Mortgage investment analysis. The concept of mortgage-investment analysis. Approaches to its implementation. Mortgage investment analysis is a type of income approach and is used to evaluate real estate purchased with the participation of a mortgage
The investment and mortgage analysis is based on the idea of the value of property as a combination of the cost of equity capital and borrowed money. In accordance with this, the maximum reasonable price of the property is defined as the sum of the present value of cash flows, including the proceeds from the reversion, attributable to the investor's funds and the amount of the loan or its current balance.
In the investment and mortgage analysis, the investor's opinion is taken into account that he pays not the cost of real estate, but the cost of equity, and the loan is considered as an additional means to complete the transaction and increase equity. The analysis uses two methods (two techniques): the traditional method and the Elwood technique. The traditional method explicitly reflects the logic of investment and mortgage analysis. Elwood's method, reflecting the same logic, uses ratios of return ratios and equity ratios of investment components.
Traditional method. This method takes into account that the investor and the lender expect to receive a return on their invested funds and return them. These interests must be secured by the total income for the entire amount of investments and the sale of assets at the end of the investment project. The amount of required investment is determined as the sum of the present value of the cash flow, consisting of the investor's equity capital and the current debt balance.
The present value of an investor's cash flow consists of the present value of the periodic cash inflows, the increase in the value of equity assets as a result of loan amortization. The value of the current debt balance is equal to the present value of the loan servicing payments for the remaining term, discounted at the interest rate.
The calculation of the cost in the traditional technique is carried out in three stages.
StageI. For the adopted forecast period, a statement of income and expenses is compiled and the cash flow before tax is determined, i.e. to own capital. The stage ends with the determination of the current value of this flow in accordance with the forecast period and the final return on equity Ye expected by the investor.
StageII. The proceeds from the resale of property are determined by subtracting from the resale price the costs of the transaction and the balance of debt at the end of the forecast period. The present value of the proceeds is estimated at the same rate.
StageIII. The current value of equity capital is determined by adding the results of the stages. The cost of equity and the current balance of debt is estimated.
The traditional technique of mortgage-investment analysis allows us to draw certain conclusions regarding the impact of the forecast period on the assessment results. An important factor limiting the holding period from an investor's point of view is the decrease in depreciation (assets) and interest deductions from pre-tax profits over time. In addition, more preferred investment options may emerge (external factors). On the other hand, the current value of the current debt ratio is gradually decreasing, which leads to the effectiveness of financial leverage. Analysis using traditional techniques of options with different holding periods shows the obvious impact of the forecast period on the value of the estimated value. At the same time, the dependence is such that with an increase in the predicted period of ownership, the value of the estimated value decreases, provided that the cost decreases over the forecast periods.
Elwood technique. It is used in investment and mortgage analysis and gives the same results as the traditional technique, since it is based on the same set of initial data and ideas about the relationship between the interests of equity and borrowed capital over the period of development of the investment project. The difference between Elwood's technique lies in the fact that, based on the profitability ratios of equity indicators in the structure of investments, changes in the cost of all capital, it quite clearly shows the mechanism for changing equity over the investment period.
General view of the Elwood formula:
where R 0 - total capitalization ratio
FROM– Ellwood Mortgage Ratio
- equity change in property value
(sff, Y e ) – compensation fund factor at the rate of return on equity
- share change in income for the forecast period
- stabilization factor
Elwood Mortgage Ratio:
C = Ye + p(sff, Ye) – Rm
Where p is the share of the current balance of the loan amortized over the forecast period
Rm is the mortgage constant relative to the current debt balance.
Expression 
in the equation - a stabilizing factor and is used when income is not constant, but changes regularly. Usually, the law of change in income is set (for example, linear, exponential, according to the factor of the accumulation fund), in accordance with which the stabilization coefficient is determined 
according to pre-calculated tables. The value is determined by dividing the income for the year prior to the valuation date by the capitalization ratio, taking into account the stabilization of income. In the future, we will consider the Elwood technique only for constant income.
Let's write the Elwood expression without taking into account the change in the value of real estate with constant income:
This expression is called the basic capitalization ratio, which is equal to the rate of final return on equity, adjusted for the terms of financing and depreciation.
Consider the structure of the total capitalization ratio in the form of Elwood without taking into account changes in the value of property, for which we use the investment group technique for rates of return. This technique weights the rates of return on equity and debt in the respective proportions of the total capital invested:
Yo = m*Ym + (1 – m)*Ye
In order for this expression to become equivalent to the base coefficient r, two more factors must be taken into account. The first is that the investor must periodically deduct from his income to amortize the loan, reducing equity. Therefore, it is necessary to adjust the Yo value in the previous expression by adding a periodically paid share of the total capital at an interest equal to the interest rate on the loan. The expression for this adjustment is the leverage m times the compensation fund factor at the interest rate (sff, Ym). The value (sff, Ym) is equal to the difference between the mortgage constant and the interest rate, i.e. Rm - Ym. So with this amendment:
Yo = m*Ym + (1 - m)*Ye + m*(Rm - Ym)
The second adjusting term must take into account the fact that the investor's equity as a result of the reversion increases by the amount of the part of the loan depreciated during the holding period. To determine this adjustment, multiply the depreciated amount as a share of total original capital by the recovery fund factor at the ultimate rate of return on equity (sales to equity occur at the end of the holding period). Therefore, the second corrective term has the form: mp(sff, Ym), and with a minus sign, since this correction increases the cost.
In this way:
Yo = m*Ym + (1 - m)*Ye + m(Rm - Ym) - mp(sff, Ye)
And after concatenating like members and replacing Yo with r (ignoring the change in property value):
R = Ye – m*(Ye + (p(sff) – Rm))
Thus, we obtain the basic capitalization ratio of the Elwood expression. A consistent transition from the investment group technique through taking into account the necessary adjustments to the Elwood expression shows that this expression really captures all the elements of the transformation of equity and debt combined in invested capital, in particular financial leverage, mortgage loan amortization and equity capital gains resulting from loan amortization.
Elwood's equation expressed in terms of the debt coverage ratio. Financing projects that involve significant risks in relation to obtaining stable income may change the orientation of lenders regarding the criterion that determines the amount of borrowed funds. The lender believes that in this situation it is more expedient to determine the loan amount not on a price basis, but on the basis of the ratio of the investor's annual net income to annual payments on the loan obligation, i.e. the creditor requires guarantees that the value of this ratio (naturally, more than one) will not be less than some minimum value determined by the creditor. This ratio is called the debt coverage ratio:
In this case, the mortgage debt ratio in the Elwood equation should be expressed in terms of the debt coverage ratio DCR:
DCR = NOI/DS = RV/(Rm*Vm) = R/(Rm*m), or
After substituting this expression for m, we get the Elwood equation expressed in terms of the debt coverage ratio:
Ministry of Education and Science of the Russian Federation
Moscow State University of Economics, Statistics and Informatics
Course work
subject: Real estate appraisal
on the topic: "Mortgage and investment analysis in real estate valuation"
Completed by: student Tsakun Anna Aleksandrovna
Groups DNF-404
Checked by: Senior Lecturer of the Department of FKiBD
Slepunin Vladimir Lvovich
Record book number: 01/AOC-093-09
Moscow, 2011.
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Content
Introduction…………………………………………………………………………..3
Chapter 1. The concept of mortgage-investment analysis. Approaches to its implementation…………………………………………………… …………………..8
- Goals and objectives of mortgage and investment analysis… ……………………8
Methods of investment analysis……………………………………………..9
The role of mortgage investment analysis…………………………………….
2.1 Ellwood Mortgage-Investment Technique………………………………... 15
2.2 Investment group method…………………………………………….18
2.3 Direct capitalization method………………………………………………20
Chapter 3 Mortgage programs………………………………………………
3.1 Subjects and types of mortgage loan………………………………………..
3.2 Comparison of Sberbank and VTB……………………………………………….
Conclusion…………………………………………………… ………………...
Bibliography…………………………………………………… ……….
Application…………………………………………………… ………………..
The word "real estate" was formed in Russian from three words: "fixed", "property" ("estate"), "property". Thus, the following features are fixed in the Russian word "real estate": immobility, belonging to someone, belonging to the right of ownership. The concept of "real estate" is inseparable from another concept - "property".
The main goal is:
- a statement of the features of the application of methods of capitalization of income and discounted cash flows in mortgage lending,
- analysis of the terms of financing stipulated in the loan agreement in order to identify the degree of their influence on the results of the assessment.
Real estate appraisal, first of all, involves determining the market value of an asset. However, if the object being valued is financed by the investor's own and borrowed funds, the problem arises of determining the market value of the investor's own capital and the market value of the mortgage loan involved.
Mortgage-investment analysis is a model of the income approach, which should be used to evaluate real estate purchased with a mortgage loan.
It should be noted that the main element or attribute of real estate is land. Due to the high dynamics of prices for all financial objects, as well as for all other markets, as well as the lack of a more or less capable information base on real estate objects, a real real estate market cannot exist without valuation of its objects.
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Real estate appraisal means, first of all, the appraisal of property rights to real estate and the real estate itself. Here it is necessary to separate two concepts - the price and the value of the property.
The market price of a property is the contractual price, the price of a specific transaction for the purchase and sale of a property. The price of a property reflects a fait accompli, a deal.
The value of a property has different forms or manifestations. Let us dwell on the most relevant - the market value of the property.
The market value of a property is the most likely price that can be obtained from the sale of property on the market at the moment.
The market value of a property can be greater than, less than or equal to its market value. In addition, a distinction is made between the cost of replacing a property, the cost of reproducing a property, investment value or investment potential real estate, etc.
Almost all transactions for the purchase of real estate are made with the involvement of mortgage loans, or loans secured by real estate. In such circumstances, the value of real estate is defined as the sum of the mortgage loan, the present value of income from the use of real estate and the proceeds from the resale of real estate.
In general, the assessment of the value of real estate encumbered or acquired with the involvement of a mortgage loan is carried out using a mortgage-investment analysis.
The Mortgage Investment Analysis Technique is a technique for estimating the value of income-generating property (real estate) based on adding the principal amount of a mortgage debt with the discounted present value of future cash receipts and proceeds from the resale of an asset.
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Chapter 1.
The concept of mortgage-investment analysis. Approaches to its implementation
1.1 Goals and objectives of mortgage investment analysis
Mortgage-equity models determine the true value of a property based on the ratio of equity to debt capital. Mortgage-equity analysis, or capital structure analysis, is an analytical tool that can in many cases facilitate the valuation process. It has been theoretically proven that debt capital plays a major role in determining the value of real estate.
Almost all investment transactions with real estate are made with the involvement of mortgage loans. By using mortgage lending, investors gain financial leverage that allows them to increase current returns, capitalize on property appreciation, provide greater asset diversification, and increase deductions for interest and depreciation for tax purposes. Mortgage lenders receive a reasonably guaranteed amount of income secured by the loan. They have the right of first claim on the borrower's operating income and assets in the event of a breach of debt obligations.
Mortgage investment analysis is a residual technique. Equity investors pay the remainder of the initial cost. They receive the balance of net operating income and resale price after
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how all payments to creditors have already been made, both during the current use and after the resale of the object.
The period of real estate ownership can be divided into three stages, at each of which capital investors receive
residual income:
- acquisition of an asset - the investor makes a mandatory cash payment, the amount of which is equal to the balance of the price after deducting the mortgage loan, which turns into debt;
use of property - investors receive residual net income from the use of property after deducting mandatory debt service payments from it;
liquidation - when reselling property, the owner of the capital receives money from the sale price after repaying the balance of the mortgage loan.
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except that instead of the rate of return on borrowed capital, the capitalization rate for borrowed capital was used, which includes the return on investment on borrowed capital. Therefore, the third and fourth components are designed to “equalize the positions” of income on equity in terms of return on investment. The third component - P x M x SFF(YE, n) reflects the increase in equity as a result of loan repayment. It is discounted at the rate of return on equity and subtracted because it represents income from a source other than the annual return on equity. The fourth component - AVO x SFF(YE, n) indicates the provision of capital growth/decrease for the investment period of ownership. It is also discounted at the rate of return on equity. This component is subtracted if capital increases during the holding period, and added if capital decreases. The total rate calculated in this way can be used to capitalize the net operating income into the value of the property. Thus, the interest rate should correspond to that charged by credit institutions with a typical percentage of the loan amount to the value of the property. Loan payments should also reflect typical policies credit institutions. The investment period of ownership should be similar for similar properties. Finally, capital gains or losses must be justified. In addition, the use of a common capitalization rate in mortgage-investment analysis assumes that the income stream is equal in each period or can be reduced to such. To this end, the Ellwood tables contain a "J-factor" that can be used to set the value of the total capitalization rate for various assumptions regarding percentage changes in income and value, on the one hand, and the rate of return on equity, on the other.
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- 1.2 Methods of investment analysis
In accordance with the proposed scheme for conducting investment analysis or analysis of the investment attractiveness of a region or other objects, in our opinion, various economic, mathematical, statistical and other methods should be used. Let us consider the proposed methods and methods in the order of their application for the corporation to analyze the attractiveness of various investment values.
Valuation of investment value.
To determine the value of the acquired block of shares by corporations, as a rule, the following methods are used:
- analysis of discount cash flows;
- comparative analysis of companies;
- comparative analysis of operations;
- analysis of replacement value.
In the case of discount cash flow analysis, in particular, the quality of information on investment value usually plays a critical role as a source of input to ensure the quality of the final estimate.
cost.
In addition to formal factors, the market price is influenced by the following factors:
- the level of competitive tension between groups of bidders during the tender;
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- the structure of the sale process, in particular, the volume of shares purchased, as well as
the possibility of restructuring the acquired company after the acquisition; - the problem of providing financial conditions for the acquisition.
Estimating the acquired investment value is usually considered
from two positions:
- cost as a whole (total cost);
- the cost of the main components (per object cost).
Discounted Fund Flow Estimation ("DFS")
This evaluation procedure is a general methodology used
when evaluating companies. If there is an appropriate quality of information
the method in question is usually the preferred one to use
corporation as a potential buyer.
Let us briefly consider some of the main steps of this algorithm.
Determining the discount rate. Profit,
received by holders of shares and debt obligations, represents the value of the debt obligation, depending on the market value of this obligation, as well as the value of the share, depending on the market value of these shares. The average value determined according to the market value is called the Weighted Average Cost of Capital (WCA).
Projected free cash flows are discounted according to FSC.
Comparative analysis of companies
The assessment of the company must also be carried out by analyzing some indicators of other peer companies that can be compared with the analyzed one. For example, when analyzing the package of an oil company, you can use data from several other oil companies.
Various indicators are selected, for example, the ratio of the value of a peer company to its reserves, as well as market capitalization to reserves
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companies. Next, figures are calculated for total reserves and those to which it has rights (usually after adjusting for small holdings in production associations). The reserves to which the company has rights are calculated on the basis of a commercial (non-voting) shareholding.
Comparing the values of the obtained indicators, it is possible to determine the approximate value of the acquired company.
Comparative analysis of the acquisition operation.
One of the methods for assessing the value of investment value is a comparative analysis of the acquisition transaction. This method is based on the analysis
acquisitions of similar investment properties. The basis for the calculation is determined by the base figure (for example, the book value of the assets and the price of the share), then using proportions, the possible value of the investment value is estimated. The reason for using this method is that it provides an appropriate degree of realism in relation to cases of acquisition of blocks of shares in Russian enterprises by Russian corporations.
Replacement cost analysis.
Another method of investment analysis is the method of assessing the replacement cost of investment value. In particular, for real investments, this method can take into account the cost of building a new investment at today's value of money and apply a discount from that cost to calculate the value of the existing investment value.
Typically, the replacement value discount is 30-40% or higher, adjusted by region. In Russian conditions, a replacement value of 10-20% is usually used due to the need
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significant modernization due to low technological equipment and low solvent demand.
The specifics of the valuation of blocks of shares.
Taking into account the specifics of the Russian market, two more methods can be proposed to significantly bring the initial price of a block of shares closer to market quotes:
1. Estimated capitalization method.
2. Method of groupings.
The essence of the methods is as follows:
If the shares of the acquired company are not listed on the stock market, then the determination of the market value can be carried out using the following initial data:
- financial statements of the analyzed company;
- financial statements of companies in the industry whose shares have a market value (quoted on the market);
- values of market quotations for the shares of these companies.
Reputation analysis (retrospective analysis)
1.3 The role of mortgage investment analysis
Mortgage investment analysis is to determine the value of property as the sum of the cost of own and borrowed capital. This takes into account the investor's opinion that he pays not the cost of real estate, but the cost of capital. The loan is seen as a means of increasing the investment required to complete the transaction. The cost of equity is calculated by discounting the cash flows to the investor
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equity from regular income and from reversion, the cost of borrowing - by discounting debt service payments.
The current value of the property is determined depending on discount rates and cash flow characteristics. That is, the present value depends on the life of the project, the ratio of equity and debt capital, the economic characteristics of the property and the corresponding discount rates.
Consider the general algorithm of mortgage-investment analysis for calculating the value of property, the purchase of which is financed with borrowed capital, and, accordingly, the cash flows of periodic income and from reversion will be distributed between the interests of equity and borrowed capital.
Stage 1. Determining the present value of regular income streams:
– a statement of income and expenses is prepared for the forecast period, while debt service amounts are calculated based on the characteristics of the loan;
- interest rate, full amortization period and repayment terms, loan amount and frequency of payments to repay the loan;
– cash flows of own funds are determined;
- the rate of return on invested capital is calculated;
- based on the calculated rate of return on equity, the present value of regular cash flows before tax is determined.
Stage 2. Determination of the present value of the reversion income minus the unpaid balance of the loan:
– the income from reversion is determined;
– the balance of the debt at the end of the period of ownership of the object is deducted from the income from the reversion;
- according to the rate of return on equity calculated at stage 1, the current value of this cash flow is determined.
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Stage 3. Determining the value of property by summing the current values of the analyzed cash flows.
Steps to apply the net present value rule:
– forecasting cash flows from the project over the entire expected life of ownership, including resale income at the end of this life;
– determination of the opportunity cost of capital for financial market;
- determination of the present value of cash flows from the project by discounting at a rate corresponding to the opportunity cost of capital, and subtracting the amount of initial investment;
- selection of a project with the maximum NPV value from several options.
The greater the NPV, the greater the income the investor receives from investing capital.
Consider the basic rules for making investment decisions.
The project should be invested if the NPV is positive. The considered efficiency criterion (NPV) allows taking into account the change in the value of money over time, depends only on the predicted cash flow and the alternative cost of capital. The net present values of several investment projects are expressed in today's money, which allows them to be correctly compared and added.
The discount rate used in calculating NPV is determined by the opportunity cost of capital, i.e. the profitability of the project is taken into account when investing money with equal risk. In practice, the profitability of a project may be higher than that of a project with alternative risk. Therefore, the project should be invested if the rate of return is higher than the opportunity cost of capital.
The considered rules for making investment decisions may conflict if there are cash flows in more than two periods.
The payback period is the time required for the amount of cash flows from the project to become equal to the amount of the initial investment.
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Chapter 2
Methods for determining the overall capitalization ratio in the framework of mortgage and investment analysis
2.1 Ellwood Mortgage-Investment Technique
The main attraction of the Ellwood technique is that it offers a concise mortgage-investment formula with a known mortgage debt ratio and an estimated percentage change in property value over the forecast period. The traditional technique is more applicable when the dollar amount of the loan and the resale price are given. Ellwood's technique is easier to use when the coefficients are known.
Ellwood's formula for determining the capitalization ratio is as follows:
k=Y-m*C-d*(SFF;Y)/1+?*J, (1)
where k- the total rate of return for capitalization of net operating income into value for a given expected change in value over the forecast period;
Y- rate of return on equity;
m- mortgage debt ratio (the share of the loan in the total value of the property);
C- Ellwood mortgage ratio;
d- change in property value for the forecast period:
(SFF;Y)- compensation fund factor at the rate of return on equity for the forecast period;
?
- change in income;
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J- coefficient of stabilization of income. The J factor is always positive, so if income changes positively, the total capitalization ratio will be adjusted downward. With constant income, the denominator of the general formula will be equal to 1, then the total capitalization ratio will be equal to: R \u003d Y - m * C - d * (SFF; Y),(2)
The Ellwood Mortgage Ratio is calculated using the formula:
C \u003d Y + P * (SFF; Y) - f,(3)
where C- Ellwood mortgage ratio;
Y- rate of return on equity;
P- part of the current balance of the loan, which will be paid for the forecast period;
(SFF;Y)- compensation fund factor at the rate of return on equity for the forecast period;
f- the annual mortgage constant, calculated on the basis of annual payments and the current (not initial) debt balance.
Part of the current balance of the loan that will be paid out for the forecast period - the loan repayment percentage is defined as the ratio of the recovery fund ratio for the total term of the loan to the coefficient of the compensation fund for the billing period:
P=[ i / (1+i)^t-1] / [ i / (1+i)^T-1],
(4)
where P- percentage of loan repayment;
i- interest rate on the loan;
t- full loan amortization period;
T
The compensation fund factor is calculated using the formula:
(SFF;Y)=Y/(1+Y)^T-1,(5)
where Y- rate of return on equity;
T- the period of ownership of the property.
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The annual mortgage constant can be calculated on an annuity basis, as a contribution to the depreciation of the unit:
, (6)
where f- annual mortgage constant;
i- interest rate on the loan per year;
t- the full amortization period of the loan.
The Ellwood technique can be used both in the case of obtaining new financing, and when the buyer accepts an existing debt.
The Ellwood technique requires the use of the same assumptions as the traditional mortgage-investment technique and is similarly defined by those assumptions. The latter includes certain
terms of financing, the resale price or estimated change in value, and the forecast period.
In the Ellwood technique, the most important is the C-factor. It is the result of the synthesis of other variables. Users of this method of mortgage investment analysis should pay great attention to the choice of assumptions, since the valuation is completely determined by the latter.
etc.................
Mortgage investment analysis is based on the idea of the value of property as a combination of the cost of equity capital and borrowed funds. Accordingly, the maximum reasonable property price is defined as the sum of the present value of cash flows, including reversion proceeds, attributable to the investor's funds and the amount of the loan or its current balance.
Mortgage investment analysis takes into account the investor's opinion that he pays not the cost of real estate, but the cost of equity, and the loan is considered as an additional means to complete the transaction and increase equity. The analysis uses two methods (two techniques): the traditional method and the Ellwood technique. The traditional method explicitly reflects the logic of mortgage investment analysis. Ellwood's method, reflecting the same logic, uses ratios of return ratios and equity ratios of investment components.
Traditional method.
The calculation of the value of a property in traditional technology is based on the following equality.
V = Ve + Vm, (4.22.)
Where V is the value of the property;
V e - the current value of equity capital invested in the property;
V m - the current value of the borrowed capital invested in the property.
The present value of equity is calculated using the discounted cash flow method. The current value of borrowed capital is equal to the amount of the loan.
An algebraic expression for the value of a property is written in the same three-stage logical sequence:
where V is the value of the property;
V m is the current value of the borrowed capital invested in the property (loan amount).
СFj - net operating income;
РMTj - annual debt service;
V term - real estate resale price (reversion) after n years;
MP n -- debt balance at the end of term n, which is outstanding at the end of the forecast period.
Ellwood technique. It is used in mortgage and investment analysis and gives the same results as the traditional technique, since it is based on the same set of initial data and ideas about the relationship between the interests of equity and borrowed capital over the period of development of the investment project. The difference between the Ellwood technique lies in the fact that it allows you to analyze the property in relation to its price based on the profitability ratios of equity indicators in the investment structure, changes in the value of all capital and quite clearly shows the mechanism for changing equity over the investment period.
Ellwood's formula looks like this:
Ro = r e, - M _ C - DI v _ sff(r e, n), (4.24.)
Where Ro is the overall capitalization ratio;
M - mortgage debt ratio (the share of the loan in the total amount of invested capital);
C -- Ellwood's mortgage ratio;
DI v - the rate of increase in the value of real estate through n years.
In the event of a decrease in the value of a property, the rate of increase in the value of property through n years (DI v) can be expressed through the share of cost reduction (dep) DI v = - dep.
If the value of the property is projected to increase through n years, the growth rate of real estate value through n years (DI v) can be expressed in terms of the cost increase share (app) DI v = app.
If the value of the property, according to forecasts, will not change in n years, then the growth rate of real estate value through n years DI v = 0.
If the change in the value of the property is not predicted, then the formula is:
R o \u003d r e - M _ C (4.25.)
The Ellwood Mortgage Ratio is calculated using the formula:
C \u003d r e + p_ sff (r e, n) - R m , (4.26.)
where C is the Ellwood mortgage ratio;
r e -- rate of return on equity;
R-- the share of the loan amortized over the forecast period (the share of the loan that will be repaid over the forecast period),
sff(r e, n) -- compensation fund factor at the rate of return on equity;
Rm -- mortgage constant.
Mortgage investment analysis
Mortgage investment analysis (MIA) is used in real estate appraisal. Real estate valuation - the process of determining the monetary value of real estate There are three main approaches to valuation: Costly Market Income RIA is mainly used within the income approach. The income approach assumes that the value of real estate is determined by the income that the owner will receive in the future (rent, resale price). Thus, to determine the value of real estate, it is necessary to convert future cash receipts into its current value.
Since real estate on the market very often turns out to be burdened with a mortgage loan, part of its value is the property of the lender, and part is the seller's own capital. The purpose of investment and mortgage analysis is to determine the price of real estate, taking into account the borrowed funds
Mortgage investment analysis is a residual technique: when acquiring an asset, the investor makes a mandatory cash payment, the amount of which is equal to the residual price after deducting the mortgage loan, which turns into debt; when using property, investors receive residual net income from the use of property after deducting mandatory debt service payments from it; upon liquidation (upon resale) of property, the owner of the capital receives money from the sale price after repayment of the balance on the mortgage loan.
Techniques of mortgage-investment analysis: 1) Traditional - the total value of the property is equal to the sum real value equity interest and the present value of debt capital interest. 2) Models based on capitalization of income from the use of property: Ellwood method Investment group method Method using debt coverage ratio, etc.
Conventional Technique Principle: Both investors and creditors receive estimated returns. The combined present value of the income of lenders and investors is the price that must be paid for the property: Price = Cost of Equity + Mortgage Loan
The cost of equity is defined as the sum of two elements: cash receipts and resale proceeds. Both elements are discounted at the appropriate rate of return: Cost of Equity = = PVAF * (PMT) + PVF * (PS) rate of return on equity, PS - resale proceeds
To value real estate, add the current mortgage balance to the cost of equity. The mortgage balance is equal to the present value of the required debt service payments, discounted at the mortgage's nominal interest rate. The general formula for assessing the value of a property is: V = PVAF * (CF) + PVF * (PS) + MP where V is the value of the property (original), MP is the current mortgage balance.
Stages of traditional technique Stage 1. Estimation of the present value of annual cash receipts. A. Estimate of Annual Net Operating Income (NOI) Calculate: 1. Potential gross income (revenue at 100% property utilization) 2. Adjustment for underutilization and collection losses. 3. Other income 4. Operating expenses (fixed and variable) 5. Net operating income - NOI (1.A.1 - 1.A.2 + 1.A.3 - 1.A.4)
Step 2. Estimating the present value of the resale proceeds at the end of the forecast period. A. Resale price. 1. Initial value of the property. 2. Growth in property value per year (d). 3. Resale price (PS) PS = P * (1 + d) ^N where P is the original cost of the property; d - growth (decrease) in the value of property for the year; N - the period of ownership of the property. B. Transaction costs.
E. Estimate of expected resale proceeds (present value 2.D) 1. Reversion present value factor (PVF). 2. Present value of proceeds from resale (2.D * 2.D.1). Stage 3. Assessment of the current value of the property. A. Estimated cost of own capital (1.D.4 + 2.D.2). B. Estimated value of property (3.A + 1.B.1).
Models based on income capitalization Direct capitalization method The value of real estate is calculated according to the formula: V = NOI/Ro where V is the market value of real estate; NOI - expected net operating annual income Ro - capitalization rate The capitalization rate includes the rate of return on capital (invested funds, or initial investment) and the rate of return, which takes into account the recovery of the initially invested funds.
Methods for calculating the capitalization rate Ellwood's mortgage-investment technique Ellwood's formula for determining the capitalization ratio at constant income: R = Y - m * C - d * (SFF;Y) Y - rate of return on equity; m - mortgage debt ratio (the share of the loan in the total value of the property); C - Ellwood's mortgage ratio; d - change in property value over the forecast period (SFF;Y) - factor of the recovery fund at the rate of return on equity for the forecast period
The Ellwood Mortgage Ratio is calculated using the formula: C = Y + P * (SFF;Y) – f where C is the Ellwood Mortgage Ratio; Y - rate of return on equity; P - part of the current balance of the loan, which will be paid for the forecast period; (SFF;Y) - compensation fund factor at the rate of return on equity for the forecast period; f is the annual mortgage constant, calculated on the basis of annual payments and the current (not original) debt balance.
Investment group method. Here, when calculating the capitalization rate, it is taken into account what part of the redemption capital falls on a mortgage loan and what part - on equity Ro = m Rm + (1 - m) Re m is the share of borrowed funds Rm is the cost of borrowed funds Re is the cost of equity Ro – capitalization rate for property
Debt Coverage Ratio Method (DCR) The debt coverage ratio is the ratio of annual debt service payments DS calculated from the terms of a self-absorbing loan to net operating annual income NOI: DCR = DS/NOI where DS is the annual debt service payment.
The capitalization rate is calculated by the formula: Ro = m Rm DCR, where m = Vm/V, Vm is the amount of borrowed funds; V - the cost of the object (the entire amount of investments); Rm = DS/Vm, is the mortgage constant, or capitalization rate for borrowed funds. The parameters used in this method are public banking information (easily accessible). This method is not the main one, but rather is used as a corrective
Features of the mortgage of land plots
What land plots can be mortgaged: Land plots not excluded from circulation and not limited in circulation (such as nature conservation areas, lands occupied by military facilities, etc. - see the land code) land plot(within the term of the land lease agreement with the consent of the land owner)
Which land plots cannot be mortgaged: Land plots that are in state or municipal ownership, with the exception of land plots intended for housing construction or for integrated development for the purpose of housing construction and transferred as security for the repayment of a loan granted for the development of these land plots through the construction of engineering infrastructure facilities. Part of a land plot, the area of which is less than the minimum size established for lands of various purpose and permitted use. Share in the right to a land plot that is in common shared or joint ownership
When a land plot is mortgaged, the right of pledge also extends to the pledgor’s building or structure located or under construction on the land plot (unless otherwise provided by the agreement). or construction and acquires the right of limited use (servitude) of the land plot Exception: land from the composition of agricultural purposes
Lending for the purchase of a land plot is a rather risky operation for a bank: There is uncertainty with the liquidity of a land plot: on average, it takes more time to sell a land plot than to sell an apartment; the amounts of transactions with land plots often differ significantly from the offer prices. with a small market capacity Т.о. the bank tightens the terms of the loan: raises the interest rate and / or down payment
Mortgage lending risks
Mortgage risks can be caused by different reasons: Economic Inflation Currency Tax Political Some of the risks relate exclusively to either the lender or the borrower, but many risks are joint and several. Main lender risks: credit risk risk interest rate liquidity risk.
Credit Risk Management credit risk on the part of the bank: - control over the quality of loans provided; - distribution and monitoring of loans by risk groups in accordance with the requirements of the Central Bank of the Russian Federation and the bank's internal instructions; - creation of reserve funds for possible losses on loans; - timely identification of problem loans and a developed action plan for working with them; - development of programs for the return of loans. To reduce the risk of non-payment, various restrictions are applied (the ratio of the monthly payment of the borrower to the monthly family income, the ratio of the loan amount to the market value of the collateral)
Interest rate risk A change in the market interest rate is usually a consequence of changes in the inflation rate. This risk takes place at a floating interest rate. For the lender, this risk consists in lowering the rate, which leads to a decrease in the profitability of mortgage lending operations. For the borrower, there is only the risk of an increase in the interest rate, in which there is an increase in periodic debt service payments.
If the loan rate is fixed, then: If inflation rises (increase in market rates): The bank may not be able to cover its costs of issuing a loan, and this may also lead to an imbalance in assets and liabilities The borrower does not risk anything. He will be in a better position than a new client. With a decrease in market interest rates: For the lender, the likelihood of early repayment of the loan by the borrower increases. The borrower does not risk anything. He can take out a new, cheaper loan secured by the same real estate while simultaneously paying off the balance of the old debt at his own expense.
Liquidity risk This type of risk arises when, upon the maturity of the bank's obligations under passive operations(deposits), he - due to the imbalance of assets and liabilities - does not have enough funds for this. This is due to the fact that the resource base of mortgage loans is formed largely by attracting short-term loans and deposits. Liquidity risk is only the risk of the lender and is not directly related to the borrower.
Borrower's risks The main borrower's risk is foreclosure of mortgaged real estate. According to the law, if the borrower systematically violates the deadline for making payments (more than three times within 12 months), the bank will foreclose on the collateral. However, if there are problems with paying the loan, negotiations with the creditor are acceptable, as a result of which he can make concessions, having considered the reasons for the client's insolvency.
Borrower's risks Disability risk This risk transforms: for the lender - into a credit risk for the borrower - into the risk of losing your home Property risks: the risk of damage to property the risk of loss of title to the collateral. The risk of losing the title of ownership occurs when, after the completion of the purchase and sale transaction, it becomes known that there are reasonable claims to the mortgaged property from third parties.
Change in housing prices during the credit period. The borrower does not risk anything. The lender bears the risk of a sharp drop in prices: in a crisis in the real estate market, there may be a risk of changes in the value of collateral. Way to mitigate the risk: requiring a significant down payment of the borrower when buying a home using a mortgage (in Russian practice, 30-50% of the cost of the purchased housing).
Insurance of the most probable risks On the market mortgage lending It has become common practice to insure three main risks: the life and health of the borrower the risk of loss or damage to the collateral the risk of loss or restriction of ownership of the collateral (title insurance) Mortgage insurance costs are borne by the borrower, and they average about 1.5% of the loan value.
Financial management is based on the following concepts: taking into account the time factor and the time value of cash resources, cash flows, taking into account entrepreneurial and financial risk when calculating expected income, the price of capital, an efficient market, etc. Making a decision on investing in real estate is associated with various factors: financial condition enterprise and the feasibility of investment, assessment of future income from the implementation of the project, the multiplicity of available projects, limited financial resources various sources of funding, etc.
Making decisions on capital investment, in particular, on the acquisition of real estate, land is one of the areas of financial management. Features of investing in real estate and the methods used for valuing real estate as an asset for investment are related to the characteristics of the property itself. real estate object, risks of investing in real estate, tools for investing in real estate.
Making an investment decision is based on the use of various formalized and non-formalized methods. Market conditions for development and implementation investment projects make fundamental changes in the calculation of efficiency, in the assessment methodology. The methodology for evaluating the effectiveness of investments in real estate is based on the developments of domestic specialists, which, in turn, is based on the methodology for evaluating the effectiveness of UNIDO investment projects (United Nations Organization for industrial development), which is widely used in world practice.
Methodological recommendations for evaluating the effectiveness contain a system of indicators, criteria and methods for evaluating the effectiveness of investment projects in the process of their development and implementation, used at various levels of management.
Modeling of product, resource and cash flows;
Accounting for the results of market analysis, the financial condition of the enterprise, the degree of trust in project managers, the impact of the project on environment;
Determining the effect by comparing future investments and future cash flows while meeting the required rate of return on capital;
Bringing upcoming expenses and incomes at different times to the conditions of their commensurability in terms of economic value in the initial period;
Accounting for inflation, delays in payments and other factors affecting the value of the funds used;
taking into account the uncertainty and risks associated with the implementation of the project.
The main task in modeling the investment process, in order to evaluate its effectiveness, is to describe the flow of income that should be expected during its implementation.
During the implementation of the project, three main activities:
Operating (production);
Investment;
Financial.
The cash inflow from production activities is the difference between the proceeds from the sale of products (services) without value added tax and the costs of producing these products, excluding depreciation. Depreciation deductions are accounting costs, calculated according to established depreciation rates and, when determining profit, are included in costs. The actual accrued amount of depreciation remains on the account of the enterprise, is an internal source of financing. Therefore, the cash flow from production activities includes net income and depreciation.
Cash flow from investment activity includes proceeds from the sale of an entity's assets less payments for newly acquired assets. The cost of acquiring assets in future periods of activity should be calculated taking into account inflation for fixed assets by their types and for intangible assets. Cash flow from financial activities takes into account the contributions of the owners of the enterprise, equity capital, long-term and short-term loans, interest on deposits less amounts to repay loans and dividends.
The amount of the cash flow of each of the activities in the implementation of the investment process will be the balance of liquidation funds in the corresponding period. In this case, the total cash flow at the end of the settlement period will be equal to the sum of the cash flow of the previous period with the balance of liquidation funds of the current period of time.
An enterprise cannot operate without capital. Sufficient can be considered such amount of own and attracted (borrowed) capital, in which the total cash flow in all periods of the enterprise will be positive. The presence of a negative value in any of the time periods means that the company is not able to cover its costs.
Thus, a necessary criterion for the adoption of an investment project is a positive balance of accumulated real money in any time interval where the enterprise incurs costs or receives income. A negative balance indicates the need to attract additional own or borrowed funds.
Concept " investment project"involves an event, an activity to achieve a specific goal (results), as well as a system of organizational and settlement and financial documents for the implementation of this activity.
Investment project- this is both a technical measure (improvement of technology and the technological process, modernization of the facility, organizational and technical measures to improve production, management decisions) and the movement of money (investment today and income in the future).
The analysis of the attractiveness of investment projects is based on the assessment and comparison of the volume of proposed investments (IC) and future cash receipts (S).
Because cash have a temporary value, it is necessary to solve the problem of comparability of cash flow elements. The problem of comparability can be treated in different ways, depending on the existing objective and subjective conditions: the size of investments and incomes, the inflation rate, the forecasting horizon, the skill level of the analyst, and the purpose of the analysis.
The methods used in assessing the attractiveness of investment activities can be divided into two groups: based on discounted estimates, i.e. taking into account the time factor, and on accounting estimates.
The investment process is an object of quantitative financial analysis, in which the investment project is considered as a cash flow. From a financial point of view, the investment process combines two opposite processes - the creation of a production or other facility for which certain funds are spent (IC) and the consistent receipt of income (S).
Both of these processes proceed sequentially or in parallel. Return on investment can begin before the completion of the investment process. The time factor, the distribution of expenses IC and income S over time play a greater role than the size of the amounts, especially in long-term operations and in inflationary conditions.
The duration of the calculation period or the calculation horizon corresponds to the duration of the creation, operation of the facility or the achievement of the specified profit characteristics, or other requirements of the investor.
It is recommended to compare various investment projects and choose the best one using the following indicators:
NPV - net present value as the difference between the present flows of income and costs;
PI - profitability index as the ratio of the reduced flow of income and costs;
IRR - rate of return or internal rate of return, which is understood as the estimated rate of return at which NPV=0;
CC is the price of capital;
PP - payback period, an indicator that characterizes the duration of the period during which the amount of net income given is equal to the amount of investment;
ARR - investment efficiency ratio, as the ratio of book profit to average investment.
