Evaluation and Management of Real Estate

Real estate is the world’s most important store of wealth. Just to be clear, the value of all the gold ever mined is just

4 % of the value of the global real estate.

The three main actors in real estate are:

• INVESTORS -> Linked to the figure of the ASSET MANAGER

• OWNERS -> Linked to the figure of the PROPERTY MANAGER

• END USERS -> Linked to the figure of the FACILITY MANAGER

THE VALUATION PROCESS IN A NUTSHELL:

EVALUATION AND MANAGEMENT OF REAL ESTATE

The most important thing is to evaluate the market before passing to the investment/design and construction phase.

The building demand comes from families, public sector, private companies.

⑳

As for corporate policy, it is more addressed to rent because:

• FINANCIAL BENEFITS: lower initial investments

• CAPITAL PRESERVATION: tax deductibility

• FLEXIBILITY AND SCALABILITY: adaptability to change, easier relocation.

INCOME FROM REAL ESTATE INVESTMENT:

• Income producing properties: CASH FLOWS

• Trading operations: CAPITAL GAIN (SHORT TERM)

• Development: CAPITAL GAIN (LONG TERM) Demand falls Demand rises

R.O.I. = return of investment ↓

↓

N.B. High risk = high return Supply rises Supply falls

↓

↓

Prices fall Prices rise

CRITICAL POINT: for global investors investing in a concentrate area -> prices increases to maintain market

demand accessible. INVESTMENTS :

Factors that influence the RE market: Core

-

• Environmental and cultural climate plus

Core

-

• Social and economic climate Value add

-

• Demographic trends Opportunistic

- W

• Local and general trends j also

And

Risk

• Employment rate retur

increases or

investment

• Bank loans

• Purchasing power of families

MARKET CYCLES

-

RECOVERY RECESSION

HypE

T

Expansion

~ - Best investment

PROPERTY MEASUREMENT

CADASTRAL AREA: gross area of interior walls and the perimeter until the middle of those bordering other properties.

It includes the surface area of appliances and accessories indirect calculated separately NET USABLE AREA

The walkable area (also

called usable area) of a

building includes all the m²

on which it is actually

possible to walk; the

perimeter bounded by the

wall is excluded

COMMERCIAL FLOOR AREA: % OF ADJUSTMENT

The commercial floor area of the property includes all covered floor areas, weighted floor areas (such as terraces and

pertinenziale

balconies), and percentage shares of appurtenant floor areas.

Covered floor area must be included in percentage shares within the calculation:

the net usable floor area must be included at 100%.

perimeter walls of the property should be calculated at 100% up to a maximum of 50 cm;

perimeter walls in common should be calculated at 50% up to a maximum thickness of 25 cm;

for the attic it will be necessary to take into account only 75% of the area if it has a minimum height of 240 cm

and otherwise only 35% up to 150 cm;

for lofts the principle of 240 cm always applies, and in the case where it is higher 80% of the surface will be

counted, and 15% in case it is not actually habitable;

for verandas 80% of the area is counted in the case of finishes similar to the main rooms and 60% without

finishes similar to the main rooms;

for taverns and habitable basements, 60% of the surface area will be taken into account for a minimum average

height of 240 cm. SNAPSHOT :

different approach

IPMS ->

MEASUREMENT STANDARDS

The growth of cross-border property investment and expansion by global corporate occupiers underpins the demand

for transparency against the background of many differing national and local measurement conventions.

to promote market efficiency and measure properties on

- transparent basis

- greater confidence between investors, occupiers and funds.

The Code defines the methods of measurement of buildings, and

when and how they should be used.

The principal methods used in property valuation and management

work are:

IPMS 1

IPMS 2

IPMS 3

Property evaluation is functional for the development of multiple activities and strategies of management practice

carried out during the development process of real estate investing.

An appraisal answers one or more specific questions about a real estate parcel’s value, marketability, usefulness or

suitability.

Including real estate financing, listing real estate for sale, investment analysis, property insurance, real estate taxation,

and more.

REAL ESTATE VALUATION

Property evaluation is functional for the development of multiple activities and strategies of management practice

carried out during the development process of real estate investing.

An appraisal answers one or more specific questions about a real estate parcel’s value, marketability, usefulness or

suitability.

Including real estate financing, listing real estate for sale, investment analysis,

property insurance, real estate taxation, and more.

REAL ESTATE DUE DILIGENCE - WHAT IMPACT ON INVESTMENT PROCESS?

DUE DILIGENCE STANDARDS: RICS BEST

PRACTICE AND GUIDANCE NOTE

VALUATION PROCESS

PRELIMINARY PHASE

Determining valuation requirements: nature of property, objectives of valuation

Gathering and analyzing the documentation and documentation required (is a DD available ?)

• OPERATIONAL PHASE

Inspection of the property (unless it is a desktop valuation)

Identification of the applicable method and criteria

Gathering of market parameters

Calculation of the value (using and explaining the chosen method)

Writing the valuation report

• CONCLUSION

Checking of results and opinion

Valuation is:

the expression of a judgment of equivalence, under certain conditions and in certain circumstances of time, between

the degree of usefulness of an economic subject being valued and a given amount of money.

THE MARKET VALUE

The market value represents the most probable price at which the asset should be bought and sold at the time of

the valuation. The date of the valuation should be specified in the valuation report. Since market conditions could

change, the market value estimated for other times (e.g. in the future) could be incorrect.

The valuation should reflect the market conditions at the time of the valuation, without taking into consideration past

conditions or possible changes that could take place in the future.

The position of the parties involved in the transaction is important. It is assumed that the buyer is in effect inclined

to make a purchase, i.e. that the valuation refers to a buyer who is willing, and not compelled or

otherwise influenced. At the same time, it is assumed that the buyer is not willing to buy at any price, but to

purchase the asset under normal market conditions.

The assumption of an owner in effect willing to sell means that the seller is seriously oriented toward the sale,

willing to sell at the best market price that he or she is able to obtain after proper marketing of the property,

whatever the price is that the market will pay at that time.

All particular conditions that could lead to formulating a special value are excluded, where special value is

understood as a value that is unusual and greater than the market value.

THE FAIR VALUE (OR EQUITABLE VALUE)

Is defined as a price that is fair between two parties acting at arm’s length for the exchange of an asset.

Differs from market value in that:

- The price must be fair to both parties having regard to all the circumstances

- There is not requirement to assume that the asset has been exposed to the whole market

- The price should reflect any special advantages or disadvantages to either party

- Market value does not need to be fair to either buyer and seller

THE SYNERGISTIC VALUE

Is the result of a combination of two or more assets or interests where the combined value is more than the sum of the

separate values. If the synergies are only available to one specific buyer then synergistic value will differ from market

value, as the synergistic value will reflect particular attributes of an asset that are only of value to a specific purchaser.

THE INVESTMENT VALUE

‘The value of an asset to a particular owner or prospective owner for individual investment or operational objectives.’

As the definition implies, and in contrast to market value, this basis of value does not envisage a hypothetical

transaction but is a measure of the value of the benefits of ownership to the current owner or to a prospective owner,

recognizing that these may differ from those of a typical market participant.

VALUATION METHODS

• MARKET APPROACH

• INCOME APPROACH

• COST APPROACH

O

Price is the amount asked, offered or paid for an asset. Because of the financial capabilities, motivations or special

interests of a given buyer or seller, the price paid may be different from the value which might be ascribed to the

O

asset by others. Cost is the amount required to acquire or create the asset. When that asset has been acquired or

created, its cost is a fact. Price is related to cost because the price paid for an asset becomes its cost to the buyer.

O

Value is not a fact but an opinion of either: the most probable price to be paid for an asset in an exchange, or the

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economic benefits of owning an asset. Worth is a specific investor’s perception of the capital sum that theh would

be prepared to pay (or accept) for the strean of benefits which he expects to be produced by investment.

MARKET COMPARISON APPROACH

The market approach is based on comparing the subject asset with identical or similar assets (or liabilities) for which

price information is available, such as a comparison with market transactions in the same, or closely similar, type of

asset (or liability) within an appropriate time horizon.

The market approach should be used as the primary basis for a valuation when:

(a) the asset has recently been sold in a transaction appropriate for consideration under the basis of value,

(b) the asset or substantially similar assets are actively publicly traded,

and

(c) there are frequent or recent observable transactions in substantially similar assets.

Identify suitable comparable property sales by reference to:

• property type

• location

• size and specification

• date of sale

Identify the appropriate unit of comparison:

• square meter (gross area, commercial area, ….)

• per property (eg. 3 bedroom residential