Commercial Real Estate InvestmentSpecialist Valuer ensures that the asset being appraised is all that it appears to be. One of the paramount concerns of the valuation profession is the need to ensure that information presented to a client is clear and unambiguous.
In finance, ‘investment’ means putting money into an asset with the expectation of earning interest or dividends plus capital appreciation. Commercial real estate is a large part of the universe of potential investments available to global investing institutions. Despite that real estate investing can be a highly profitable activity for many investors, there are a few disadvantages to be aware of before investing in real estate. Like any investment, there are pros and cons to investing in real estate, therefore, due diligence is essential in the investment process. A key part of the due diligence process is the appraisal.
What Are The Risks Of Real Estate Investment?
Real estate investment involves operational difficulties, the property is a real asset, and it wears out over time, suffering from physical deterioration and obsolescence, together creating depreciation that needs regular management and maintenance.
Building obsolescence refers to changes in what is expected from buildings, the most obvious source of which are changes in technology that impact upon occupier requirements and may render a building’s design or configuration redundant.
The cash flow delivered by a property asset is controlled or distorted by the lease contract agreed between owner and occupier. There are many factors contained in a lease that directly affect the value and performance of interests in land and buildings. For instance, repairing liabilities, lease length, break clauses, user and assignment restrictions and rent review patterns may all, individually or collectively, have an impact on the cash flow delivered by the property and its resulting capital or rental value.
Property is highly illiquid. It is expensive to trade, there is a large risk of abortive expenditure and the result can be a very wide bid–offer spread (a gap between what buyers will offer and sellers will accept).
Property assets are generally large in terms of capital price. This means that property portfolios cannot easily be diversified, and suffer hugely from specific risk.
Real Estate Investment Risk And Return Characteristics
Risk and return characteristics vary from property to property and from sector to sector. A key issue is the nature of the revenue that is produced. Factors impact on revenue and capital such as income stability, location, building quality and condition, and lease length. Core, core-plus, value-add and opportunity are terms that carry with them judgements about property risk, including leverage, and expected returns.
Real Estate Valuation And Appraisal
It is a crucial aspect of the property purchase decision to appoint a specialist valuer to ensure that the asset being appraised is all that it appears to be. The introducing agent may be expected to produce an external valuation report, including comparable evidence and opinions concerning the strength of the local market. Whether this can be regarded as impartial professional advice will depend upon the broker and the buyer’s relationship with him. Where debt is involved, a truly independent valuation may be commissioned. it is important to distinguish between three concepts, worth (Investment Value), price and value. Worth is the value of an asset to the owner or a prospective owner for individual investment or operational objectives, Price is the market’s estimate of value and Value is a valuation of property, usually an estimate of the most likely selling price.
The value of an investment is the present value of its expected income stream discounted at a rate that reflects its risk. However, any estimate of value depends on the views of the investor making the estimates and is subjective. Price may therefore differ from value in a variety of circumstances, for example, if the vendor has to make a forced sale for any reason, or if the investor has different views or better information, or is better able to use the available information.
An investor will view worth as the discounted value of the rental stream produced by the asset, whereas the owner-occupier will see the asset as a factor of production and assign to it a worth derived from the property’s contribution to the profits of the business.
One of the paramount concerns of the valuation profession is the need to ensure that information presented to a client is clear and unambiguous. Not only should all parties understand the terminology used, it is also important that the client receives all other information that might be required to make a rational financial or investment decision.
The income approach is mainly applied in calculating market value of commercial properties, which earn or might earn income. Calculating market value with income approach means estimating the market value of the right to receive infinite income flows. However, the correctness of calculations depends on the correct estimation of rental rates, capitalization rates, discount rates, and other parameters reflecting the market segment represented by a valued property.