Analyzing Real Estate Valuation: Comparables, Cash Flows, and Redevelopment Options
This comprehensive analysis delves into real estate valuation techniques, examining how specific asset classes and locations may be over or undervalued. We discuss the implications of industrial versus residential properties and explore growth opportunities in cities like Chicago and Dallas. By utilizing various valuation approaches—including traditional and theoretical methods—we highlight the significance of holding periods and resale value. Additionally, we present three key valuation techniques: comparable values, replication values, and discounted cash flows, particularly focusing on capitalization rates and their impact on property value.
Analyzing Real Estate Valuation: Comparables, Cash Flows, and Redevelopment Options
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Presentation Transcript
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: Dont 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
