On the value of real estate capitalization ratios determined by the market extraction method. Real estate valuation methods: Income method for determining the market value of real estate Calculation of the capitalization rate using the extraction method

Practicing appraiser, Ph.D. tech. sciences,
Moscow

Introduction

Recently, the market extraction method is often used in practice when assessing the value of various assets to determine discount rates. Hereinafter, by asset we will primarily understand a real estate object, although the results presented are of a more general nature. Despite the fact that the income approach when using such rates loses its independence from the comparative approach, as noted in, the use of this method allows one to determine the actual market rates of return.

Most often, the market extraction method is implemented in the following version (and others):

Where
R— capitalization ratio;
NOR - net operating income;
WITH— asset value;
AP - annual rent;
A— share of operating expenses;
k— sample size;
index “0” corresponds to the current state (as of the valuation date).

Thus, according to formula (1), the current rate of return is essentially determined. But the direct capitalization method (DC) involves capitalizing the forecasted value of the NPV for one future period (etc.):

(2)

Where
Y— rate of return (discounting);
f— compensation fund factor (rate of return of capital);
t h—annual growth rate of NPR;
index “1” corresponds to the forecast value for 1 period (year) ahead.

So, there is a discrepancy between dependencies (1) and (2). Indeed, if we substitute the value of the capitalization coefficient calculated from dependence (1) into dependence (2), we will obtain a value estimate that is shifted relative to the true value, i.e., a systematic error will arise. One option for eliminating systematic error is to perform market extraction based on dependence (2), as, for example, proposed in.

Determining the real rate of return

Dependence (1) can be considered as an example of using the forecast value of the NOR in the absence of its growth (no inflation of the NOR). Since NAV inflation always exists in the real market, dependence (1), using a constant NAV value, allows us to determine the real capitalization ratio based on the real rate of return. Here and in the future, when writing formulas to simplify the calculations, we will omit the averaging expression (the sum of the sample elements divided by the sample volume), reducing the sample to one element. Taking into account the above, the dependence for calculating the real rate of return will take the form:

(3)

where the subscript "p" refers to real values.

However, when using relationship (3) to determine the real rate of return, it is essentially assumed that the inflation of all market segments is the same. Indeed, for next year the expression for extraction will look like this:

Where
OR - operating expenses for the year;
t AP is the annual growth rate (inflation) of rent;
t OR - annual growth rate (inflation) of operating expenses;
t c is the annual growth rate (inflation) of the asset value;
index “11” corresponds to the value next year.

If the inflation of rent and operating expenses are equal, they actually turn into inflation of the NAV, and dependence (4) takes the form:

(5)

It follows that when inflation of all input cost parameters is equal, inflation indicators (growth rates of NPV and asset value) are reduced, and the above dependence (5) for the next year, assuming the same rates of return of capital, takes the form of dependence (3).

At the same time, equal inflation in all market segments is possible only in an idealized market. In real markets (both developed and developing countries), the rate of price growth in various market segments, both in the short and long term, changes asynchronously. This leads to the fact that the real rate of income, defined as the current rate of return according to dependence (3), changes over time, i.e., it is a function of the relative inflation of market segments and acquires the features of a nominal rate. Graphs of the dependence of the current rate of return in the next year on the current rate of return in the current year (dependence (5)) with different inflation in the value of the asset (assuming that rent inflation is equal to operating income inflation) are shown in Fig. 1.

Rice. 1. Dependence of the current rate of return next year on the current rate of return
this year at t h = 10%, asset life is 20 years, rate of return of capital is determined using the Inwood method

To eliminate the time dependence of the real rate of return (eliminate its dependence on inflation of market segments), inflation can be considered either as an average value for a fixed forecast period, obtained taking into account its forecast for market segments for this period, or in a quasi-static approximation (assuming that inflation (growth rates) of NPV and asset value are the same) as the current rate of return.

In the future, we will limit ourselves to considering the real rate of return only in a quasi-static approximation.

It should be noted that the real rate of return can also be obtained using the market extraction method based on the equation for the discounted cash flow (DCF) method in the form:

Where
WITH rev — the cost of reversion (in real terms);
n— duration of the forecast period.
The presented equation can be solved numerically with respect to Y p (for example, using the parameter selection function in Excel).

At the same time, the real rate of return obtained on the basis of the DCF equation will coincide with the real rate of return determined on the basis of the PC equation only if the PC method uses the return of capital according to the Inwood method, and in the DCF method it is determined taking into account the return of capital also according to Inwood method (for depreciable assets with remaining economic life m, the value ) or for non-wearable assets (as a special case) at .

The Inwood method is the most economically effective method return of capital, as it requires minimal contributions. Despite the fact that in practice it is not always possible to implement it, when determining the real rate of return, it seems advisable to consider this particular method of capital return based on the assumption of the most efficient use of funds.

In valuation practice, the DCF equation with a half-period shift is often used. The equation is

This approach leads to smaller calculation errors in conditions where annual income consists of several periodic payments. Therefore, in the case of several periodic payments during the year, it is advisable to use the DCF method with a half-period shift for market extraction, or to adequately use the PC method in this case, it is necessary to use the adjusted NFR value, which is equal to

The adjustment value can be found from the following relationship:

Thus, to determine the real rate of return using the market extraction method, both the PC method and the DCF method, based on the return of capital according to the Inwood method, can be used.

Determination of nominal rates of return

The relationship between real and nominal rates of return can be obtained from the relationship:

where the index “n” refers to nominal values.

If in both cases the return of capital is carried out at a real rate, which seems justified, since by the end of the asset’s life it is necessary to accumulate an amount for its reproduction in real terms, then we obtain:

The results of calculating the relationship between real and nominal rates of return are shown in Fig. 2.

Rice. 2. Dependence of nominal rates of return on real rates for different levels of inflation NPV for the period
asset life is 20 years, the rate of return of capital is calculated using the Inwood method (in real terms)

It should be noted that when deriving dependencies (7) and (8), the default assumption is that the growth rate of NPV (inflation) is a constant value throughout the entire life of the asset. Strictly speaking, this is not true, at least for the current economic state of Russia. Therefore, it is more correct to take the average integral value of forecast inflation over the life of the asset as the estimated inflation.

In addition, the obtained dependencies were derived without taking into account income from the growth in value (inflation) of the asset. The features of calculating the contribution of the growth rate of the value of an asset to the nominal rate of return are discussed in sufficient detail in.

It should be noted that in the real market, for assets with different remaining economic lives (for example, for similar properties of different ages), the inflation rate is almost the same (provided that the remaining economic life is long enough). At the same time, the required rate of return on capital for such assets should differ due to differences in life expectancy. Therefore, when making calculations using the market extraction method, it is advisable to take into account separately inflation (growth rates) and the rate of return of capital as an element of depreciation. In this case, we can write the following relation:

— annual change in value (absolute inflation) of the asset; t c is the annual growth rate of value (relative inflation) of the asset.

It should be noted that for non-depreciable assets ( f R = f n = 0) and in the case of equal inflation of the asset and the NPV ( t With = t h) dependencies (9) and (10) turn into the well-known Fisher formula:

In general, the market extraction method for determining nominal rates of return can also be used on the basis of the DCF method. However, here the problem becomes multivariate and the nominal rate determined by the PC method does not coincide with the rate determined by the DCF method.

In some cases, you can try to ensure the same nominal rates of return for the DCF and PC methods by selecting the appropriate relationship for calculating the capitalization ratio (rate of return on capital), as shown in. However, apparently, the proposed selection method is more of an artificial mathematical technique than an economically sound behavior of the investor.

The fact is that the PC and DCF methods reflect fundamentally different models of investor behavior and, therefore, can produce different results.

Indeed, the dependence can be transformed to the following form:

Thus, we have obtained the classic formula for calculating the return on invested capital. For example, in the case of lending, the ratio of annual interest payments on the loan to the loan amount.

Since the rate of return on capital is calculated taking into account the remaining economic life of the asset, it follows that the PC method is built on a model that assumes that an investor, after investing capital in an asset, will own it until the end of its economic life.

The DCF method (dependence (6)) assumes a different model of investor behavior when investing capital in an asset, namely: receiving income for a limited period of time (forecast period, which is less than the economic life of the asset) and selling the asset at the cost that will be at the end income period.

The multivariance of market extraction results when using the DCF method is due to a number of reasons.

Firstly, the calculated dependencies for the DCF method using nominal rates of return can take different forms.

Most often in practice, the DCF equation is used for a constant rate of return in the form

At the same time, it is possible to use DCF equations with rates of return variable by period:

When using spot rates:

When using forward rates:

(13)

Secondly, the duration of the forecast period when using the DCF method can also be different.

Thirdly, the cost of reversion can be determined in different ways:
- based on the capitalization of the NPV of the first year of the post-forecast period using the rate of return of capital according to the methods of Inwood, Hoskold, Ring or the Gordon model;
- by directly forecasting the current value of an asset for the first year of the post-forecast period using the growth rate of its value.

All this variety of calculation options using the DCF method leads to the fact that the calculated nominal rates differ from those obtained using the PC method. The results of calculating some options, provided that the value of the asset on the valuation date is the same and corresponds to a real rate of return of 10%, are given in table. 1.

Table 1

No.	Type of bet	Rate value in %, with the duration of the forecast period, years					Payment terms
No.	Type of bet	1					Payment terms
1	RealY R	10	10	10	10	10	PC and DDP method, dependencies (3) and (6), f- Inwood method
2	NominalY n	11,44	—	—	—	—	PC method, dependence (7), f- Inwood method
3	Y n	11,17	—	—	—	—	PC method, dependence (8), f- Inwood method
4	Y n	11,50	—	—	—	—	PC method, dependence (7), f- Ring method
5	Y n	23,44	—	—	—	—	PC method, dependence (9), f- Inwood method
6	Y n	23,17	—	—	—	—	PC method, dependence (10), f- Inwood method
7	Y n	23,50	—	—	—	—	PC method, dependence (9), f- Ring method
8	Y n	23,20	—	—	—	—
9	Y n	12,78	14,01	15,11	16,08	16,92	DDP method, dependence (11), WITH rev - PC method, f- Inwood method
10	Y n	12,78	14,03	15,19	16,26	17,25	DDP method, dependence (12), WITH rev - PC method, f- Inwood method
11	Y	12,78	14,23	15,77	17,43	19,21	DDP method, dependence (13), WITH rev - PC method, f- Inwood method
12	Y n	36,44	29,15	26,76	25,54	24,80	DDP method, dependence (11), WITH t With)

Note. When calculating nominal rates of return Y n accepted: t h = 10%, t c = 12%.

The examples given show that the value of the nominal rate of return significantly depends on the calculation method. Therefore, in order to obtain adequate results when using the market extraction method to determine the nominal rate of return, the extraction process must be carried out using a relationship that will later be used when carrying out valuation calculations.

Calculation of investment risks

To determine the rate of return, practicing appraisers quite often use the cumulative construction method. Its essence is that the rate of return is presented as the sum of the so-called risk-free rate of return and premiums (surcharges) for investment risks (etc.). In this case, various methods for determining risks are used: from expert assignment of values to the construction of calculation and analytical models. However, in practice, all these methods have elements of subjectivity.

The market extraction method creates the ability to determine the risks of different investments based on market data.

Typically, risk-free rates are considered to be the yield to maturity rates on government securities(bonds). However, market data on bond yield rates are conditionally risk-free, since they contain inflation risks. Therefore, the bond yield rates used by appraisers are nominal.

To ensure comparability of the magnitude of inflation risks for the risk-free rate and the rate of return of the asset being valued, they usually strive to select a bond with a maturity close to the holding period of the asset.

If we determine the nominal rate of return using the market extraction method and select the (nominal) risk-free rate, we can determine the total risk of the investment. The calculated dependence has the form:

Where
r n - total investment risk (in nominal terms);
Y br - risk-free rate of return.

The results of calculating investment risks for the nominal rates of return calculated above (see Table 1) are given in Table. 2 (the numbering of the corresponding columns in Table 1 is retained). In the calculations it was assumed that Ybr = 5%.

table 2

No.	Type of risk	The value of the total risk in %, with the duration of the forecast period, years					Payment terms
No.	Type of risk	1	2	3	4	5	Payment terms
2	Nominal r n	6,44	—	—	—	—	PC method, dependence (7), f- Inwood method
3	r n	6,17	—	—	—	—	PC method, dependence (8), f- Inwood method
4	r n	6,50	—	—	—	—	PC method, dependence (7), f- Ring method
5	r n	18,44	—	—	—	—	PC method, dependence (9), f- Inwood method
6	r n	18,17	—	—	—	—	PC method, dependence (10), f- Inwood method
7	r n	18,50	—	—	—	—	PC method, dependence (9), f- Ring method
8	r n	18,20	—	—	—	—	Fisher formula (calculation by tс)
9	r n	7,78	9,01	10,11	11,08	11,92	DDP method, dependence (11), WITH rev - PC method, f- Inwood method
10	r n	7,78	9,03	10,19	11,26	12,25	DDP method, dependence (12), WITH rev - PC method, f- Inwood method
11	r n	7,78	9,23	10,77	12,43	14,21	DDP method, dependence (13), WITH rev - PC method, f- Inwood method
12	r n	31,44	24,15	21,76	20,54	19,80	DDP method, dependence (11), WITH rev - forecast based on the growth rate of asset value ( t With)

Strictly speaking, since the PC and DCF methods assume different holding periods for the asset, the risk-free rates used for these methods should be different. However, this is usually not taken into account in practical assessments.

In conclusion, I would like to note that there is a temptation to determine the real risk-free rate using the known real rate of return and the calculated total investment risks. In this case, you can accept the assumption that the nominal risks for the asset are equal to the real ones, or use the amendment proposed in to calculate the real risks.

However, such a calculation seems unlawful, since the predicted risks when investing in the asset being valued and the predicted risks for bonds, as perceived by participants in the market for the assets being valued and the securities market, differ significantly. Apparently, these differences are associated with the high dynamics of the securities market and the speculative component present in the real profitability of participants in this market. Obviously, if you try to subtract the calculated risks from the real rate of return of an asset, then in some cases you may end up with negative values of real risk-free rates. Therefore, real risk-free rates of return for government bonds can only be determined based on an analysis of the securities market, which is beyond the scope of this publication.

Conclusion

The article discusses the features of using the market extraction method to determine real and nominal rates of return. Dependencies are derived that establish a connection between nominal and real rates of return, which, under certain conditions, coincide with the well-known Fisher formula.

Also presented are the calculation results confirming that adequate use of the market extraction method to determine nominal rates of return is possible only if the same dependencies are used for extraction and for valuation. The fundamental possibility of calculating and comparing investment risks based on market data is shown.

Literature

1. Ozerov E.S. Economic analysis and real estate valuation. St. Petersburg: MKS, 2007. pp. 188-243.
2. Esipov V.E., Makhovikova G.A., Terekhova V.V. Business valuation. St. Petersburg: Peter, 2006. pp. 99-100.
3. Fomenko A.N. Features of using VRM when determining the capitalization ratio using the market extraction method. — www.appraiser.ru
4. Mikhailets V.B., Artemenkov I.L., Artemenkov A.I. The income approach and the discounting principle when valuing income-producing illiquid assets. Revision of the concepts of the income approach and development of a transactional pricing model // Questions of assessment. 2008. No. 1.
5. Fomenko A.N. Possible error and uncertainty of the results of estimated calculations when using various equipment discounting. — www.anf-ocenka.narod.ru
6. Leifer L.A. Income approach to real estate valuation. Typification of models of forecasted cash flows // Questions of assessment. 2007. No. 3.
7. Fomenko A.N. Using a variable discount rate when estimating the value of real estate within the framework of the income approach. — www.anf-ocenka.narod.ru
8. Real estate valuation / Ed. A.G. Gryaznova, M.A. Fedotova. M.: Finance and Statistics, 2005. pp. 146-149.
9. Kozyr Yu.V. Implications of the effects of interest rates on risk premiums. — www.appraiser.ru

Conceptually, the income approach is based on utility and expectation theories and is based on the principles of real estate valuation such as expectation and substitution.

Important to remember

The basic idea of the income approach is that the price of real estate is determined by the income it can bring in the future.

Application approach involves determining the value of a property by recalculating estimated future income from real estate into their current (present) value.

In this case, income from real estate includes:

income from the operation (from operational use) of real estate (which primarily includes income in the form of rent, as well as income from business based on the use of real estate);
income from the resale (reversion) of real estate.

The main scope of application of the approach is valuation of profitable real estate.

The approach is implemented through recalculating the flow of future income into their current value, taking into account:

the amount of future income;
period of income;
time of receipt of income.

The basis of the approach is IVR -formula where I - income; V - price; R – capitalization rate, according to which income is equal to cost multiplied by the capitalization rate:

I = VR

This in turn implies that cost equals income divided by the capitalization rate:

V=I/R.

This general formula underlies all the methods that make up the income approach.

The income approach can be implemented in three main options:

gross rent method (sometimes considered as a type of comparative approach);
direct capitalization method;
discounted cash flow method.

The application of any of the methods is carried out on the assumption that the property is a source of income (subject to rent), and therefore the value of the object is determined through the relationship between the amount of rent and cost.

The difference in the methods lies in the technology of using this principle, the accuracy of income accounting, and, consequently, the accuracy of the result obtained.

Gross rent method consists in determining the relationship between price and potential gross income (gross rent) that the valued object can bring for a certain period (one year).

In practice, this means that the appraiser must find market information about the level rental payments and sales prices comparable to the property being valued (hence it can be considered a type of comparative approach).

Based on these data, the appraiser can draw a conclusion about the typical price/rent ratio for a given market by calculating the average (5.5), median (middle of the series) (5.5) and, based on the calculations, determine the most justified value of this ratios.

The price/rent ratio is called gross rent multiplier (VRM) ( gross rent multiplier – GRM ).

Now, to determine the value, it is necessary to either obtain data from the owner on the amount of the annual rent, or also use market information on the level of rent for of this type objects.

Thus, within this method the cost is equal to the annual rent (or rent for another period) multiplied by the VRM.

Direct capitalization method and discounted cash flow method involve a more thorough study of the property’s profitability than the gross rent multiplier method.

The key concepts that are used in their application are the concepts of net operating income (NOI, or NOI-net operating income) and capitalization rate R (rate ).

Therefore, the appraiser's first task is to determine the net operating income of the property. To do this, you need to remember such concepts as potential gross income, actual (effective gross income), operating costs.

Potential Gross Income (PVD) - the total rent that can be received from the permanent and full rental of a property without taking into account losses and expenses.

Valid (effective ) gross income (DVD) – potential gross income, adjusted taking into account the vacancy of premises, losses from unscrupulous tenants, rental benefits, and other income from the property.

Operating costs - expenses to ensure the normal functioning of the facility in accordance with its purpose and, accordingly, to ensure the reproduction of actual gross income.

Net operating income – actual gross income minus operating expenses and deductions for the replacement of building elements and equipment whose service life is less than the economic life of the building.

Direct capitalization method involves the use of the formula

V=NOI/R.

To apply the direct capitalization method you must:

determine the size of the NPV for the year (as a rule, the average value is taken over a number of years, taking into account ideas about market dynamics, income and expenses);
determine the capitalization rate;
apply the formula.

The direct capitalization method is used in cases where we are dealing with a stable cash flow for an unlimited period of time.

When using the direct capitalization method, the fact that over time the profitability of the object (capitalization rate) may change due to the fact that at the beginning of operation there is a probability of a high proportion of unoccupied space is not taken into account; additional expenses for advertising, attracting tenants; at the end of the operation period, the costs of maintaining the facility increase, etc. In addition, possible changes in the cost of the facility itself are not taken into account. real estate, which affects the discount rate.

With the direct capitalization method, the value of the object is determined by the formula

Or , (8.2)

Where I (NOI ) – net operating income; V – the cost of the property; R – capitalization ratio.

The scheme for using the IPC is as follows:

1) determination of the amount of the capital budget for one year;
2) calculation of capitalization ratio R;
3) calculating the value of real estate.

In formula (8.2), the calculation of net operating income is carried out on the basis of an analysis of net operating income comparable to the valued object, using the method comparative analysis their rental rates. The capitalization ratio is calculated by the market squeeze (extraction) method based on an analysis of the relationship between net operating income and the cost of objects comparable to the one being valued in terms of their characteristics.

Let's look at an example of calculating net operating income. The object of assessment is an apartment building with apartments for rent (data are presented in Table 8.5).

Table 8.5

Characteristics of the property being assessed (apartment building)

Data on income from the facility are given in table. 8.6.

Table 8.6

Data on income from the valuation object

Index	Value, rub.
1. Total monthly PVD
2. Annual PVD (page 1 12)
3. Losses due to underloading and losses during collection of payments (5% of PPV)
4. Other income
5. Actual Gross Annual Income (page 2 – page 3 + page 4)
6. Operating expenses, including:
communal payments
Maintenance
payment for manager services
staff salaries
payroll taxes

legal and accounting services
real estate taxes (land tax, property tax)
other expenses
replacement reserve
7. Net operating income

Capitalization rate calculation market extraction method (market squeeze ) (determining the capitalization rate based on sales price and net operating income data for comparable real estate on the market) is made by determining the average rate based on market data for similar properties. An example of calculating the capitalization rate is given in table. 8.7.

Table 8.7

Determining the capitalization rate using the market extraction method

The average capitalization rate is 0.11.

Under these conditions, the value of the property, determined by the method of direct capitalization of income, will be equal to:

5 000 000/0,11 =45 450 000.

Discounted Cash Flow Method (MDDP) is considered a more accurate method of determining the value of real estate under the income approach. This method is based on the concept of changes in the value of money over time and the concept of compound interest.

The use of MDDP makes it possible to take into account changes in the capitalization rate (profitability) of a real estate object over time (including under the influence of inflation, risks) and the income that can be received after the operation of the object from its sale. At the same time, these opportunities also contain significant problems.

The accuracy of determining the result - the value of a real estate object when using MDDP - depends on how accurately one can predict the required level of future profitability of the object (in fact, predict the future level of risks), the amount of cash flows from operating activities during the period of ownership of the object, the amount of income from reversion . Considering that the forecast period can be five, ten or more years, it becomes clear that this is very difficult to do.

The full MDDP formula for real estate will look like this:

Where PV – real value ( present value) -, CF-, – cash flow in i th period; P - number of periods; r - discount rate.

The most important thing when using MDDP is to determine the value of the discount rate.

The discount rate is chosen as the average rate of return that investors expect to receive on investments in similar objects in the conditions of a given real estate market, or as the rate of return on equity capital, provided that the object is purchased on own funds, or as the weighted average cost of capital subject to borrowing.

The choice of discount rate is based on an analysis of available alternative investment options with a comparable level of risk (opportunity cost of capital). To determine the discount rate, the following methods are usually used.

Market sampling method. The method is based on the analysis of market data and, if sufficient information is available, is the most accurate method for determining the discount rate, taking into account the opinions of typical sellers and buyers, risks, location features, property characteristics and income.

Cumulative construction method. The discount rate is calculated by adding premiums (percentage), reflecting additional risks associated with the property, to the risk-free rate, which can be, for example, the rate of return on government securities, or the refinancing rate of the Bank of Russia, or another indicator that has minimal risks.

Typically, bonuses are associated with the following factors factors that increase investment risk: low liquidity of real estate, quality of investment management, location of real estate.

Linked investment method. The method is based on determining the share of equity and debt capital in the total investment and the required rates of return for each of these components. The overall discount rate is determined taking into account these financial components as a weighted average.

Let's consider the use of MDDP using the following example.

It is necessary to estimate the value of a property using MDDP, with a forecast period of two years; in the first year, the property is reconstructed in the amount of 1.5 million rubles. The initial data for the calculation are given in table. 8.8.

Table 8.8

Initial data for calculating the cost of an object using MDDP

Index	Meaning
Object area, m2
Rental rate per year, RU6./m2/year
Rent growth rate, %
Occupancy rate, %
Reconstruction costs, rub.
Operating expenses to operating expenses ratio, %
Discount rate, %
Capitalization rate (to calculate the reversion amount), %

Cash flow forecast and calculations are presented in table. 8.9.

Table 8.9

Calculation of the value of a property using MDDP

Index
Potential Gross Income (GPI)
Losses from vacancy
Effective Gross Income (EGI)
Operating expenses (OP)
Net operating income (NOI)
Sales income
Reconstruction costs
Cash flow (CF )
Discount factor ( F )
Current value cash flow (PV )
The value of the object (V )

Thus, the value of the property, determined by the MDDP, is rounded to 3.26 million rubles.

Coordination of assessment results. As follows from the analysis of the main approaches to assessing the value of real estate and the corresponding methods, each of the approaches implements a certain economic-theoretical view of the nature of value in such an applied field as economics and real estate valuation.

None of these approaches reflects the nature and magnitude of cost absolutely adequately, so different approaches must inevitably give in real economic conditions different results. (Theoretically, equality of assessment results obtained using different approaches is possible only in a perfectly balanced economy, where costs equal price and price equals benefits. However, such an economy is not capable of development.)

To obtain the most accurate assessment result, firstly, it is necessary to use different approaches in the assessment process, and secondly, the final stage of the assessment should be the coordination of the calculation results obtained using different approaches.

Coordination – this is an analysis of alternative conclusions obtained using three different approaches to valuation and determination of the final value of the assessed value.

The appraiser must determine to what extent this or that approach corresponds to the purpose of evaluating the object in question, whether the calculations carried out are supported by market data, whether they contradict them, and in the final conclusion must indicate what weight can be given to this or that approach when formulating the final judgment about the value. An example of coordination of assessment results is given in table. 8.10.

Table 8.10

Coordination of valuation results obtained using different approaches to assessing the value of an object

Index
Index	expensive	comparative	PROFITABLE
Criteria:
by the ability to take into account the specific features of the object
by quality of initial information
in terms of adequacy to the market
according to the purpose of the assessment
Sum of points

Market value obtained within the framework of the approaches used, rub., including VAT
Total market value including VAT, rounded, rub.

It should be noted that the results of real estate valuation obtained using various approaches are themselves carriers of important information (of course, if they are applied correctly).

If the market approach gives a result higher than the cost approach, then this indicates that it is more profitable to sell the object and build a new one, since the costs should be lower than the prices at which similar objects are sold.

If the income approach gives a result greater than the market one, then this means that the object is undervalued by the market: such objects should be bought and held, since they are capable of generating more income than most market participants believe.

practicing appraiser, ktn

email: *****@***ru

Features of using VRM when determining the capitalization ratio using the market extraction method

The market extraction method, apparently, makes it possible to determine the most adequate value of the capitalization ratio for real estate.

As you know, the capitalization ratio is:

K – capitalization ratio;

NOD1 – forecast value of net operating income;

C0 – the cost of the property on the valuation date;

NOR0 – current value of net operating income as of the valuation date;

t – annual growth rate of net operating income.

Due to the fact that data on market values of net operating income, as a rule, is not available to the appraiser, the value of the proposed rent must be used for market extraction. In this case, the calculated dependence takes the form:

А1i – predicted rental value for the i-th property;

A0i – the amount of rent for the i-th property on the valuation date;

С0i – cost of the i-th property on the valuation date

а1 – average market coefficient of underutilization of the property;

а2 – average market value of the ratio of operating expenses to rent;

n is the number of real estate objects, based on information about which market extraction is carried out.

An adjustment for losses when collecting rent is usually not taken into account, since currently, in the vast majority of cases, the established practice is to collect advance payments from the tenant, or to form a repayable fund, at the expense of the tenant, in the amount of the rent for a certain period (usually 1 …3 months).

When determining the market value of the ratio of operating expenses to rent, it should be borne in mind that utilities are usually paid in whole or in part in excess of the rent. Most often, electricity and communication services are paid separately. Strictly speaking, operating expenses must additionally take into account deductions for major repairs, which in practice, as a rule, are not made.

Gross rent multiplier (GRM) is the average statistical ratio of the market price to the potential or actual gross income of a certain type of property.

It is shown that when calculating the VRM value, average (market) values of rent and cost for the corresponding segment of the real estate market can be used. The calculated dependence for determining the BRM has the form:

;

CVRM is an adjustment coefficient depending on the parameters of samples of sales prices and rental rates for real estate objects;

CP0 – average cost of sales of real estate;

AP0 is the average rental rate for real estate.

The value of the CVRM coefficient depends on the range of samples of rental rates and the value of real estate objects and is given in Table. 1.

Table 1. Values of CVRM coefficients

Relationship Cmax/Cmin	AttitudeAmax /Amin

The calculated dependence for determining BPM has a similar structure to dependence (1) for calculating the capitalization ratio. Carrying out similar reasoning given for BRM in , we can obtain the following calculated relationship for determining the capitalization ratio:

At the same time, the values of the coefficient KK are presented in table. 2, which is a transposed matrix of values from table. 1.

Table 2. Values of coefficients KK

Relationship Cmax/Cmin	AttitudeAmax /Amin

Taking into account the last relationship, the calculated dependence for determining the capitalization ratio takes the form:

The peculiarity of the obtained calculated dependence is that it includes only dimensionless parameters that characterize the corresponding segment of the real estate market.

Table 2. The value of the product of coefficients КК x КВРМ

Relationship Cmax/Cmin	AttitudeAmax /Amin

At the same time, for a fairly narrow market segment, which is characterized by a small sample range, it can be assumed that the value Kk x CVRM = 1 (the range of cells in which this condition can be accepted with an error of no more than 10% is shaded).

Subsequently, by subtracting the compensation fund factor for the property being valued from the resulting capitalization ratio, for example using the Ring method, the rate of return (discounting) can be determined.

The above ratios potentially allow the use of the following methods (algorithms) when assessing the value of real estate:

As part of the income approach, determine the capitalization rate (discount rate) based on market data for the corresponding segment of the real estate market;

Within the framework of the income approach, when making an assessment, use the value of the capitalization coefficient (discount rate) obtained by reconciling the values determined by the cumulative construction and the market extraction method;

As part of the comparative approach, use a cumulatively constructed discount rate to determine the BRM or reconcile the resulting BRM with the value determined on the basis of market data.

It should be emphasized that the values of VRM and capitalization ratio characterize not the specific object being valued, but the current situation in the market segment under consideration. Therefore, when calculating them, it is unacceptable to use the adjusted cost characteristics of analogous objects, but it is necessary to use the available data on the market segment under consideration. At the same time, in order to reduce the scope of the initial rent and cost values used in calculations, the market segment can be as narrowed as desired, for example, office space on the 1st floors of residential buildings in the area of the University of Moscow metro station. The only limitation for narrowing the market is the sample size, which usually should not be less than 7...8 elements.

Conclusions:

1. A justification is given for the admissibility of using average values of sales prices and rental rates within the corresponding market segment to calculate the capitalization ratio of real estate using the market extraction method, which can significantly expand the possibilities of using this method.

2. The functional interdependence between the capitalization ratio and the gross rental multiplier expands the possibilities of clarifying these values for the relevant segments of the real estate market when conducting an assessment.

Literature

Property valuation. Ed. , . M., Finance and Statistics, 2005, Makhovikova G, A, Terekhova business. 2nd edition. St. Petersburg, PETER, 2006 http://dictionary. /dictionary Fomenko calculating the gross rental multiplier for real estate. www. , www. anf-ocenka.

Note: posted on:

http://www. /default. aspx? SectionID=41&Id=2512

Cand. tech. sciences,
General Director of ANF-ASSESSMENT LLC

The market extraction method, apparently, makes it possible to determine the most adequate value of the capitalization ratio for real estate.

As you know, the capitalization ratio is:

Where:
K - capitalization ratio;
NOR 1 - forecast value of net operating income;
C 0 - the cost of the property on the valuation date;
NOR 0 - the current value of net operating income as of the valuation date;
t is the annual growth rate of net operating income.

Where:
A 1i is the predicted rental value for the i-th property;
A 0i is the amount of rent for the i-th property on the valuation date;
C 0i - the cost of the i-th property on the valuation date
a 1 is the average market coefficient of underutilization of the property;
a 2 is the average market value of the ratio of operating expenses to rent;
n is the number of real estate objects, based on information about which market extraction is carried out.

Gross rent multiplier (GRM) is the average statistical ratio of the market price to the potential or actual gross income certain type of property.

Where:
K VRM - an adjustment coefficient depending on the parameters of samples of sales prices and rental rates for real estate objects;
C P0 - average cost of sales of real estate;
And P0 is the average rental rate for real estate.
The value of the coefficient K VRM depends on the range of samples of rental rates and the value of real estate objects and is given in table. 1.

Table 1. Values of coefficients K VRM

Ratio C max / C min	Ratio A max / A min
Ratio C max / C min	1,00	1,25	1,50	2,00	2,50	3,00	4,00
1,00	1,000	1,006	1,029	1,085	1,153	1,220	1,358
1,25	1,000	1,012	1,036	1,095	1,165	1,232	1,370
1,50	1,000	1,015	1,040	1,103	1,172	1,240	1,376
2,00	1,000	1,019	1,047	1,111	1,181	1,247	1,377
2,50	1,000	1,021	1,050	1,115	1,183	1,249	1,374
3,00	1,000	1,024	1,053	1,119	1,186	1,250	1,370
4,00	1,000	1,026	1,057	1,122	1,188	1,248	1,360

At the same time, the values of the coefficient K K are presented in table. 2, which is a transposed matrix of values from table. 1.

Table 2. Values of coefficients K K

Ratio C max / C min	Ratio A max / A min
Ratio C max / C min	1,00	1,25	1,50	2,00	2,50	3,00	4,00
1,00	1,000	1,000	1,000	1,000	1,000	1,000	1,000
1,25	1,006	1,012	1,015	1,019	1,021	1,024	1,026
1,50	1,029	1,036	1,040	1,047	1,050	1,053	1,057
2,00	1,085	1,095	1,103	1,111	1,115	1,119	1,122
2,50	1,153	1,165	1,172	1,181	1,183	1,186	1,188
3,00	1,220	1,232	1,240	1,247	1,249	1,250	1,248
4,00	1,358	1,370	1,376	1,377	1,374	1,370	1,360

Taking into account the last relationship, the calculated dependence for determining the capitalization ratio takes the form:

The peculiarity of the obtained calculated dependence is that it includes only dimensionless parameters that characterize the corresponding segment of the real estate market.

Table 2. The value of the product of coefficients K K x K VRM

Ratio C max / C min	Ratio A max / A min
Ratio C max / C min	1,00	1,25	1,50	2,00	2,50	3,00	4,00
1,00	1,000	1,006	1,029	1,085	1,153	1,220	1,358
1,25	1,006	1,024	1,051	1,116	1,189	1,262	1,405
1,50	1,029	1,052	1,082	1,154	1,231	1,306	1,455
2,00	1,085	1,116	1,154	1,234	1,316	1,395	1,545
2,50	1,153	1,190	1,231	1,317	1,400	1,482	1,632
3,00	1,220	1,261	1,306	1,396	1,482	1,563	1,710
4,00	1,358	1,406	1,455	1,545	1,632	1,709	1,849

At the same time, for a fairly narrow market segment, which is characterized by a small sample range, it can be assumed that the value K k x K BRM = 1 (the range of cells in which this condition can be accepted with an error of no more than 10% is shaded).

The above ratios potentially allow the use of the following methods (algorithms) when assessing the value of real estate:

within the framework of the income approach - determine the capitalization factor (discount rate) based on market data for the corresponding segment of the real estate market;
within the framework of the income approach - when making an assessment, use the value of the capitalization coefficient (discount rate) obtained by reconciling the values determined by the cumulative construction and the market extraction method;
within the framework of the comparative approach, use a cumulatively constructed discount rate to determine the BRM or reconcile the resulting BRM with the value determined on the basis of market data.

Conclusions:

Literature

Property valuation. Ed. A. G. Gryaznova, M. A. Fedotova. M., Finance and Statistics, 2005
Esipov V. E., Makhovikova G. A, Terekhova V. V. Business assessment. 2nd edition. St. Petersburg, St. Petersburg, 2006
dictionary.finam.ru/dictionary
Fomenko A. N.

The capitalization rate is the interest rate that is used to convert annual income into value. From an economic point of view, the capitalization rate reflects the investor’s rate of return, taking into account the risks of the object and possible changes in the value of the object in the future.

The market extraction method was used to determine the capitalization rate. This method does not separately calculate the rate of return on capital and return on capital, but uses market data for objects that are comparable both in terms of the share of changes in the value of the property in the future and in terms of risks.

Where NOI i- net operating income i-th analogue object; V i- sale price of the i-th analogue object; n-the number of similar objects in real estate.

As analogues for constructing a market extraction, premises were selected that corresponded to the purpose of the property being assessed (in our case, office facilities), which is justified from the point of view of structural and planning characteristics and the best use of the property being assessed. The selection of analogue objects for calculating the capitalization ratio was carried out on the basis of a database of commercial real estate objects of the information and analytical department "Estimatika". The main conditions for selecting objects for calculations are:

1. Objects are presented on the market both for sale and for rent;

2. the object was offered for sale/rent in one time period.

3. The number of pairs under consideration should not be less than 5

For calculations, it is necessary to apply a number of adjustments, such as “bargaining discount”, “accounting for losses from downtime” (“underload”), and operating costs.

An analysis of average bargaining discounts for the rental and sale of retail and office real estate in Yekaterinburg was carried out based on consultations with representatives of various real estate agencies. As a result of the analysis, the range of discounts for bargaining when selling retail and office real estate was determined, which is 5 - 15%, the average value is 8%, the range of discounts for bargaining when renting retail and office real estate is 2 - 11%, the average value is 6%.

The estimated costs of operating the property being assessed are calculated. Periodic expenses to ensure the normal functioning of the facility and the reproduction of income are called operating expenses. In general and practical understanding, operating expenses include the costs of maintaining the premises. First of all, this includes the costs of utility bills, cleaning the territory, etc. Considering that most of the costs in objects with a unified organized management system are not included in the rental rate level, then for such objects operating expenses were not deducted when calculating the NIR in order to avoid double counting impact of operating expenses. Based on the analysis of the market segment, in relation to each of the similar objects selected for calculating the capitalization ratio, the underutilization coefficient typical for the market segment and the operating expense rate per useful unit leased are applied. When determining the net operating expense (NOC) When justifying the net operating expense, the value of losses from downtime in the amount of 10% of the operating expenses and the amount of operating expenses in the amount of 18% of the operating expenses were taken into account according to negotiations with real estate agencies and a number of management companies.

home > Registration

On the value of real estate capitalization ratios determined by the market extraction method. Real estate valuation methods: Income method for determining the market value of real estate Calculation of the capitalization rate using the extraction method

We also recommend