Mr. Amit Oberoi

15 Pages·2015·1.42 MB·English

by  Aries Christian Gimpaya

VALUATION OF REITS
20th March 2015
Presented by: Amit Oberoi
National Director | Valuation & Advisory Services, and Research
COLLIERS INTERNATIONAL
Any Business Is Inherently Risky
Triggers for Valuation of a REIT or REIT property
Responsibilities of the Appraiser
Valuation Process
Challenges to Valuation
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Triggers for Valuation
REASONS

 Audit / Transparency

@ IPO, Calculation of NAV  Ascertain fairness of
Based on Valuation transaction for related party
transactions

Periodic Reporting -

Annual & Half Yearly  Regulatory Checks

 Value of Assets is not less
Related Party than INR 500 cr.
 > 80% of value of REIT should
Transactions
be invested in Income
Generating Assets
 < 10% of the value of REIT
Purchase or Sale of
should be invested in under-
Property
construction & non-rent
generating assets.
Incase of Any Material Development  > 75% of value of REIT should
that may impact Valuations be rent generating

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Responsibilities of the Appraiser
SEBI Guidelines: Quality Control

 In India we @ Colliers follow RICS & IVS
… ensure that the valuation of the REIT is
valuation standards. The team is certified
impartial, true and fair …
under ISO 9001:2008

… ensure adequate and robust internal
 All appraisers have at least a post
controls to ensure integrity of its valuation graduate degree.
reports.
 Each appraiser/consultant has to
undertake 12 training courses every year
… ensure that it has sufficient key personnel

with adequate experience and qualification
 We have a standard operating procedure
to perform property valuations…
and standardized templates

The valuer(s) and any of its employees …  All reports are vetted by a senior
shall not (i) invest in units of the REIT or in appraiser.
the assets being valued; and (ii) sell the
 We follow the NPS system of
assets or units of REITs held prior to being
measurement of client satisfaction.
appointed as the valuer.
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Responsibilities of the Appraiser
…(contd)
SEBI Guidelines: RICS Standards – Red Book

“As it is fundamental to the integrity of the
… act with independence, objectivity and
valuation process, all members practising
impartiality in performing the valuation …
as valuers must have the appropriate

experience, skill and judgment for the task
The valuer shall not accept remuneration,
in question and must always act in a
in any form, for performing a valuation of professional manner free from any undue
the REIT assets from any persons other influence, bias or conflict of interest.”
than the REIT or its authorized PS 2 Ethics, competency, objectivity &
disclosure
representative.

 Responsibility for the Valuation
… shall not make false, misleading or
 Professional & Ethical Standard
exaggerated claims in order to secure the
 Member Qualification
assignment.  Independence, Objectivity and Conflict
of Interest.
… disclose to the trustee, any pending  Terms of Engagement
 Duty to 3rd Party
business transactions, contracts under
 Disclosures
negotiation and other arrangements with

the manager or any other party whom the
REIT is contacting with …
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Valuation Process
1 Description of Problem
Identification of
Definition of Limiting
property rights Date of value
value conditions
to be valued
2 Subject Property Analysis
Property specific
Highest and Best
Location characteristics
Use
3 Application of Relevant Appraisal Approaches
Market (Direct Cost Income
Comparison)
4 Reconciliation of Value Estimates
Final value estimate
5 Report Preparation
Appraisal report
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Approaches to Value
Market / Sales Cost Approach Income Approach
Comparison Approach (Land + Improvements)
Direct Capitalization
Method
Discounted Cash Flow
Method
Use All Applicable Approaches to Value
Valuation of …
 Ready Income Generating Properties*
 Under Construction Properties

 Ready (non-income generating properties)
 Vacant Land

 Excess FSI
 TDR
 …

* Various types of assets
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Reporting: Best Practices
Report for Valuation of a REIT should,

 Be Absolutely Transparent, so that the Reader can Clearly Understand How
the Valuer has Arrived at the Numbers

 All Variables must be Supported by Data Points and Clear Explanation in-case
of deviations (Since the Product is Income Producing, a DCF model would
normally be used).

 Value Arrived Should be Cross Checked with Sales Data

 All Disclosures Should Clearly be Mentioned in the Report

(Reporting Requirements are MORE Demanding)

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Challenges in Valuations
Lack of Market Transparency
There have been few institutional sales of properties, and even for these there is limited data
available for sale price per sq.ft. or to be able to derive cap rates.

Organized Market Limited to Office Real Estate
There is limited organized market for asset types like healthcare, industrial, research labs,
prisons, etc.; therefore key valuation benchmark (like cap rates) are not available.

Restricted Disclosures
At times REITs do not disclose all material facts to the appraiser (e.g. related party transactions,
access to lease deed, access to legal reports, any encumbrance on the property, etc). The
appraiser should clearly mention these as caveats in the report.

Some Assets are Challenging to Appraise
e.g. TDR – Very volatile asset class, value depends on demand and supply
Regulatory Challenges – Multiple interpretations to law.
Unique Assets – e.g. valuation of a hotel located in cantonment
Restrictive Covenants – e.g. restrictions on sale, leasehold property in an area where all
else is freehold.
…

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Appendix I: Office Real Estate Ready Leased Stock
Market Size (approx) 425 million Year wise supply, absorption & vacancy
60
Delhi NCR
50
Political Capital Market Size
of India 88 MN SF
40
Kolkata
Old administrative Market Size 30
Mumbai capital of India 25 MN SF
Financial Market Size
Capital of India 99 MN SF 20
Bengaluru (Bangalore)
10
Pune
Silicon valley of Market Size
Emerging IT/ITeS Market Size India 123 MN SF
destination 42.5 MN SF
0
2008 2009 2010 2011 2012 2013 2014 F2015 F
Chennai
Automobiles & Market Size
IT/ITeS Hub 47 MN SF
New Supply (In Mln sqft) Absorption (In Mln sqft)
Source: Colliers International (Data for Top 6 Cities of India)
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