Special Township Valuation Presentation


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Special Township Valuation Paper Presented by Mohit Mehta Director Value Add Consultant during Institution of Valuers Seminar in Rodas Hotel Mumbai

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Special Township Valuation Presentation

  1. 1. Special Township Feasibility Study & Valuation Value Add Consultant presents: Presented By : Mohit Mehta Masters of Valuation , ( Accredited by R.I.C.S) MRICS,U.K;FIV;AMIE;MISSE Bachelors of Engineering Director Value Add Consultant Real Estate Advisors Registered Valuers under Wealth Tax Act.India Email : vac@consultant.com Phone : +91-98924 89265 / +91-22-2808 2583
  2. 2. Topics • Why Special Township Valuation ? • Economics and Its Role in Valuation • Role of Law in Valuation • Overview : How to Start Valuation ? • Valuation Approach • Key Regulation of Special Township Policy • Land Marks in Approval Process • Case Study • Various Possible Scenarios Valuer may come across • Valuation Methodology • Factors which may impact land valuation • How to Develop Financial Model for Valuation • Scenario and Sensitivity Analysis • Discounting Rate & Capitalization Rate • Key Performance Indicators • Conclusion and Recommendation • Quick Reference Card • Question and Answers Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 2
  3. 3. Why Special Township Valuation • Valuers are generally consulted for land valuation for various purposes. • Land Valuation methods and outcomes varies depending on the purpose • Scope of this paper is to demonstrate how a prior knowledge of “Township Policy and Discounted Cash Flow Modeling Techniques” helps in valuation • Unlike other valuation, a valuer has to perform more complex and intelligent tasks of analyzing past, current and future projected information for valuing Township Land • There are many proposals of special townships under consideration due to tremendous interest amongst local as well as international investors • See Recent news published in ET few days back HDIL Township Policy.jpg • Many local and international funds are set up to invest in such real estate development projects • In recent time developer become more capable of undertaking such large projects after listing there companies in capital markets • Huge demand of real estate in metropolitan city like Mumbai and scarcity of developable land are pushing developers to undertake such special township projects on the out skirts • Hence efforts are made to make delegates aware about due diligence a valuer needs to carry out before issuing final valuation report using Thane Township Policy Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 3
  4. 4. Economics and It’s Role in Valuation • Globalization of Economies made entire a world as a Global Village • Top Down Approach • Macro Economics Factor • County’s Economic Outlook, Country Rating • Key Growth Indictors , Capital Markets, Inflation, Currency Movement • Sector Specific Activities, Market Research, Trends, FDI Inflows & Outflows, • Risks needs to be considered to value assets like Country Risks, Geo Political Risks, Currency, Cultural Heritage, Market, Operation Risks etc. • Micro Economics Factors • In Real Estate Valuation Land Economics Plays a Vital Role • Urban Land is Scare, Supply is controlled By State • Value of Assets depends on Demand and Supply • Country’s Laws and Ownership Restrictions • Master Planning , Investments in Infrastructure Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 4
  5. 5. Role of Law in Valuation • Ownership Rights • Transfer of Property Act. • Types of Ownership A. Leasehold B. Freehold • Company’s Law • Indian Contract Act . • MRTP Act ( Development Control Regulation) • Land Acquisition Act. • BMC Act. / Environment Act. / Easements • Succession Act. / Rent Control Act. / Urban Land Ceiling Act. • Insurance • Amendment of FDI in Real Estate Press Note No.-2 • Special Economic Zone’s / Special Township Notifications • Arbitrations Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 5
  6. 6. Overview: How to Start Valuation? Basics to start an assignment Prepare for the assignment using following steps 1. Prepare Brief about assignment after consulting client 2. Define Purpose of Valuation 3. Identify Date of Valuation 4. Define Scope of Assignment 5. Define Terms of Reference and Limitations 6. List of Documents and Information Required 7. List of Documents available and Information Provided 8. Prepare strategy to manage the gap of documents & information Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 6
  7. 7. Which are the approaches used for valuation ? Approaches Types of Assets Important Methods used Used Internationally Cost For Service Assets A.Replacement Cost Approach Like Public Non Income B.Book Value Method Producing Assets etc. Income For Income Producing A.Capitalization of Earnings Investments Assets Approach B.Discounted Cash Flow Method (Estimation of Present Worth of the future benefits) Market For Assets Traded in A. Direct Sale Comparison Method Established Markets and B. Thumb Rule Method Approach Enough Comparable Sale C. Relative Methods Most Widely Used Instances available Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 7
  8. 8. Land Valuation Techniques • There are many methods used to value Special Township Land • It is very useful to know that all are derived form three fundamental approach • Land Value depends on the Purpose of Valuation and Date of Valuation • Current Use / Zoning ( Non Agriculture Land ) as well future use • Discounted Cash Flow technique is widely used for special township land valuation as it can incorporates Highest and Best Use Analysis • Comparable Sale Instances • Income Capitalization Method • Global FSI concept is permissible in Special townships • Global FSI means total FSI of Township remains constant • Entire township is master planned with different zones for different uses and if one particular zone of the township did not utilize entire permissible FSI due to low density development the remaining FSI out of total permissible can be transferred to any other zone within township to build high density high-rise developments • This make entire proposal of township viable as well as marketable Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 8
  9. 9. Market Approach Widely Used Concept in Township Land Valuation • Market Approach is mostly widely used method in valuation of land for townships • It is very easy to find out comparable instances for an apartment and arrive a fair market rate on per sq.fts. Basis in Mumbai ,where plenty of market transaction data’s are available • However, as you all know market approach is most complex assessment technique used by an experts • In this technique finding a most comparable instance is a key and unfortunately it is very difficult to know what is the correct consideration amount as far as land deals are concerned hence arriving per sq.fts land rate does not make sense • Even if reliable information's are available it is very difficult to find exact comparables as every special township land has different potential & unique selling points • Due care should be taken in selecting instances for the comparison • Adjustment or allowances should be made depending on various differences in factors contributing value • A SWOT analysis is must for attaching premium or discounts to land value • Market survey is must to know latest trends Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 9
  10. 10. Valuation Tables ( Present Value Concept) • Table No.1 Amount of Re.1 at the end of given number of years Formula = (1+i)n Where i = interest rate, n=no. of years • Table No.2 Amount of Re.1 per annum in given numbers of years Formula =(1+i)n – 1 / i • Table No.3 Annual Sinking Fund for the redemption of Re.1 capital invested Formula = i/(i+i)n-1 However you can able to value easily using three fundamental approach • Table No.4 Years Purchase Y.P = ((1+i)n – 1) / ((1+i)n x i) Single Rate Y.P. =100/i Here i = interest rate Dual Rate Y.P. = 1/ i+s where s= allowance for sinking fund • Table No.5 Present value of Re.1 receivable at the end of given term PV = 1/(1+i)n • Table No.6 Depreciation Formula = Amount of Re.1 for the age passed Amount of Rs.1 for the full life Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 10
  11. 11. Income Approach • Income Approach is widely used for Income Producing Investments Assets • Two Popular Methods A. Capitalisation Technique B. Discounted Cash Flow Technique • Capitalised Value = Net Income x Year’s Purchase CV = NOI x Y.P. Y.P. in perpetuity = 100/i where i = capitalization rate or yield • DCF Technique Present Value = PV1+PV2+PV3 +….+ PVt Here PV1 = Present Value of first year earnings and so on Present Value of Terminal Sale Value Terminal Sale Value = Forward Earnings x Y.P ( Perpetuity ) • Capital Appreciation due to yield compression phenomenon Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 11
  12. 12. Township Land Valuation Using Income Approach • A Special Township Developer will consider investing in a project with a set financial goals and it’s future earning capacity • This is a critical valuation process land value is dependent on future earnings • Net Operating Income (NOI) before Debt Service needs to be ascertained • Debt Coverage Service Ration is one of the important aspects to understand project liquidity • Cost of Capital & Leveraging plays a big role in deciding value of land • IRR and ROI criteria's and KPI are used to identify potential investment value • Net Present Value of NOI for project duration will determine value of Land • However to allow for taxation in the presented paper effect of interest has been considered. Interest is tax deductible and result in effective lesser tax rate on NOI due to interest deduction form NOI. This has been considered for arriving land value • Selection of discounting rate & capitalization rate is key in the entire exercise • Structure of the private equity deal and deal terms as well as preferences in paying to investors essentially determines what discounting rate needs to be used • One of the ways to find out discounting rate is going on yields of similar projects or discount rate reflected in similar transactions transacted and offered in the market Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 12
  13. 13. Selection of Capitalisation Rate • Fishers Equation Total Return = R = L + i + RPr L = Reward for Liquidity Preference i = Current Inflation Expectations Rpr = Default Risk Premium • Fishers Equation and Bonds • Indexed Linked Govt. Bonds R=L • Non Indexed Govt. Bond R = L + i = Rfr = Risk Free Rate • Rfr is Nominal Interest Rate on Govt. Bonds = 6.05% for GOI 2019 Bond • In India 10 Year Bond , UK 10 – Year Gilt, US 30 Year Treasury Bond • Belgian 10 Year OLO • Bond Yields Increases as Price Fall and Vice a Versa • Required Return R = C( Dividend Yield) + G ( Growth) • C = R – G+D ( Depreciation) • Property Cap Rate (C )= L (real rate) +i + Rpr-G+D Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 13
  14. 14. Valuing Different Asset Classes Required Return R Your expectation Asset Real Inflation Risk = Yield Growth Depreciation Class Rate Premium Real +i + RPR = C +G -D Rate Indexed Govt. Bonds 3.5 5 1 9.5 4.5 5 0 Non-Indexed Govt. 3.5 5 0 8.5 8.5 0 0 Bonds (safe) Equities 3.5 5 4 12.5 3.5 9 0 Property Development 3.5 5 3 11.5 0 12.5 1 Scheme Property Mature 3.5 5 2 10.5 8 4.5 2 Building Japanese Bonds 3.5 0 -2 1.5 1.5 0 0 Cash 3.5 5 -1 7.5 9.5 0 -2 Selection of Cap Rate depends on number of factors Security of Income, Regularity of Income, Liquidity of assets ,Transferability of assets , Chances of Capital Appreciation, Ease of Management and Maintenance, Remaining Life of Asset Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 14
  15. 15. Financial Model We have used many assumptions to prepare a Hypothetical Township Development Scheme a perspective developer may execute depending on prevailing market conditions. Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM Township Model.xls 15
  16. 16. Conclusion and recommendations Conclusion : There is a very fine line between various techniques used for valuing special township land. It is useful to use combination of the various methods to get more accurate results. Hence to arrive at accurate value, we should emphasis on right information, documents as well as purpose of valuation. Recommendations : 1. Please always visit land under valuation 2. Prepare a neighborhood analysis map and write all the comparables on map 3. Proper methods needs to follow for measurement or due checks are necessary 4. Carry out proper due diligence before certifying value 5. Try to find out as many instance for sale as you can to compare with asset under valuation 6. Sort out genuine Instances and use those for the comparison 7. If Instances are not exactly comparable make certain adjustment before comparing them 8. Jot down all the information you have observed during your visit to site 9. Use photographs to make the report more presentable and clear 10. Please adopt due care in applying capitalisation rate or discounting rate as it is a key to valuation 11.Perform Scenario analysis and Sensitivity Checks to have a value range to depend upon Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 16
  17. 17. Networking Internet Group Valuation Groups for exchanging Information and Future learning as well as networking with others Value Add Consultant has formed Linked In group as under to communicate with interested Group Name : Indian Business Valuers and Networkers Link to Join : http://www.linkedin.com/groups?gid=1447867&trk=hb_side_g Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 17
  18. 18. Value Add Consultant is committed to implements best practices in the profession Mohit R Mehta Director Value Add Consultant India Tel : +91 22 28082583 / +91 98924 90265 Email:vac@consultant.com Value Add Consultant Mark of Property Professional World Wide 6/12/2009 9:16 PM 18