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Тема: «Relevant Commercial Property Valuation Techniques used in Emerging Markets»

Предмет: Оценка недвижимости

An investigation of the DCF use as opposed to traditional valuation techniques as instruments for development projects valuation in volatile and uncertain emerging commercial real estate market in Russia. Moscow and St. Petersburg practices

Abstract
The subject of this study is the methodology of development project valuation under risk and uncertainty, traditional valuation methods (British Approach) and the DCF (Discounted Cash Flow) method. Author compares and contrast traditional valuation methods and DCF technique that main principals are to analyse a number of forecasting indicators. Therefore, he concludes that the model is subjective and examines the reasons why DCF is inappropriate valuation technique to use in emerging volatile Moscow and St. Petersburg commercial real estate markets. The most vulnerable point of the method of discounted cash flows is the discount rate, as well as forward-looking indicators that are impossible to predict in the current Russian political and economic situation. This is especially true for emerging markets with an unstable economy and high inflation. The author believes, that traditional valuation methods are better suited for determining the cost of the project, which is not a multi-phase project and the project that investment value should be determined. According to his professional experience, traditional valuation methods represent a conservative model without forecasting a project performance and use of many parameters, with which an appraiser and / or customer may not agree.

Acknowledgements
Firstly, the author is very thankful to his family and especially to father and his future fiancé, support, encouragement and trust during the Dissertation module and the whole study process. He would also like to thank the College staff for their patience, support and understanding of the difficulties, which the author came across during preparing this work. He would like to thank specially xxx who provided his help during the Valuation and Dissertation modules.
The author is grateful to the group of respondents included seven professionals, mainly Heads of Departments, Associate Directors from Jones Lang LaSalle Russia, DTZ / IMS, Cushman and Wakefield, Knight Frank. The author appreciates the opinions of colleagues, and believes that the interviews with the professionals have made a significant contribution to this work.
Large part of the author’s work would never be done without the help of his colleagues and friends, who brought the author to the real estate business, supported him during the times of uncertainty and helped him during his studies. He thanks them all from the bottom of his heart!
Table of Contents
Abstract    i
Attestation    ii
Acknowledgements    iii
Table of Contents    iv
List of Figures    v
1    Introduction    1
2    Literature Review    3
2.1    Historical Background    3
2.2    Current Situation    4
2.1.1    Primary Market of Land    5
2.1.2    Secondary Market of Land    6
2.3    Royal Institution of Charted Surveyors    7
3    Methodology    9
3.1    Valuation Methodology    9
3.1.1    Income Approach    9
3.1.1.1    Discounted Cash Flow    9
3.1.1.2    Traditional Valuation Methods (British Approach)    10
3.1.2    Comparative Approach    12
3.1.3    Net Assets Method    12
3.2    Chosen Methodology    13
3.2.1    Values Adjustment    13
3.2.2    Control Premium    13
3.2.3    Discount for Low Liquidity    14
3.2.4    Russian Uncertainty    14
4    Data Collection    16
4.1    The Results of Interviews    16
4.2    Market Data    18
4.2.1    A Terrible Track Record    18
2.1.2    A Tough Business    19
5    Analysis & Presentation of Evidence    23
5.1    Discounted Cash Flow Method    23
5.1.1    Why Numbers Are Wrong    23
5.1.2    Why DCF Method Is Misinterpreted    26
5.2    Traditional Valuation Methods    26
6    Recommendations    28
7    Conclusion    30
References    32
Appendices    39
Appendix 1    39
Appendix 2    39
Appendix 3     40
7
List of Figures
Figure 1.    Shareholder’s in Real Estate Companies    19
Figure 2.    Performance of Russian IPO’s    20
Figure 3.    Price of Development Land in Moscow, mln / ha    21
Figure 4.    Cost Structure of Small Office Development in the UK, $ / sq. m    21
Figure 5.    ROE in the Real Estate Sector    22
Figure 6.    Raven Russia Yields and the Cost as % of Build Cost    23
Figure 7.    EPH Yields and the Cost as % of Build Cost    23
Figure 8.    PIK Group DCF Value, $ bln    26

 
1    Introduction
The dissertation is devoted to the study of existing methods of site valuation and analysis of their applicability in market conditions and uncertainty. The theoretical basis of the dissertation was the works of leading Russian and foreign economists in the field of land valuation, DCF modeling and traditional valuation methods, the Land Code, the Town Planning Code, legislative and regulatory documents governing the valuation and urban planning, the results of author’s own research, information analysis of various publications. The real situation of the practice was used to construct the financial model.
The subject of this study is the methodology of development project valuation under risk and uncertainty, traditional valuation methods (British Approach) and the DCF (Discounted Cash Flow) method. Author compares and contrast traditional valuation methods and DCF technique that main principals are to analyse a number of forecasting indicators. Therefore, he concludes that this model is subjective and examines the reasons why DCF is inappropriate valuation technique to use in emerging volatile Moscow and St. Petersburg commercial real estate markets.
The object of this work is a search for adequate valuation methods of site and development projects under risk and uncertainty, in a situation where an expected return is volatile and the proper use of land can not be accurately determined. Realization of this goal led to the following tasks:
• Review of basic properties of the land as a commodity, the shaping trends of the land market in the Russian Federation and the identification of global patterns of development,
• Analysis of the existing methods of land valuation: their advantages and disadvantages in terms of the current level of land market in Russia,
• Development of algorithm analysis of the best and most efficient use of land - as a major step towards the definition of Market Value,
• Analysis of the possibility of using DCF method in the framework of the investment model, taking into account the risk assessment to meet the challenges of land valuation,
• The use of traditional valuation methods (British Approach) to solve the problem of estimating the land under risk and uncertainty.
The dissertation consists of several parts such as Introduction, Literature Review, Methodology, Data Collection, Analysis & Presentation of Evidence, Recommendations, Conclusion, Bibliography and Appendices.
In the chapter of Literature Review, the author investigates the theoretical framework (regulated documents, laws, decrees, professional works, etc.) of valuation of sites and development projects, which begins with the adoption of the Land Code. 
In the chapter of Methodology he focuses on the study of the distinctive characters of the DCF method, the traditional valuation methods (British Approach), comparative approach and the method of net assets value.
In the chapter of Analysis & Presentation of Evidence, the author devoted directly to the task of valuation of development projects under risk and uncertainty. This chapter provides examples of actual valuation practices under uncertainty in the analysis phase and the most effective and the best use of land. IThis chapter provides a detailed DCF scheme of sites valuation with samples and the traditional valuation methods (British Approach) with a sample.
In the chapter of recommendations, the author proves the possibility and expediency for the use of traditional valuation methods. Currently appraisers began to get back for the use of DCF as a more transparent and understandable method, and to abandon traditional methods of property valuation (British Approach). A prerequisite for the use of traditional methods of land valuation is the capitalization rate (all risks yield), which includes all of the risks (implicit yield). Also, traditional methods are based on the fact that all data are taken only on valuation date, without forecasting major parameters.
In conclusion, the author pointed out that the Russian land market is not transparent in order to determine the true Market Value by using DCF method, the traditional valuation methods (static residual) is more applicable, since the market gives no information about the desired level of profitability, the level of sales and purchases. Second, it is only one unclear indicator in the model, while the DCF model has a forecast of much more parameters, such as the Discount Rate, Exit Cap Rate, market forecast, rents, vacancies, etc. From the author's viewpoint the traditional valuation methods of land are more suited to the conditions of uncertainty and opacity of the Russian market, where there is no possibility for an accurate calculation and prediction of performance.





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