broad sense, it can be distinguished as a system of property rights, long-term privileges and competitive advantages, highly specialized and universal property, technologies and agreements that ensure the receipt of specific stable profits. Also, the line is called a product line, and in the analysis of investment investments - an investment project located at all stages of the life cycle of an enterprise.
In the narrow sense of the word, a business line is presented as a system of certain agreements and specific assets, which include licenses for certain types of activities, which are the main ones for generating a stream of net profit. The process of investing in rare, risky and non-tradable on the market, excluding counterfeiting and related to the activities of the organization, assets of an innovative nature, takes place subject to the acquisition of competitive priorities.
Investment and
The investment price is not market value. It is added to the price of use, which is of the nature of the subject and reflects the intentions of the owner, investor, tenant, which are not related to the sale and purchase agreement of the object, lease and other similar actions.
Federal Law, as amended, "On appraisal activity in the Russian Federation" No. 135, adopted on July 29, 1998, states that appraisal activity is a professional activity of all subjects of the appraisal process, which is aimed at defining market or other appraisal objects in terms of objects. In addition, the law provides a broad definition of market value. Within the framework of this legislative document, the price of investment capital is classified as a different price.
The federal appraisal standard No. 225 "The purpose of appraisal and types of value (FSO No. 2)", which was approved by decrees of the Ministry of Economic Development of the Russian Federation on July 20, 2007, identifies several types of value of the appraised object:
1) Market value.
2) Investment value.
4) Cadastral value.
Information asymmetry
The price of investment resources of objects of appraisal activity is determined as the price for a certain person or several persons with the investment objectives set by him for the use of this object. To determine the investment price, as opposed to establishing the market value, it is not so important to take into account the cases of alienation at the price on the open market.
The price of capital of an investment project plays a significant role in choosing the best financing system. In asymmetric data models, assuming that there are significant information inequalities in market conditions, and the main operators who have access to insider information are top managers.
Thanks to their high official position, these managers gain access to all the hidden information movements within the organization. There are two conditional types of models of the best capital system, the separation of which is based on the theory of the asymmetric distribution of information flows. These are investment models and signaling models.
Investment models are characterized by such a capital structure, which is used by managers for effective financial support of investment objects. For the correct choice of the method of financing the investment project. They often pay attention to the relative underestimations and overestimations of the expected income flows that other investors make due to the existing asymmetric information.
A certain unique information transmitter is used by managers in the signaling model financing system. It transmits information about the actual position of the company and its growth prospects by means of a signaling method to external investors. Issues of various securities of the organization can serve as signal objects.
Cost standards
A widely used standard for market, fundamental or domestic, investment and liquidation prices are basic value standards.
The use of the market price standard involves the process of assessing the organization, carried out on the basis of all the necessary information, to which there is free access to both the seller and the buyer. The foundations for this are sometimes the ideal market model, which is characterized by the presence of comprehensive and publicly available information activities.
The basis of the investment price standard is the ability of a particular investor to receive a higher price than the one offered by the seller. used for this standard, in each specific case, is expressed by insufficient full accessibility for investors.
These pricing standards ensure that all participants in the investment process are aware of the prospects for further growth of the organization. will happen if the investor evaluates its capabilities higher than the seller himself.
It is also worth noting that in addition to the different approaches of both parties to the process of evaluating a particular organization, it is of great importance that the investor has specific opportunities to obtain the maximum possible profit from the investment object. The difference in the investment price from the standpoint of prospective investors is quite obvious, which is observed due to all kinds of development horizons and the growth of investment attractiveness for a specific area of business.
The price of investment resources is regulated by the intrinsic value standard, which involves the process of evaluating the investment object by an independent expert from the outside on the basis of his experience and knowledge, as well as using his own appraiser questionnaire. The final assessment will be derived using all possible and available approaches and methods, with the obligatory consideration of the expert's experience in this business and using a complete and independent information flow about the assessed object.
When determining the investment value of the appraisal object, the value for a specific person or group of persons is determined with the investment purposes of using the appraisal object established by this person (persons).
When determining the investment value, in contrast to determining the market value, it is not necessary to take into account the possibility of alienation at the investment value on the open market.
Investment value - the value of a property for a particular investor (group of investors), based on his investment requirements and preferences. The cost calculation is based on a subjective assessment of the discounted costs and income of the investor expected from the use of this property in a promising investment project.
The calculation of the investment value is based on the feasibility of investing, from the point of view of typical investors, in this segment of the real estate market. For example, the investment value of a building located in the city center can be determined based on the most efficient use of similar properties, taking into account the saturation of the market with these services, and commensurate with the current income that the owner of the building would have lost if it was sold.
The investment value of real estate for a particular investor differs from its market value as a result of different assessments of the required rate of return, prestige, location prospects, and the possibility of obtaining a "spiritual" effect. It is calculated when building vacant land plots, expanding and reconstructing real estate objects, making real estate objects as a contribution to the authorized capital of enterprises and in other cases.
1. The method of connected investments
Since most real estate properties are purchased using debt and equity capital, the total capitalization rate must meet the market requirements for income for both parts of the investment.
Investments = debt capital + equity capital.
Lenders must provide for a competitive Interest rate commensurate with the perceived risk of the investment (otherwise they will not lend) and repay the principal on a Periodic Amortization basis.
Likewise, equity investors must expect to receive competitive cash returns on their investment, commensurate with the expected risk, otherwise they will invest their money in another project.
The capitalization rate on borrowed funds is called the mortgage constant and is calculated as follows:
R = annual service payments. debt / mortgage loan principal
If the loan is repaid more frequently, then R is calculated by multiplying the payments by their frequency (month, quarter).
The mortgage constant is a function of the interest rate, the frequency of debt amortization, and the terms of the loan. When the terms of the loan are known, the mortgage constant can be determined from the financial tables: it will be the sum of the interest rate and the ratio of the repayment fund. The equity investor also seeks to generate systematic cash income.
The rate used to capitalize the return on equity is called the capitalization rate on equity (Re) and is defined as follows:
Rc = pre-tax cash receipts / equity invested
Rc is not just the rate of return on capital, but combines the rate of return on capital and return on capital invested.
The total capitalization rate (R) must satisfy a certain level of mortgage constant for the lender and the flow of income for the investor's equity capital.
The credit (debt) share in total investments in real estate is equal to:
Mcred. = Loan amount property value / property value
Then the share of equity capital is:
MSob. = 1 - Mcred., Where the total capital is taken as 1.
When the mortgage constant (Ra) and the capitalization rate of return on equity are known, the total capitalization rate will be:
R = R3 x Mcr. + Rc (1-Mcr.).
Typical terms and conditions for mortgage loans can be obtained by analyzing market data. Equity capitalization rates are derived from comparable sales data and are calculated as follows:
Rc = cash receipts before tax / equity
2. Capitalization of debt and equity capital (Elwood method)
It is believed that the tied investment method has some disadvantages, since it does not take into account the length of the planned investment period, or the decrease or increase in the value of the property during this period. In 1959, a member of the Institute for Assessment (IAG) L.V. Elwood linked these factors to factors already included in the tied investment method and proposed a formula that could be used to test or calculate the total capitalization rate. In addition, simplified methods of using its table have been developed.
Elwood's formula, developed to calculate the total capitalization rate, is as follows:
R = Rс - Мкр х С / Dep - app (SFF),
where R is the total capitalization rate;
Rс - rate of return on equity;
Мкр - the ratio of the size of the mortgage loan to the value (credit share in the total capital);
С - mortgage ratio;
Dep - decrease in property value for the forecast period;
arr - increase in property value for the forecast period;
SFF is the Y-rate fund-to-maturity ratio for the projected holding period.
The mortgage ratio can be calculated using the formula:
C = Y + P (SFF) - Rs,
where P is the part of the mortgage loan that will be amortized (repaid) during the forecast period;
Ps - mortgage constant.
The mortgage ratio can be found in Elwood's tables without calculating it yourself.
So, Elwood's method for calculating the capitalization rate can be represented as the following algorithm:
1. Collecting the necessary information about the appraised property:
a) Rс (rate of return on equity). The return on equity rate represents the real return on investment that the typical investor expects to receive over the period of ownership. It includes losses or mainly gains from sales (since most investors plan to sell the acquired property at a higher price than it was purchased).
The rate of return on equity is calculated on the basis of market data and depends on the specifics of the particular subject of valuation.
b) Mkred - (the ratio of the size of the mortgage loan to the cost) - the tax share (share of the loan) in the total capital allocated to real estate.
Naturally, when calculating Mcred, special (preferential) financing conditions are not considered.
c) Determination of the typical conditions of a mortgage loan and the interest rate on it.
When mortgage does not have a fixed interest rate, then the typical investor's interest rate proposals over the calculation horizon are predicted. If such a forecast is impossible, this method of calculating the capitalization rate for the property being valued should not be applied.
d) Typical holding period (settlement horizon).
Although some investors do not purchase property with the intention of ever selling it (inheritance), it should be determined how long a prudent investor is willing to own the property. When calculating the mortgage ratio C using Elwood tables, you can choose as a typical period of ownership of real estate: S, 10, 15, 20 years.
e) app, Dep - increase (decrease in the value of the property for the projected period of ownership.
Most investors who buy property believe that its value will grow in the future (otherwise they would not invest their capital).
f) Determination of the appropriate mortgage ratio according to Elwood tables. Information for selecting tables:
The projected amortization (maturity) period;
Forecasted mortgage interest rate;
The projected holding period.
g) Selection of the appropriate Redemption Fund Ratio (SFF) (in the same section of Table C). The maturity fund factor can also be found in the table of the six functions of money.
h) Calculation of the total capitalization rate:
R - Rс - Мкр х С / Dep - app (SFF)
3. Refund accounting capital expenditures in the capitalization ratio
As discussed earlier, the capitalization ratio for real estate includes return on capital and return on capital. Income flows on investments, the receipt of which is predicted to be equal amounts over an indefinite period, and also, if the change in the cost of capital invested is not predicted, can be capitalized at the interest (discount) rate.
In this case, the reimbursement of investment costs occurs at the time of the resale of the asset. The entire stream of income is income on investment.
If a change in the value of an asset is predicted (loss or growth), then it becomes necessary to take into account the capitalization ratio of capital recovery.
Consider the procedure for capitalizing an income stream in the following cases:
3. An increase in the cost of capital is projected.
1. The cost of capital does not change.
When analyzing real estate investments, the capitalization ratio should not include a capital refund premium if the asset is resold at a price equal to the initial investment and an equal income is predicted.
2. Decrease in the cost of capital is forecasted.
When the value of the capital invested is expected to decrease, then part or all of the recovered investment must be derived from current income. Therefore, the current income capitalization ratio should include both the return on investment and the recovery of the expected loss.
There are three ways to recover the invested capital: - Straightforward capital return (Ring method). - Return on capital for the reimbursement fund and the rate of return on investment (Inwood method). - Return on capital for the reimbursement fund and the risk-free interest rate (Hoskold method).
4. Straightforward return on capital (Ring method)
The Ring method assumes that principal is reimbursed in equal installments annually. With straight-line capital repayment, the annual total payments are reduced. This indicates that straight-line capitalization corresponds to diminishing income streams and is not applicable to equal income streams because leads to underestimation of their assessment.
5. Return of capital on the fund for reimbursement of the rate of return on investment (Inwood method)
The rate of return on investment, as a component of the capitalization ratio, is equal to the factor of the recovery fund at the same interest rate as for investments. Part of the total income stream is NPV, while the remainder of the income stream provides capital reimbursement or return. In the event of a 100% loss of capital, the part of the income going to capital recovery, being reinvested at the interest rate, will rise to the original principal: i.e. there is a full refund of capital.
Capital cost increase projected
Typically, when investing in real estate, the typical investor expects future growth in the value of the initial investment. This calculation is based on the investor's forecast of an increase in the price of land, buildings and structures according to the principles of information, an increase in demand for certain real estate objects, etc. In this regard, it becomes necessary to take into account the capitalization ratio of the increase in the cost of capital investments.
The method for comparing alternative investments is based on the provision that projects of similar risk should have similar discount rates.
The monitoring method allows you to identify trends in the profitability of alternative investments that are related to the profitability of the real estate object. This analysis allows us to make an assumption about the likely forecast of changes in the profitability of a property based on monitoring the real estate market, the results of which are officially published.
The income approach is used in determining both the market value and the investment value, since a potential investor will not pay for an object more than the present value of future income from this object.