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Valuing Real Estate

Two Distinct Questions. Are specific asset classes and locations over or undervalued?Industrial versus residentialChicago versus DallasNeed to evaluate growth opportunities and discount rateAre particular properties within an asset class over or undervalued?Evaluating an Austin office building

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Valuing Real Estate

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    1. Valuing Real Estate An analysis of comparables Discounting cash flows Considering redevelopment options

    2. Two Distinct Questions Are specific asset classes and locations over or undervalued? Industrial versus residential Chicago versus Dallas Need to evaluate growth opportunities and discount rate Are particular properties within an asset class over or undervalued? Evaluating an Austin office building on 6th and Congress An analysis of comparables

    3. Old and new valuation approaches Valuation using standard industry practice Valuation using the “theoretically” best approach Use a combined approach that depends on your expected holding period. If your holding period is short, resale value plays an important role. The Keynes beauty contest: Don’t pick the most beautiful property, pick the property that others consider the most beautiful.

    4. Three Valuation Techniques Valuation relative to comparables Replication values Discounting cash flows Ultimately, we are interested in DCF, however, replication values and comparable values provide information about future cash flows.

    5. Capitalization Rates We tend to think about property values in terms of Cap rates: The income on a property divided by the property value , where ? - g is the capitalization rate. Example: CF1 = 1,000 g = .05 ? = .14  PV = 1000/(1.14) + 1050/(1.14)2 + 1102.50/(1.14)3 + . . .   = 1000/(.14-.05) = 1000/.09 = $11,111  

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