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Commercial Property Valuation: Methods and Case Studies

Commercial Property Valuation: Methods and Case Studies

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781119512127
  • Published In: July 2019
  • Format: Hardback , 240 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only

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    A practical guide to the best approaches for commercial real estate value assessment 

    Commercial Property Valuation provides a comprehensive examination of principles and methods of determining the accurate value of commercial assets. This invaluable resource covers all key elements of commercial property valuation, including valuation queries, real estate report structure, market analysis, capitalization and discount rates estimation, and more. This book details the economic characteristics unique to commercial property and illustrates property-specific risk factors and mitigation strategies. Drawing from years of professional and academic experience, the authors provide accurate information on multiple valuation approaches suitable for commercial real estate such as sales comparison, income capitalization and residual land value. Favoring real-world practicality over complex formulas, this book provides a powerful set of tools to assist readers in selecting and applying the best valuation approach to various situations. Actual case studies of office buildings, hotels, high street retails, and residential developments allow readers to understand and apply appropriate valuation methodologies. 

    Commercial property is a major investment class that offers abundant opportunities but poses unique risks. Thorough and inclusive knowledge is essential to success in this complex and competitive sector of real estate. This book provides expert coverage of critical topics allowing readers to:

    • Identify the unique economic characteristics and potential risks of commercial real estate valuation and investment
    • Focus on methods specific to commercial real estate valuation
    • Learn how to select and apply the appropriate valuation method in a variety of scenarios
    • Access sample Excel spreadsheets and ancillary online resources including slides and useful Internet links

    Commercial Property Valuation is an essential resource for investors, appraisers, consultants, accountants, and students in real estate courses. 

  • About the Authors xi

    Foreword xiii
    by Andrew Baum

    Foreword xv
    by Vincent Vinit

    Preface xvii

    Chapter 1 Introduction to Property Valuation 1

    Determining the Valuation Requirement 1

    The Subject of the Valuation 1

    Purpose of the Valuation 2

    Value to Be Estimated 2

    Valuation Date 2

    Definitions of Value 3

    Market Value 3

    Investment Value 5

    Valuation Associations, Codes and Standards 6

    Notes 7

    Chapter 2 Economic Characteristics and Elements of Risks of Properties 9

    Characteristics of Property Investments 10

    Building and Land 10

    Use of Space and Investment Asset 13

    Owners and Users 13

    Business Perspective 14

    Location 15

    Categories of Property Investments 16

    Development Projects 16

    Income-Producing Properties 17

    Trading Operations 17

    Skills in Asset and Investment Management 18

    Economic Classification of Properties 19

    Property Classification Criteria 19

    Macro Categories of Properties 24

    A Simple Definition of Risk 28

    Common Risk Elements in Real Estate Investment 29

    Capital Market 29

    Liquidity 30

    Financial Structure 30

    Regulatory 31

    Location 31

    Intended Use and Type of Properties 32

    Development Projects 33

    Authorisation 33

    Environmental 33

    Construction-Related 34

    Market 34

    Income-Producing Properties 35

    Physical and Technical Features 35

    Management and Market 36

    Rental and Contractual Situation 36

    Notes 37

    Chapter 3 Market Analysis 41

    Economic Analysis 41

    Analysis of the Property Market 41

    Comparative Data and Valuation Method 43

    Characteristics of the Comparative Factors and Information Sources 43

    Notes 45

    Chapter 4 A New Simple Classification of Valuation Methods 47

    Choice of Valuation Method 49

    Depreciated Cost Approach Methods 53

    Introduction 53

    Description 53

    Use, Advantages, and Limitations of the Depreciated Cost Approach 56

    Notes 56

    Chapter 5 Sales Comparison Approach Methods 59

    Approach and Application Criteria 59

    Direct Comparison Approach 60

    Hedonic Pricing Model 63

    Notes 65

    Chapter 6 Income Capitalisation Comparison Approach Methods 67

    Approach and Application Criteria 67

    Direct Capitalisation Approach 69

    The Direct Capitalisation Approach Calculation Algorithm 70

    Profit and Loss Account of an Income-Producing Property 71

    Use, Advantages, and Limitations of the Direct Capitalisation Approach 78

    Application of the Direct Capitalisation Approach 78

    Discounted Cash Flow Approach 81

    Choosing the Time Horizon 82

    Estimating the Cash Flows 83

    Estimating the Terminal Value 83

    Discounting the Cash Flows and Calculating the Asset Value 85

    Use, Advantages, and Limitations of the Discounted Cash Flow Approach 88

    Residual Value Methods 90

    Introduction 90

    Single Period Residual Value Approach 90

    Multiple Periods Residual Value Approach 91

    Notes 94

    Chapter 7 Property Return Rates 97

    Measuring the Return on a Property Investment 97

    Rates and Capital Market 101

    Cap Rate 103

    Definition and Description of the Cap Rate 103

    Going-In and Going-Out Cap Rate 104

    Discount Rate 107

    Definition and Description of the Discount Rate 107

    Consistency Between Discount Rate and Cash Flow 108

    The Components of the Discount Rate 110

    How to Estimate Property Return Rates 113

    Market Extraction 114

    Determining the Discount Rate from the Cap Rate 117

    Build-Up Approach 119

    Analysing the Opinions of Market Players on the Return Expected 122

    Notes 122

    Chapter 8 Structure of the Valuation Report 127

    Executive Summary 128

    Preamble 128

    Description of the Property 128

    Market Analysis 133

    Valuation 134

    Conclusions 134

    Appendices 135

    Notes 135

    Chapter 9 Office Property Appraisal 137

    Description of the Property 137

    Choice of Valuation Method 139

    Market Analysis 139

    Valuation 140

    Choosing the Time Horizon 140

    Estimating the Cash Flows 141

    Determining the Terminal Value 145

    Determining the Discount Rate 146

    Calculating the Market Value of the Property 147

    Notes 151

    Chapter 10 High Street Retail Unit Appraisal 153

    Description of the Property 153

    Choice of Valuation Method 154

    Market Analysis 157

    Estimating the ERV 157

    Estimating the Cap Rate 160

    Estimating Vacancy and Leasing Time 161

    Estimating Refurbishment Costs 161

    Valuation 161

    Notes 163

    Chapter 11 Hotel Appraisal 165

    Description of the Property 165

    Choice of Valuation Method 167

    Market Analysis 168

    Macroeconomic Climate 168

    Supply and Demand Analysis 169

    Forecast of Average Rate and Occupancy 173

    Projection of Income and Expenses 178

    Valuation 185

    Notes 187

    Chapter 12 Development Project Appraisal 189

    Description of the Property 189

    Choice of Valuation Method 190

    Market Analysis 191

    Valuation of the Development Project 192

    Choosing the Time Horizon 192

    Estimating the Cash Flows 194

    Determining the Discount Rate 195

    Calculating the Market Value of the Development Project 197

    Notes 197

    Glossary 199

    Bibliography 205

    Index 209

  • GIACOMO MORRI, PhD, MRICS, is Faculty Deputy and Associate Professor of Practice in Corporate Finance and Real Estate at SDA Bocconi School of Management (Milan, Italy) and a lecturer of Real Estate Finance at Bocconi University (Milan, Italy). He served as a Director of the Master in Real Estate and the Executive Master in Corporate Finance and Banking, and was in charge of real estate executive education. Giacomo is former President and a board member of the European Real Estate Society. He is a freelancing advisor for several real estate companies and asset managers, a non-executive director at UnipolSai Investimenti SGR, and a RICS Registered Valuer. He is also on the advisory board of several real estate funds and a board member of various real estate companies.

    PAOLO BENEDETTO, MRICS, is Advisory & Valuation Director at Agire – IPI Group, an Italian real estate service company. His specialization is in real estate valuations. He is an Academic Fellow of Real Estate Finance at Bocconi University (Milan, Italy) and a Fellow of Corporate Finance and Real Estate at SDA Bocconi School of Management (Milan, Italy). Paolo is a member of the Italian board of the Royal Institution of Chartered Surveyors (RICS) and a RICS Registered Valuer.

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