For an independent market valuation of machinery and equipment, as for real estate valuation, the same approaches are used 119,26,37,83]: comparative. costly, profitable, but the methods differ from those. used in the evaluation of objects with a state share of property. There is a specificity in the use of these methods also in comparison with real estate valuation.
In contrast to real estate, for which the income method is the most appropriate, in the course of valuation of machinery and equipment, the first two approaches are more important and provide a greater level of reasonableness in determining the market price. The income approach for evaluating both new and worn-out machinery and equipment requires taking into account too many random factors due to the wide variety of possible directions for the best use of the asset being evaluated, the future conditions for its operation, the level of obsolescence, and so on. The main problems in using any approach to property valuation usually arise from the lack of reliable and unambiguous information. Each method of these approaches has its own requirements for information support and its own area of the most effective application, then machines and equipment are no exception.
Thus, the income approach, and in particular the method of capitalization of income, as it is quite effective in determining the price of an enterprise as a whole or real estate, in valuing machinery and equipment, is suitable only for "system valuation" (that is, valuation of a system of machines that perform a complete cycle of manufacturing products), therefore, it requires the determination of the corresponding flow of income and expenses, which are practically impossible to determine for a separate operation (since it is impossible to take into account the conditions of the future specific workplace for the sale of the object). But for a full cycle of manufacturing products, a line or link for the complete processing of raw materials can be carried out, this is an acceptable method for determining the cost.
The comparative approach in evaluating machinery and equipment, as the most universal tool, provides the ability to evaluate any partial element of the carrier, including: a separate piece of equipment, their system or complex on the basis of a complete production cycle, or the entire fleet of enterprise equipment as a whole, especially if the enterprise is small. Such methods require the definition of analogues, but even if there are no complete analogues, a system of corrections can be applied and the estimate will be quite real. The study of the dynamics of supply prices or sales statistics in determining the cost of machinery and equipment in the relevant market in Ukraine can currently provide the formation of an information base, and that is why the comparative method is the main one in the evaluation of machinery and equipment.
A comparative approach based on the principle of substitution or substitution, according to which the buyer (investor) will not pay more for the property being valued than it costs to replace it, that is, the acquisition of a similar new object on an open, free and competitive market. This also applies to an object that was in use, taking into account corrections for its physical and functional deterioration and economic aging. The practical application of the relevant methods is possible in the presence of an active, efficiently functioning market and systematized information about its general condition and statistics of transactions for the sale of movable property.
The main problems of the comparative approach are related to the observance of the principles of using the necessary information: completeness, reliability, relevance, compliance with the object being evaluated. Obtaining the necessary information on the specified conditions requires the creation of databases with the ability to automatically select analogues similar to the objects being evaluated, taking into account the degree of discrepancy between the composition and numerical values of the main indicators of analogues and the objects being evaluated, with regular deletion of obsolete and addition of new data.
The cost approach to valuation takes into account the psychological characteristics of the buyer, based on the perception of consumer value as a product of social labor. According to this view, despite the differences in quality, with all the existing differences, market participants correlate cost and price with production and sales costs. Therefore, when using the cost approach, the estimated value is determined by direct or indirect calculation of the entire set of costs necessary for the production (reproduction) of the relevant object. It should be noted that according to this practice, sometimes sellers are guided by the book value, when determining which the market price of an object adds the cost of its delivery, installation (mounting) at the place of use, foundation, adjustment, related investments for supplying energy, ventilation, etc.
For an integral object or real estate, this is justified, but with regard to machinery and equipment, and in our opinion, this cannot be done if the equipment is sold "in bulk". The buyer does not need either the foundation or the production infrastructure at the old site, so he only buys machinery and equipment. He will add all the indicated expenses when putting this property on the balance sheet of his own enterprise. Evaluation of moving objects with all associated costs for a fixed installation only makes sense if they are purchased together with real estate and will be operated in the same place, in the same or similar technological process. But this is already a systematic assessment, according to which not only the cost of each individual element of the carrier will be taken into account, but the full cost of the complex of machines and equipment that performs the completed technological processing of the product, then the income method is more suitable for such an assessment.
This approach is based on methods widely used in world practice and is recommended for use by National Valuation Standards No. 1, 2, 3. In its implementation, focusing on cost also means taking into account average income in accordance with the level of profitability characteristic of this group of products.
The main drawback of the cost approach is the lack of consideration of the real utility of the object for a specific buyer, since it operates on the abstract utility of a given type of product in general at a given level of wear. That is why, in the course of establishing the terms of the sale and purchase agreement, the preliminary assessment established by this method is often adjusted taking into account the interest in the implementation of both parties.
There are options for a mixed approach, according to which either the residual method for equipment can be applied by analogy with a similar method for real estate, or methods for constructing statistical pricing models that express the dependence of the price of an object on the composition and values of its technical characteristics. Models of this kind can be multifactorial or take into account the main parameter, be built as a static or dynamic model, but with any construction, they must reflect objectively existing dependencies and determine the expected price for a given set of technical characteristics, for a given market situation and under the terms of a specific contract. The influence of market factors can be taken into account by introducing correction factors into the model.
These methods contain elements of a comparative approach, since the valuation obtained in this way can be considered as the market value of a generalized (averaged) analogue of the object being valued. Elements of the cost approach are manifested as taking into account the dependence between the initial parameters and the costs of their creation, in particular, according to the method of specific indicators, which expresses a stable functional dependence of the price on a specific parameter. The initial approach is implemented by the fact that the output characteristics of the evaluated object just provide the desired result according to the average assessment of the level of implementation of the best use principle.
Due to the fact that each assessment approach and method has not only advantages, but also disadvantages, in order to ensure greater validity and accuracy of the assessment, it is generally recommended to use several methods simultaneously, followed by statistical processing of the results obtained by different approaches and methods.
Such recommendations are based on the notion that theoretically the result of the valuation should be one - the market value, since all the applied methods in all their elements were based on market information. From our point of view, even theoretically, given the probability of error in determining each component of the calculation algorithms, this is impossible. According to the same source, in practical calculations, the price obtained by different methods is almost always different, and the differences are usually significant. To harmonize the results, it is recommended to use a weighted average assessment, the task of assessment intervals, the choice of one method that is most adequate to the conditions and the object of assessment. We believe that the method should still be the same, and the complexity of the issue lies in the fact that it takes into account both the availability of information and its reliability, and the essential features of the object of assessment and the conditions for its use better than any other method.
Approaches to valuation in one or another composition can be applied to evaluate any classes, groups and types of machinery and equipment, however, sometimes it is necessary to take into account the specifics of its specific types, first of all, this concerns unique machines of high manufacturing cost, for which valuation by breakdown is possible. into individual components and assemblies. This also applies to systems and complexes of machines and equipment, which can be considered as a whole and evaluated by the original method or divided into separate machines, vehicles, units, loaders, and evaluated separately using the cost approach.
The comparative approach is most consistent with the requirements for estimating the market value of machines and equipment of mass and mass production, which were already part of the fixed assets of the enterprise (i.e. objects of assessment in the secondary market). Comparisons are usually made relative to recent (less than a year old) sales of identical or similar properties. For a year or more comparison, the sale already requires adjustments for inflation. The main comparison parameter is the price, so you need to take into account not only its size by analogy, but also the conditions under which it was set. There are the following types of market prices according to the stages of formation of the price of a particular transaction:
Publicly available reference prices published in special publications (price guides, catalogs), newspapers and magazines, newsletters, are formed on the basis of data from manufacturers and wholesale intermediaries and rarely depend on the terms of payment and delivery. They are informational in nature for buyers, creating a primary demand environment.
Offer prices (manufacturers or intermediaries) for buyers of a certain direction are published in price lists, company and exhibition catalogs at specialized "trade shows", and are differentiated in terms of delivery (composition of the package, conditions of insurance, delivery, etc.) and payment (discounts on the size of the batch, payment after the fact, or subscription, delivery on credit, full or partial barter, settlement currency). After discussing the conditions, the prices of offers can be changed.
The prices of actual transactions for specific buyers in internal trading are the most reliable basis for estimating the value of machinery and equipment using a market comparison method, if such information can be verified. Such prices may take into account not only general conditions, but also those relating, for example, to permanent partners, special production of products, urgency, etc. However, they are rarely published and may contain elements of targeted misinformation.
In addition to analyzing the prices of specific producers and wholesale intermediaries, it is also necessary to consider generalized price market information, such as:
Exchange prices, which reflect the price situation of constantly operating markets for mass, qualitatively homogeneous goods (in our case, commercial and industrial exchanges, the range of which includes machinery and equipment), are formed behind a high level of supply and demand competition. Exchange prices reflect the level of real transactions, are published in stock exchange bulletins of the domestic market, prices of international exchanges are published in international economic publications of the UN, the International Monetary Fund, countries of a certain region, and can serve as the basis for a comparative approach to setting prices for goods that have no analogues in the domestic market .
Bidding or tender prices are formed with the participation of a limited number of sellers and one buyer, announces a tender for a sufficiently large batch of machinery and equipment, and chooses the most favorable one from several proposals in terms of conditions, including price. Thus, the formation of prices based on the results of auctions or tenders takes place in conditions of a high level of supply competition, therefore, tender prices are usually lower than the prices of similar products sold on exchanges or under ordinary commercial contracts, which is compensated by the volume of supply.
Import-export prices are formed as a result of the analysis of world prices and negotiations of participants on the basis of not only national legislation, but also general international and bilateral agreements of states, this should be taken into account when creating a database, since such prices may be based not so much on economic than on political principles, distorting the real market price of the objects of assessment when compared.
World prices for machinery and equipment are formed according to the prices of leading firms - manufacturers or suppliers of these products. With the exception of computer technology, automotive technology and agricultural machinery, information on the prices of international trade in machinery and equipment is practically non-existent. Information about world prices, although poorly systematized and incomplete, can be obtained by searching through the "Internet".
Estimates of any asset: comparative (direct market comparison approach), profitable (income approach) and costly (cost approach) (see Diagram No. 1).
Diagram #1. Approaches to assessing the value of the company.
In Russia, valuation activities are regulated by the Law on Valuation Activities and the Federal Valuation Standards (FSO).
In each approach there are evaluation methods. So the income approach is based on 2 methods: the capitalization method and the discounted cash flow method. The comparative approach consists of 3 methods: the capital market method, the transaction method and the industry coefficient method. The cost approach relies on 2 methods: the net asset method and the salvage value method.
income approach.
Income approach - a set of methods for estimating the value of the object of assessment, based on the determination of expected income from the use of the object of assessment (clause 13 of the FSO No. 1).
In the income approach, the value of a company is determined on the basis of expected future income and discounted to the current value that the company being valued can bring.
The present value theory was first formulated by Martin de Azpilcueta, a representative of the Salamanca school, and is one of the key principles of modern financial theory.
The discounted dividend model is fundamental to the discounted cash flow model. The discounted dividend model was first proposed by John Williams after the US crisis of the 1930s.
The DDM formula looks like this:
Where
Price - share price
Div - dividends
R - discount rate
g - dividend growth rate
However, dividend payments are currently very rarely used to measure the fair value of equity. Why? Because if you use dividend payouts to estimate the fair value of equity, almost all stocks in the stock markets around the world will appear overpriced to you for very simple reasons:
Thus, the DDM model is now more used to estimate the fundamental value of a company's preferred shares.
Stephen Ryan, Robert Hertz and others in their article say that the DCF model has become the most common, as it has a direct connection with the theory of Modeliani and Miller, since free cash flow is a cash flow that is available to all holders of the capital of the company, as holders of debts and equity holders. Thus, with the help of DCF, both the company and the share capital can be valued. Next, we will show what the difference is.
The formula of the DCF model is identical to formula #2, the only thing is that free cash flow is used instead of dividends.
Where
FCF is free cash flow.
Since we have moved to the DCF model, let's take a closer look at the concept of cash flow. In our opinion, the most interesting classification of cash flows for evaluation purposes is given by A. Damodaran.
Damodaran distinguishes 2 types of free cash flows that must be discounted to determine the value of the company:
In order to move on, we already need to show the difference in the value of the company and the cost of equity capital. The company operates on invested capital, and invested capital may include both equity capital and various proportions of equity and debt capital. Thus, using FCFF, we determine the fundamental value of invested capital. In the literature in English, you can find the concept of Enterprise value or the abbreviation EV. That is, the value of the company, taking into account borrowed capital.
Formulas No. 4, No. 5 and No. 6 present free cash flow calculations.
Where EBIT is earnings before interest and income tax;
DA - depreciation;
Investments - investments.
Sometimes in the literature you can find another formula for FCFF, for example, James English uses formula #5, which is identical to formula #4.
Where
CFO - cash flow from operating activities (cash provided by operating activities);
Interest expense – interest expenses;
T is the income tax rate;
CFI - cash flow from investment activities (cash provided by investing activities).
Where
Net income - net profit;
DA - depreciation;
∆WCR - changes in required working capital;
Investments - investments;
Net borrowing is the difference between received and repaid loans/loans
Formula #7 shows how you can get the cost of equity from the value of the company.
Where
EV is the value of the company;
Debt - debts;
Cash - cash equivalents and short-term investments.
It turns out that there are 2 types of valuation based on DCF cash flows depending on the cash flows. In formula No. 8, the company's valuation model, taking into account debts, and in formula No. 9, the equity valuation model. To assess the fundamental value of a company or equity, you can use both formula No. 8 and formula No. 9 together with formula No. 7.
Below are two-stage evaluation models:
Where
WACC - weighted average cost of capital
g - the growth rate of cash flows that persists indefinitely
As you can see, we have WACC (weighted average cost of capital) and Re (cost of equity) instead of the abstract discount rate R in equations #11 and #12, and this is no coincidence. As Damodaran writes, “the discount rate is a function of the risk of expected cash flows.” Since the risks of shareholders and creditors are different, it is necessary to take this into account in valuation models through the discount rate. Next, we will return to WACC and Re and take a closer look at them.
The problem with the two-stage model is that it assumes that after a phase of rapid growth, stabilization immediately occurs and then incomes grow slowly. Despite the fact that, according to the author's observations, in practice, most analysts use two-stage models, it is more correct to use a three-stage model. The three-stage model adds a transitional stage from rapid growth to stable income growth.
Damodaran in one of his training materials very well shows graphically the difference between two- and three-stage models (see Figure #1).
Figure #1. two- and three-stage models.
Source: Aswath Damodaran, Closure in Valuation: Estimating Terminal Value. Presentation, slide #17.
Below are three-stage models for assessing the value of the company and equity:
Where
n1 - the end of the initial period of rapid growth
n2 - end of transition period
Let's get back to the discount rate. As we wrote above, for the purposes of discounting, WACC (weighted average cost of capital) and Re (cost of equity) are used in the valuation of a company or share capital.
The concept of the weighted average cost of capital WACC was first proposed by Modeliani and Miller in the form of a formula that looks like this:
Where
Re - cost of equity
Rd is the cost of borrowed capital
E - the value of equity
D - value of borrowed capital
T - income tax rate
We have already said that the discount rate shows the risk of expected cash flows, so in order to understand the risks associated with the company's cash flows (FCFF), it is necessary to determine the capital structure of the organization, that is, what share of equity in invested capital and what share occupies borrowed capital in inverted capital.
If a public company is analyzed, then it is necessary to take into account the market values of equity and borrowed capital. For non-public companies, it is possible to use the balance sheet values of own and borrowed capital.
After the capital structure is determined, it is necessary to determine the cost of equity capital and the cost of borrowed capital. There are many methods to determine the cost of equity (Re), but the most commonly used is the CAPM (capital asset pricing model), which is based on the Markowitz portfolio theory. The model was proposed independently by Sharpe and Lintner. (see Formula No. 16).
Where
Rf is the risk-free rate of return
b - beta coefficient
ERP - equity risk premium
The CAPM model says that the expected return of an investor consists of 2 components: the risk-free rate of return (Rf) and equity risk premiums (ERP). The risk premium itself is adjusted for the systematic risk of the asset. Systematic risk is denoted by beta (b). Thus, if the beta is greater than 1, this means that the asset appears to be riskier than the market, and thus the investor's expected return will be higher. Well, if the beta is less than 1, this means that the asset is less risky than the market and thus the investor's expected return will be lower.
Determining the cost of borrowed capital (Rd) does not seem to be a problem, if the company has bonds, their current yield can be a good guideline at what rate the company can attract borrowed capital.
However, as you know, companies are not always financed by financial markets, so A. Damodaran proposed a method that allows you to more accurately determine the current cost of borrowed capital. This method is often referred to as synthetic. Below is the formula for determining the cost of borrowed capital by the synthetic method:
Where
COD - cost of borrowed capital
Company default spread – company default spread.
The synthetic method is based on the following logic. The coverage ratio of the company is determined and compared with publicly traded companies and the default spread (the difference between the current bond yield and government bond yield) of comparable companies is determined. Next, the bersie rate of return is taken and the found spread is added.
To value a company using free cash flows to equity (FCFE), the cost of equity (Re) is used as the discount rate.
So, we have described a theoretical approach to assessing the value of a company based on cash flows. As you can see, the company's value depends on future free cash flows, discount rate and post-forecast growth rates.
Comparative approach
Comparative approach - a set of methods for estimating the value of the object of assessment, based on a comparison of the object of assessment with objects - analogues of the object of assessment, in respect of which information on prices is available. An object - an analogue of the object of assessment for the purposes of assessment is recognized as an object similar to the object of assessment in terms of the main economic, material, technical and other characteristics that determine its value (clause 14, FSO No. 1).
The assessment of a company based on a comparative approach is carried out by the following algorithm:
- Collection of information about sold companies or their blocks of shares;
- Selection of peer companies according to the criteria:
- Industry similarity
- Related Products
- Company size
- Growth prospects
- Management quality
- Conducting financial analysis and comparison of the company being valued and peer companies in order to identify the closest analogues of the company being valued;
- Selection and calculation of cost (price) multipliers;
- Formation of the final value.
The value multiplier is a ratio that shows the ratio of the value of invested capital (EV) or equity (P) to the company's financial or non-financial performance.
The most common multipliers are:
- P/E (market capitalization to net income)
- EV/Sales (company value to company revenue)
- EV/EBITDA (company value to EBITDA)
- P/B (market capitalization to book value of equity).
In a comparative approach, it is customary to distinguish three methods of evaluation:
- Capital market method;
- Transaction method;
- Method of branch coefficients.
The capital market method relies on the use of stock market analogue companies. The advantage of the method lies in the use of factual information. What is important, this method allows you to find prices for comparable companies on almost any day, due to the fact that securities are traded almost every day. However, it should be emphasized that with the help of this method, we evaluate the value of the business at the level of a non-controlling stake, since controlling stakes are not sold on the stock market.
The transaction method is a special case of the capital market method. The main difference from the capital market method is that this method determines the level of the cost of the controlling stake, as the company's analogues are selected from the corporate control market.
The method of industry coefficients is based on the recommended ratios between the price and certain financial indicators. The calculation of industry coefficients is based on statistical data for a long period. Due to the lack of sufficient data, this method is practically not used in the Russian Federation.
As mentioned above, the capital market method determines the value of a freely realizable minority interest. Therefore, if an appraiser needs to obtain a value at the level of a controlling interest and information is available only for public companies, then it is necessary to add a control premium to the value calculated by the capital market method. Conversely, to determine the value of a minority stake, the discount for non-controlling nature must be deducted from the value of a controlling interest that was found using the transaction method.
Cost approach
Cost approach - a set of methods for estimating the value of the object of assessment, based on the determination of the costs necessary for the reproduction or replacement of the object of assessment, taking into account wear and tear and obsolescence. The costs of reproducing the appraisal object are the costs necessary to create an exact copy of the appraisal object using the materials and technologies used to create the appraisal object. The cost of replacing the object of assessment are the costs necessary to create a similar object using materials and technologies in use at the date of assessment (clause 15, FSO No. 1).
I would like to immediately note that the value of the enterprise based on the liquidation value method does not correspond to the value of the liquidation value. The liquidation value of the appraisal object on the basis of paragraph 9 of FSO No. 2 reflects the most probable price at which this appraisal object can be alienated for the period of exposition of the appraised object, which is less than the typical exposure period for market conditions, in conditions when the seller is forced to make a transaction for the alienation of property. When determining the liquidation value, in contrast to determining the market value, the influence of extraordinary circumstances is taken into account, forcing the seller to sell the appraised object on conditions that do not correspond to market ones.
Used Books
- Lintner, John. (1965), Security Prices, Risk and Maximal Gains from Diversification, Journal of Finance, December 1965, 20(4), pp. 587-615.
- M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics
- Marjorie Grice Hutchinson,
- Sharpe, William F. (1964), Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, The Journal of Finance, Vol. 19, no. 3 (Sep., 1964), pp. 425-442.
- Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Lauren A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.,
- Vol. 41, no. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)
- I.V. Kosorukova, S.A. Sekachev, M.A. Shuklina, Valuation of securities and business. MFPA, 2011.
- Kosorukova I.V. Lecture summary. Business valuation. IFRU, 2012.
- Richard Braley, Stuart Myers, Principles of Corporate Finance. Troika Dialog Library. Olymp-Business Publishing House, 2007.
- William F. Sharp, Gordon J. Alexander, Geoffrey W. Bailey, Investments. Publishing house Infra-M, Moscow, 2009.
Proposed New International Valuation Standards. Exposure Draft. International Valuation Standard Council, 2010.
Marjorie Grice-Hutchinson, The School of Salamanca Reading in Spanish Monetary Theory 1544-1605. Oxford University Press, 1952.
John Burr Williams, the Theory of Investment Value. Harvard University Press 1938; 1997 reprint, Fraser Publishing.
Capitalization of Apple on 4/11/2011.
Stephen G. Ryan, Chair; Robert H. Herz; Teresa E. Iannaconi; Lauren A. Maines; Krishna Palepu; Katherine Schipper; Catherine M. Schrand; Douglas J. Skinner; Linda Vincent, American Accounting Association's Financial Accounting Standards Committee Response to FASB Request to Comment on Goodwill Impairment Testing using the Residual Income Valuation Model. The Financial Accounting Standards Committee of the American Accounting Association, 2000.
Aswat Damodaran, Investment appraisal. Tools and methods for valuation of any assets. Alpina Publisher, 2010
Damodaran uses the term firm in his work, which is identical to our term company.
James English, Applied Equity Analysis. Stock Valuation Techniques for Wall Street Professionals. McGraw-Hill, 2001.
If the company has a minority interest, then the minority interest must also be subtracted from the value of the company to arrive at the cost of equity.
Z. Christopher Mercer and Travis W. Harms, scientific editors V.M. Ruthauser, Integrated Theory of Business Valuation. Publishing house Maroseyka, 2008.
M. J. Gordon, Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics Vol. 41, no. 2, Part 1 (May, 1959), pp. 99-105 (article consists of 7 pages)
Z. Christopher Mercer and Travis W. Harms, scientific editors V.M. Ruthauser, Integrated Theory of Business Valuation. Publishing house Maroseyka, 2008.
Modigliani F., Miller M. H. The cost of capital, corporation finance and the theory of investment. American Economic Review, Vol. 48, pp. 261-297, 1958.
Income approach in valuation(income approach to valuation) - a set of methods of ownership based on the expected future income that this property can bring.
The main principle of the income approach to valuation is that the value of the property being valued is equal to the current (today's) value of all future benefits from owning this property.
Methods based on the conversion of income into value are similar in the valuation of various types of assets. However, in most cases, the income stream estimate, for example for a going concern, is significantly different from the income stream estimate for a home, office building, or other income generating property. Moreover, (business) and differ markedly in quantitative and qualitative definitions of risk.
Important valuation indicators (net income, cash flow, and others) have different definitions depending on whether they are used in assessing the value of an enterprise (business), real estate, machinery and equipment, or other assets. This circumstance is the cause of many erroneous evaluation results. Thus, the income that should be capitalized in the valuation of the business, as a rule, is cleared of accruals on and , while the income capitalized in the valuation of real estate is not cleared. Real estate appreciates in value if it is reasonably maintained, and the assets of the enterprise (machinery, equipment and others) tend to wear out.
The value of the enterprise (business), obtained using the income approach, is the sum of the expected future income of the owner, expressed in current cost indicators. Here, the definition of the value of a business is based on the assumption that a potential investor will not pay for this business more than the present value of the future income received as a result of its operation (in other words, the buyer does not actually acquire property, but the right to receive future income from owning property). The owner, on the other hand, will not sell his business for less than the present value of projected future earnings. It is believed that as a result of the interaction, the parties will come to an agreement on a market price equal to the present value of future income.
As part of the income approach to the valuation of an enterprise (business), the following are traditionally used: and discounted cash flow method. The main content of these methods is the forecasting of the future income of the enterprise and their transformation into an indicator of the current (today's) value. The main difference between them is that when capitalizing income, a “representative income” is taken (the role of this notional income can be played by net income, profit before taxes, gross profit) for one time period (usually a year), which is converted into value by dividing by the capitalization rate; and when discounting, a forecast of future income (cash flow) is built for several periods, then they are reduced by periods to the current value using the compound interest formula. A prerequisite for applying the income capitalization method is the assumption that business income will stabilize in the foreseeable future.
The income approach provides for the analysis of indicators of the economic activity of the enterprise, which can be defined by the general concept of "income":
- profit (gross; before interest on loans and taxes; before taxes; net);
- cash flow (before or after taxes);
- dividends (or potential dividends);
- gross proceeds.
Each of these indicators has its own advantages and disadvantages.
There are several known real estate valuation methods used for various objects. The choice of evaluation method depends on a number of factors, such as the nature of the object, the purpose of its evaluation. It is recommended to choose the largest number of methods for evaluating a particular object in order to obtain the most accurate cost.
All methods are grouped into three approaches to real estate valuation:
market (comparative);
costly;
profitable.
Market (comparative) approach to valuation- this is a set of methods for estimating the value based on a comparison of the object of assessment with its analogues, in respect of which there is information on the prices of transactions with them.
Conditions for applying the comparative approach:
· The object must not be unique;
· The information must be exhaustive, including the terms of transactions;
· Factors influencing the value of comparable analogues of the property being valued must be comparable.
This approach is based on the substitution principle, i.e. assumes that a rational investor or buyer would not pay more for a particular object than it would cost to acquire another similar object with the same utility.
When comparing sales, the appraiser considers comparable items, then makes adjustments between the compared item and the comparable item. The adjusted price allows the appraiser to draw a conclusion about the possible value of the property being valued on the market.
Stages of evaluation by the sales comparison method:
Stage 1. Market research - an analysis of the state and trends in the development of the real estate market, and especially the segment to which the property being assessed belongs; real estate objects are identified that are most comparable to the property being assessed, sold relatively recently.
Stage 2. Collection and verification of the reliability of information about the proposed for sale or recently sold analogues of the appraised object, comparison of analogue objects with the appraised object.
Stage 3. Adjustment of sales prices of selected analogues in accordance with the differences in the object of assessment.
Stage 4. Establishing the value of the appraisal object by agreeing on the adjusted prices of analogue objects.
The objects to be compared must belong to the same segment and transactions with them must be carried out on conditions typical for this segment in terms of the exposition period and the independence of the subjects of the transaction.
The exposition period is the time that the object is on the market.
The independence of the subjects of the transaction means that transactions are not concluded at a market price if the seller and buyer:
are in a relationship;
are representatives of the same organization;
have a different interdependence and mutual interest;
transactions are carried out with objects burdened with a pledge or other obligations;
· are engaged in the sale of real estate of deceased persons, etc.
Adjustments should be made for all major features and amenities that would be worthwhile from the prospective buyer's point of view. Adjustments are made:
1) at the time of sale - allows you to bring the price of an analogue object on the date of sale to today's price;
2) ownership of real estate - based on the assumption that when the object is sold to the buyer, all ownership rights to this property are transferred. If the rights are "bad", then the adjustment is made with a "-" sign and vice versa;
3) on the terms of financing transactions;
4) on the terms of sale;
5) on the state of the market - is done in order to take into account changes in supply and demand, which are caused by changes in legislation and the tax base;
6) location;
7) for use - objects that have retained their usage profile should be considered as compared.
Adjustments can be made both in value terms and as a percentage.
Percentage Adjustments are made by multiplying the selling price of the analogue object by a coefficient reflecting the degree of differences in the characteristics of the analogue object and the object being valued. If the object being valued is better than a comparable analogue, then an increasing coefficient is added to the price of the latter, if it is worse - a decreasing one.
Cost adjustments change the price by a certain amount, which evaluates the differences in the characteristics of the object-analogue and the object being evaluated.
Advantages of the comparative approach:
1. The final cost reflects the opinion of typical sellers and buyers.
2. Sales prices reflect changes in financial conditions and inflation.
3. Adjustments are made for differences in the compared objects.
4. Relatively easy to use and gives reliable results.
Disadvantages of the comparative approach:
1. Sales differences.
2. Difficulty in collecting information on sales prices.
3. Difficulty in collecting information about the specific conditions of transactions.
4. Dependence on market activity.
5. Difficulty in reconciling data on substantially different transactions.
Cost Approach to Real Estate Valuation- this is a set of valuation methods based on determining the costs necessary to restore or replace the object of assessment, taking into account accumulated depreciation. In this case, the land plot is assessed on the basis of the current market price situation separately from buildings (structures). The result of the assessment is the sum of the construction costs and the cost of the land.
The approach is based on the assumption that the buyer will not pay more for a finished object than for the creation of a new object of similar utility.
When evaluating new objects, the cost approach is the most reliable.
This approach is appropriate or the only possible one in the following cases:
· technical and economic analysis of the cost of new construction;
justification of the need to update the existing facility;
valuation of buildings for special purposes;
· when evaluating objects in the "passive" sectors of the market;
· analysis of land use efficiency;
solving the problems of object insurance;
solving problems of taxation;
· when agreeing on the value of the property obtained by other methods.
Disadvantages of the cost approach:
1. Costs are not always equivalent to market value;
2. Attempts to achieve a more accurate assessment result are accompanied by a rapid increase in labor costs;
3. Inconsistency between the costs of acquiring the property being valued and the costs of new construction of exactly the same property, since accumulated depreciation is deducted from the cost of construction in the process of valuation;
4. Problematic calculation of the cost of reproduction of old buildings;
5. Difficulty in determining the amount of accumulated wear and tear of old buildings and structures;
6. Separate assessment of the land plot from buildings.
Assessment stages in accordance with the methods of the cost approach:
1. Calculation of the cost of a land plot, taking into account the most efficient use;
2. Calculation of the replacement cost or replacement cost of the object;
3. Calculation of accumulated wear:
· physical deterioration- wear associated with a decrease in the performance of an object as a result of natural physical aging and the influence of external adverse factors;
· functional wear- wear and tear due to non-compliance with modern requirements for such objects;
· external wear– depreciation as a result of changes in external economic factors.
4. Calculation of the value of the object, taking into account the accumulated depreciation;
5. determination of the final cost of the object (cost including depreciation + cost of the land plot).
When using the cost approach to real estate appraisal, it is important for the appraiser to understand the difference between replacement cost and replacement cost.
replacement cost of the object is determined by the costs in current prices for the construction of an exact copy of the object being evaluated with the implementation of the same architectural and planning solutions, building structures and materials. In this case, the same functional depreciation of the object and the same shortcomings in the architectural solution that the evaluated object has are reproduced.
replacement cost is determined by the costs in current prices for the construction of an object that has an equivalent cost and utility with the assessed one, but built in a new architectural style using progressive materials and equipment.
Thus, the replacement cost expresses the costs of reproducing an exact copy of an object, and the replacement cost expresses the costs of creating a modern analogue object.
For most valuation purposes, full replacement value is preferable because the replacement creates a property that is different from the property being valued.
In addition, it is difficult to measure the difference in utility between an existing building and a proposed new one that would have modern characteristics.
From a theoretical point of view, replacement cost is more preferable, because it is unlikely that anyone would want to reproduce a building of a certain age with all its functional deficiencies.
If it is necessary to start construction again, then priority is given to a building with the same utility, but created according to modern standards and design.
Replacement cost structure
The replacement cost includes:
direct costs;
indirect costs;
Entrepreneur's profit.
Direct costs - those costs that are directly related to this property and include the cost of raw materials and materials, the cost of equipment, labor costs for construction, the cost of temporary structures, the contractor's profit.
Indirect costs are costs that arise during construction, but cannot be identified directly in the structure itself. These include insurance and promotional fees during construction, architect fees, legal fees, feasibility study costs, property change costs, marketing costs for the sale of the property, etc.
The entrepreneur's profit is the premium for the use of his capital in this particular area.
At the stage of preliminary calculations, indirect costs are calculated as a percentage of the direct costs.
The amount of direct costs is determined based on the following methods:
· Quantitative survey method. It provides for the decomposition of the building into separate elements and the multiplication of the costs for each element by their total number. When carrying out this method, it is necessary to count the total number of, for example, all nails of all types of sizes, all paint of all brands, etc. For most evaluation purposes, this method is too laborious to apply.
· Breakdown method. Involves finding the cost of various components on a unit basis, such as foundations, walls, roofs, etc. With reference information on unit prices, this method allows you to reproduce the full cost of reproduction of the object.
· Comparative unit method. It is based on a comparison of a unit area of the evaluated object with the cost of a typical object, with adjustments for the features of the object being evaluated.
After calculating the replacement cost, it should be brought to today's prices in accordance with the change in the cost of construction.
Wear assessment
After the assessment of the full cost of reproduction is completed, depreciation should be deducted from the amount received.
The term depreciation, which is used in the valuation of real estate, should be distinguished from depreciation in accounting.
In accounting, depreciation is charged in accordance with legally established norms, regardless of market conditions.
In appraisal activity, depreciation is the loss of value of property due to various reasons.
The following methods can be used to estimate the amount of wear:
· Sales comparison method. The trick is to subtract the value of the property, obtained from the sales comparison or income capitalization method, from the sum of the building's replacement value and the value of the land. The resulting difference is the total accumulated depreciation.
· Breakdown method. The bottom line is that the depreciation of each component of the property being valued is estimated and, by summing up, the amount of depreciation is obtained. The method is very labor intensive.
The method of economic age. Estimates depreciation according to the relationship between the economic age of the building and its overall economic life and comparing it with the cost of new construction.
Economic age (EA) shows the usefulness and condition of an object. It can be more or less than chronological, depending on the degree of load the building was operated with.
Economic life (TE) is the period of time during which, in the opinion of the appraiser, improvements to the property contribute to its value.
· Modified method of economic age. Allows you to calculate depreciation most accurately: first, the cost of correctable physical and functional depreciation is deducted from the total cost, then the economic age method is applied to the remaining cost, and the depreciation is summed up.
When applying the cost method, it should be remembered that the value obtained on its basis is the basis of the market value of the income-generating object. For example, the market value of a gas station complex will be significantly higher than the cost of construction, and the value of a hotel located in an unfortunate location (on the outskirts of the city) will be less than the cost determined by the cost method.
Practice shows that the greatest problems when using the cost approach arise in connection with the assessment of the market value of land. The most reliable method of land valuation from the point of view of Western theory is the method of comparative analysis of comparable sales. The use of this method in Russian conditions is almost impossible due to the uncertainty of Russian land legislation and the lack of transparency of information about transactions for the purchase or sale of land.
The cost approach used for real estate valuation is based on the assumption that the costs required to create the property being valued in its current state or to reproduce its consumer properties are an acceptable benchmark for determining the market value of the property being valued.
However, here it is necessary to understand the difference between the replacement cost (reproduction cost) of an object and the replacement cost.
The replacement cost (reproduction cost) is determined by the costs in current prices for the construction of an exact copy of the object being evaluated using the same architectural and planning solutions, building structures and materials and with the same quality of construction and installation works. When determining the replacement cost, the same functional depreciation of the object and the same shortcomings in architectural solutions that are present in the evaluated object are reproduced.
Replacement cost is determined by the cost, at current prices, of constructing a facility of equivalent utility to the value being assessed, but constructed in a new architectural style using modern standards, materials, design and layout.
The boundary between the replacement cost of an object and the cost of its replacement is always conditional, and the appraiser in each specific case has to solve the problem of choosing one or another type of valuation, depending on the conditions for applying the cost approach.
According to the standards of the Russian Society of Appraisers (STO ROO 21-01-95), when assessing the cost approach, it is necessary to determine: the market value of a plot of land; the cost of restoring the object or replacing it; the amount of accumulated wear of the object; the market value of real estate using the cost method as the sum of the value of the land plot and the replacement value of the object minus the accumulated depreciation.
In Russian conditions, the object of assessment is not the full (absolute) ownership of a land plot, but only the right to use it on a leasehold basis. The theory of estimating the value of a land plot distinguishes here five main methods for determining the value: capitalization of land rent (income approach); method of correlation (transfer); method of development (development); land residue technique; method of direct comparative analysis of sales. Determination of the value of a land plot by the method of capitalization of land rent consists in the capitalization of income received from rental payments. In Russia, the practice of leasing private land holdings is not widespread, mainly state and municipal land plots are leased. At the same time, the standard price of land is inadequate to its market value.
The most reliable of all the above methods in world practice is considered to be the method of direct comparative analysis of sales. The calculation by the method of comparative sales analysis consists in the analysis of actual transactions of sale and purchase of similar land plots, comparing them with the appraised land and making appropriate adjustments for differences that exist between comparable plots and the appraised. As a result, the selling price of each comparable parcel is first established as if it had the same characteristics as the appraised parcel, and then the weighted average value of the appraised parcel is determined.
The next step in applying the cost approach is to determine the replacement cost of the object or replacement cost. There are four ways to calculate replacement cost or replacement cost.
The method of quantitative analysis consists in compiling cost estimates for all types of work necessary for the construction of individual structural elements of the facility and the facility as a whole: the cost of labor, materials, mechanization of work. To these costs must be added the developer's overheads and profits, as well as the costs of design, construction, acquisition and installation of equipment necessary to reproduce the assessed improvements.
Quantitative analysis is the most accurate, but also the most time-consuming. Its application requires a highly qualified appraiser and extensive experience in preparing construction estimates.
The element-by-element calculation method is a modification of the quantitative method, but it is much less labor-intensive, since it is based on the use of aggregated estimated norms and prices rather than single ones. The most characteristic indicators of structural elements (1 cubic meter of brickwork, 1 square meter of roofing, etc.) are taken as cost units.
The comparative unit method is based on comparing the cost of a unit of consumer properties of the evaluated object with the cost of a similar unit of measurement of a similar typical structure. The essence of the method is that for the object being evaluated, an analogue object is selected that is similar to the object being evaluated in terms of structural characteristics, materials used and manufacturing technology. Then the cost of a unit of measurement of an analogue object (1 cubic meter, 1 square meter, etc.) is multiplied by the number of units of the object being evaluated.
This is the simplest way to evaluate a property and is widely used by appraisers, especially when revaluing fixed assets of enterprises.
The index method consists in determining the replacement cost of the appraised object by multiplying the book value by the corresponding revaluation index. Indexes for the revaluation of fixed assets are approved by the State Statistics Committee of the Russian Federation and are periodically published in the press.
Determining accumulated depreciation is the final step in the cost approach.
In the cost approach, the definition of depreciation is used to take into account differences in the characteristics of the new property and the real property being valued. Accounting for the depreciation of an object is a kind of adjustment in the value of a newly reproduced building to determine the value of the object being assessed.
Depending on the factors that reduce the value of real estate, depreciation is divided into physical, functional and external (economic).
Physical deterioration reflects changes in the physical properties of a property over time (for example, defects in structural elements). Physical wear is of two types: the first occurs under the influence of operational factors, the second - under the influence of natural and natural factors.
There are four main methods for calculating physical wear and tear: expert (the most accurate, but also the most time-consuming, is calculated on the basis of creating a defective statement and determining the percentage of wear of all structural elements of a building or structure); regulatory (or accounting); cost and method of calculating the life of the building.
Functional depreciation is a loss in value caused by the fact that the object does not meet modern standards: in terms of its functional utility, architectural, aesthetic, space-planning, design solutions, livability, safety, comfort and other functional characteristics. If the additional value received exceeds the cost of restoration, then functional wear is removable. The absence of a fireplace can be considered an element of removable functional wear, the installation costs of which are covered by an increase in the profitability and market value of the property. The amount of removable depreciation is defined as the difference between the potential value of a building at the time of its valuation with updated elements and its same value at the valuation date without updated elements. Unremovable functional wear refers to a decrease in cost due to factors associated with both a lack and an excess of the quality characteristics of a building.
If the physical and, to a certain extent, functional wear and tear can be eliminated by reconstructing or modernizing the building, then the wear of external influences in most cases cannot be eliminated.
External (economic) depreciation is a loss in value due to the influence of external factors. Economic depreciation can be caused by a variety of causes, such as general economic, intra-industry, legal, or changes related to legislation, municipal ordinances, zoning, and administrative orders.
The main factors of external deterioration in Russia are the general state of the economy, which in some regions is enhanced by local factors, the existence of discriminatory legislation for certain types of business activities, and fines for environmental pollution.
There are two approaches to assessing external depreciation - comparing sales of similar properties under stable and changing external conditions and capitalizing losses in income related to changes in external conditions. After determining the total accumulated depreciation, the appraiser adds the difference between the total replacement cost of the object and the accumulated depreciation to the market value of the land plot to obtain the final value of the property.
The cost approach is applicable to the valuation of almost any property. However, such an application is not justified in all cases (for example, the valuation of income-producing real estate).
The most common area of application of the cost approach is the valuation of objects in "passive" or inactive sectors of the real estate market. The advantage of applying the cost approach in this case is due to the fact that the insufficiency or unreliability of information about completed transactions for the purchase and sale of analogous objects in some cases limits the possibility of using other approaches to valuation.
The cost approach is also used in the feasibility study of new construction, in assessing the market value of objects under construction and reconstructed objects. In this case, the cost approach allows you to evaluate the effectiveness of the investment project.
Using a combination of a cost and income approach, namely, comparing the costs of building an object with the income received from it, the appraiser makes a conclusion about the best and most efficient use of the land plot related to the object of appraisal. To reflect the results of the assessment in the financial statements of the enterprise (revaluation of fixed assets), appraisers, on the basis of the Accounting Regulations (PBU 6-97) "Accounting for Fixed Assets", determine the value of the object of assessment using the cost approach.
The insurance services market is a constantly expanding area of application of the cost approach. In this case, this approach is preferred because the sum insured, the amount of the insurance premium and insurance compensation are determined based on the costs of the insured using the cost approach.
The comparative (market) approach to real estate valuation is characterized by the analysis of market sales of objects similar and similar to the property being valued. In order for this approach to be applied to a specific situation, it is necessary to have a large amount of accumulated and reliable statistical data on sales of comparable real estate, which is possible only if the real estate market is highly developed.
In Russian conditions, to evaluate objects by the market method, it is necessary to use any available information about past transactions for objects, since the problem of finding information for this method is complicated by its closed nature.
When evaluating the value of a bank, the essence of this approach is that the bank's share price reflects the market attractiveness of this bank as an object of acquisition and investment. The market attractiveness index is usually calculated for open joint stock companies whose shares are listed on stock exchanges. In order to determine the market attractiveness index of a bank that issued only ordinary shares, it is necessary to divide the profit after tax for the past year by the number of shares outstanding at the end of that year. The resulting figure is earnings per share. The market selling price of the shares on any randomly chosen date is then compared to the result obtained - earnings per share, resulting in a market attractiveness indicator. For Russian practice, this approach is currently practically impossible to use in practice, because the shares of Russian commercial banks, with the exception of Sberbank, are not listed on stock exchanges. Nevertheless, the task of predicting the market value of bank shares after mergers remains relevant.
The rental market, unlike the sales market, is the most dynamic, more open and rich in terms of information. Rental income in most cases is the basis for applying the income approach to real estate valuation.
It is generally recognized that the income approach is the most informationally provided and, therefore, the most reliable approach to the valuation of non-residential real estate in Russia. In addition, the income approach, for all its complexity, is the most powerful and flexible valuation tool capable of solving problems not only in the field of real estate, but also in other areas: intellectual property, business, investment projects, etc. Let's consider the income approach in more detail.
In world practice, the income approach uses: the method of direct capitalization and the method of discounting cash income.
The direct capitalization method is based on directly converting net operating income (NOI) into value by dividing it by the capitalization ratio. The concept of NOR is a calculated steady value of the expected annual net income received from the subject property after deducting operating expenses and replacement reserves. The definition of NOR is based on the assumption that the property will be leased at market rental rates, and the most typical year of ownership will be taken as the forecast calculation period.
The NPV calculation begins with the determination of potential gross income (GRP) - the expected total value of market rent and payment from additional services that accompany the main activity (payment for the use of a parking lot, for installing wall advertising, etc.). The next step in calculating the NPV is to determine the effective gross income (EI). In order to obtain the ROE, the estimated losses from the vacancy of rental space and non-payment of rent are subtracted from the potential gross income. These losses are consistent with the likelihood that part of the rent will not be collected during the forecast year, and part of the space will remain unoccupied by tenants. Since there are no standards in valuation for determining these losses, the best way to obtain information is to look at a similar property for which there are data on rental payments over a long period of time, from which one can learn the level of losses in practice.
NPC is calculated as the difference between the value of the EVD and the value of operating expenses (OR). Operating expenses are called periodic expenses to ensure the normal functioning of the facility and the reproduction of income, they are usually divided into:
conditionally permanent;
conditional variables (operational);
expenses (reserve) for replacement.
Conditionally fixed OR include expenses, the amount of which does not depend on the degree of workload of the facility. As a rule, these are property taxes, land rent, VAT, insurance costs.
Conditionally variable RR include costs, the amount of which depends on the degree of workload of the facility and the level of services provided. The main semi-variable costs are the costs of management, utilities, security, etc.
Replacement costs are deducted as an annual allocation (reserve) to the replacement fund (similar to accounting depreciation).
The scoring formula looks like this:
V0 = CF / R, (2.1)
where: V0 - current value (value at the time of valuation) of the business, CF - annual cash flow, R - capitalization ratio.
The most difficult stage of real estate appraisal by the capitalization method is the determination of the coefficient (or rate) of capitalization. In the Western classic version, the direct capitalization method provides for capitalization to use a coefficient (rate) extracted from market transactions, for which the rental price and the sale price are known at the same time. Practice shows that in Russian conditions it is impossible to find such information.
The capitalization ratio in business valuation is usually defined as the difference between the rate of return on capital (discount rate) for the company being valued and the expected average annual growth rate of the company's income.
The formula for finding the capitalization ratio is:
where: R - capitalization ratio, r - discount rate, g - expected average annual income growth rate.
Another method for determining the capitalization ratio is the summation (cumulative construction) method. The essence of the method is that the risk-free interest rate is used as the base rate and adjustments for various types of risk associated with the characteristics of the property being valued are successively added to it (premium for the risk of investing in a property, premium for low liquidity, an adjustment for investment management, etc.). .).
As evidenced by the analysis of recent periodicals, in Western valuation practice, the main role is currently played by the method of discounting cash income. The discounted cash flow method is the most versatile capitalization calculation tool that allows you to determine the present value of future cash flows. Cash flows can change arbitrarily, flow unevenly and be characterized by a high level of risk. This is due to the specifics of such a thing as real estate. Real estate is acquired by an investor mainly because of certain benefits in the future. The investor views the property as a set of future benefits and assesses its attractiveness in terms of how the monetary value of these future benefits correlates with the price at which the property can be acquired.
The business valuation formula in this case is:
where: V0 - company value assessment (net present value), n - 0,1,2,...,N - planning intervals, CFn - cash flow (negative or positive) in planning interval n, CF(N+1) - stable annual cash flow of the residual period, determined by the first year following the planning period, r - discount rate (rate of return on invested capital), R - capitalization ratio for the residual period.
When calculating the market value of a property using the discounted cash flow method, the following are successively determined:
term of the forecast period (term of the project);
net operating income;
forecast (future) cash flows for each period of the project;
possible cash flow from the reversion (sale) of the property at the end of the forecast period;
discount rate for future cash flows;
market value of the property.
The term of the forecast period depends on a number of factors: the level and rate of inflation; object type; climatic conditions in which it operates, etc. In international appraisal practice, it is customary to take the average project period, unless otherwise provided by additional conditions equal to 7 - 10 years. For Russian conditions, a typical project period can be taken to be 3-5 years.
In accordance with the principle of expectation of the main assessment of the market value, the income method is the NOR, which is able to generate value through discounting. This income must be forecast for each year of use of the facility. The calculation of the NPC is carried out by forecasting the income and expenses that form it.
To predict the cash flow from a reversion, one of three methods is usually chosen:
direct setting of the reversion value;
forecasting the trend of changes in the value of property over the period of ownership;
applying a discount rate to the after-tax cash flow of the post-forecast period.
The discount rate is defined as the average rate of return that investors expect to receive on investments in similar properties in a given market. Since the rate of return is directly proportional to the risk, the discount rate is directly related to how high the average person estimates the level of risk associated with investing in the purchase of this property. The higher the level of risk, the higher the discount rate and, accordingly, the lower the cost of future income. When calculating the discount rate, it should be taken into account that it is considered as the lower marginal level of return on investments, at which the investor admits the possibility of investing his funds in this object, given that there are alternative investments that involve obtaining income with varying degrees of risk. To calculate the discount rate, several methods are used, the most preferred of which are the capital investment cost method and the summation method.
Since the summation method has been discussed above, let us dwell in more detail on the method of the price of capital investments.
This discount rate calculation method is based on the analysis of stock market information. The calculation is based on three components:
nominal risk-free rate;
overall profitability of the market as a whole (average market portfolio of securities);
beta factor.
When calculating the nominal risk-free rate, you can use indicators for risk-free operations - both average European and Russian. To improve the accuracy of the calculation, the risk-free component of the discount rate can be calculated based on data on quotations of domestic and European securities.
The return on a balanced investment portfolio of securities is used as the average market return. The list of shares based on the quotes of which the average return is calculated is regularly published in the media and on the Internet.
The method for calculating the beta coefficient consists in analyzing the key factors of macroeconomic, industry, financial and legislative risks that affect the company.
The process of calculating the present value is carried out by converting to the present value of future cash flows for each project period based on the application of the theory of monetary value over time and consists in the subsequent addition of all received values and sales proceeds (reversion).
I would like to note that in a developed real estate market, all three approaches, when using reliable data, should lead to approximately the same results. An assessment result obtained by any method that differs significantly from others is a symptom that either incorrect information was used in the assessment process or a methodological or mathematical error was made.
In order to draw up a final conclusion on the market value of the property, it is necessary to finalize the results of the assessment. To do this, you need to add weights to the evaluation results obtained by each of the three approaches. Weight coefficients show what share of the value obtained as a result of using each of the applied valuation methods is present in the final value of the market value of the object being valued.
The agreement of the results, as well as the objectives of the evaluation, to some extent reflects the adequacy of the application of each of the approaches. So, if the results of the assessment are necessary for insuring the object, the cost approach is preferred. If it is necessary to determine the market value of an object for sale and purchase, then the methods of income and comparative approaches are more often used. If the results of the assessment are necessary in order to invest certain funds in the development of a property, then it is better to use one of the methods of the income approach.
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