About the Authors xi Foreword xiii by Andrew Baum Foreword xv by Vincent Vinit Preface xvii Chapter 1 Introduction to Property Valuation 1 Determining the Valuation Requirement 1 The Subject of the Valuation 1 Purpose of the Valuation 2 Value to Be Estimated 2 Valuation Date 2 Definitions of Value 3 Market Value 3 Investment Value 5 Valuation Associations, Codes and Standards 6 Notes 7 Chapter 2 Economic Characteristics and Elements of Risks of Properties 9 Characteristics of Property Investments 10 Building and Land 10 Use of Space and Investment Asset 13 Owners and Users 13 Business Perspective 14 Location 15 Categories of Property Investments 16 Development Projects 16 Income-Producing Properties 17 Trading Operations 17 Skills in Asset and Investment Management 18 Economic Classification of Properties 19 Property Classification Criteria 19 Macro Categories of Properties 24 A Simple Definition of Risk 28 Common Risk Elements in Real Estate Investment 29 Capital Market 29 Liquidity 30 Financial Structure 30 Regulatory 31 Location 31 Intended Use and Type of Properties 32 Development Projects 33 Authorisation 33 Environmental 33 Construction-Related 34 Market 34 Income-Producing Properties 35 Physical and Technical Features 35 Management and Market 36 Rental and Contractual Situation 36 Notes 37 Chapter 3 Market Analysis 41 Economic Analysis 41 Analysis of the Property Market 41 Comparative Data and Valuation Method 43 Characteristics of the Comparative Factors and Information Sources 43 Notes 45 Chapter 4 A New Simple Classification of Valuation Methods 47 Choice of Valuation Method 49 Depreciated Cost Approach Methods 53 Introduction 53 Description 53 Use, Advantages, and Limitations of the Depreciated Cost Approach 56 Notes 56 Chapter 5 Sales Comparison Approach Methods 59 Approach and Application Criteria 59 Direct Comparison Approach 60 Hedonic Pricing Model 63 Notes 65 Chapter 6 Income Capitalisation Comparison Approach Methods 67 Approach and Application Criteria 67 Direct Capitalisation Approach 69 The Direct Capitalisation Approach Calculation Algorithm 70 Profit and Loss Account of an Income-Producing Property 71 Use, Advantages, and Limitations of the Direct Capitalisation Approach 78 Application of the Direct Capitalisation Approach 78 Discounted Cash Flow Approach 81 Choosing the Time Horizon 82 Estimating the Cash Flows 83 Estimating the Terminal Value 83 Discounting the Cash Flows and Calculating the Asset Value 85 Use, Advantages, and Limitations of the Discounted Cash Flow Approach 88 Residual Value Methods 90 Introduction 90 Single Period Residual Value Approach 90 Multiple Periods Residual Value Approach 91 Notes 94 Chapter 7 Property Return Rates 97 Measuring the Return on a Property Investment 97 Rates and Capital Market 101 Cap Rate 103 Definition and Description of the Cap Rate 103 Going-In and Going-Out Cap Rate 104 Discount Rate 107 Definition and Description of the Discount Rate 107 Consistency Between Discount Rate and Cash Flow 108 The Components of the Discount Rate 110 How to Estimate Property Return Rates 113 Market Extraction 114 Determining the Discount Rate from the Cap Rate 117 Build-Up Approach 119 Analysing the Opinions of Market Players on the Return Expected 122 Notes 122 Chapter 8 Structure of the Valuation Report 127 Executive Summary 128 Preamble 128 Description of the Property 128 Market Analysis 133 Valuation 134 Conclusions 134 Appendices 135 Notes 135 Chapter 9 Office Property Appraisal 137 Description of the Property 137 Choice of Valuation Method 139 Market Analysis 139 Valuation 140 Choosing the Time Horizon 140 Estimating the Cash Flows 141 Determining the Terminal Value 145 Determining the Discount Rate 146 Calculating the Market Value of the Property 147 Notes 151 Chapter 10 High Street Retail Unit Appraisal 153 Description of the Property 153 Choice of Valuation Method 154 Market Analysis 157 Estimating the ERV 157 Estimating the Cap Rate 160 Estimating Vacancy and Leasing Time 161 Estimating Refurbishment Costs 161 Valuation 161 Notes 163 Chapter 11 Hotel Appraisal 165 Description of the Property 165 Choice of Valuation Method 167 Market Analysis 168 Macroeconomic Climate 168 Supply and Demand Analysis 169 Forecast of Average Rate and Occupancy 173 Projection of Income and Expenses 178 Valuation 185 Notes 187 Chapter 12 Development Project Appraisal 189 Description of the Property 189 Choice of Valuation Method 190 Market Analysis 191 Valuation of the Development Project 192 Choosing the Time Horizon 192 Estimating the Cash Flows 194 Determining the Discount Rate 195 Calculating the Market Value of the Development Project 197 Notes 197 Glossary 199 Bibliography 205 Index 209
GIACOMO MORRI, PhD, MRICS, is Faculty Deputy and Associate Professor of Practice in Corporate Finance and Real Estate at SDA Bocconi School of Management (Milan, Italy) and a lecturer of Real Estate Finance at Bocconi University (Milan, Italy). He served as a Director of the Master in Real Estate and the Executive Master in Corporate Finance and Banking, and was in charge of real estate executive education. Giacomo is former President and a board member of the European Real Estate Society. He is a freelancing advisor for several real estate companies and asset managers, a non-executive director at UnipolSai Investimenti SGR, and a RICS Registered Valuer. He is also on the advisory board of several real estate funds and a board member of various real estate companies. PAOLO BENEDETTO, MRICS, is Advisory & Valuation Director at Agire IPI Group, an Italian real estate service company. His specialization is in real estate valuations. He is an Academic Fellow of Real Estate Finance at Bocconi University (Milan, Italy) and a Fellow of Corporate Finance and Real Estate at SDA Bocconi School of Management (Milan, Italy). Paolo is a member of the Italian board of the Royal Institution of Chartered Surveyors (RICS) and a RICS Registered Valuer.