Cresapp 16 valuation of office buildings

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VALUATION OF OFFICE BUILDINGS

VALUATION OF OFFICE BUILDINGS

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OFFICE BUILDINGS  Office buildings are developed and purchased as investment opportunities.  The objective of developers and purchasers alike is to realize a profit on their investment. The greater the earning power, the greater the profit and, therefore, the higher the value of the investment .  The production of income is a major reason for an income-producing property's existence.  The expectation of monetary gain is the major consideration in the valuation of income-producing properties, like office buildings.  The anticipation of future benefits, either amenities or pesos, is the very basis of the value of any kind of property.

OFFICE BUILDINGS

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Office buildings are categorized in three groups: Class A, B and C.



Buildings are given a Class A designation  the design and finish are of the highest quality,  they attract quality tenants and are professionally managed.  have superior locations and command rents at the top of the market.  Examples - The Enterprise, The RCBC Plaza, Ayala Tower One

OFFICE BUILDINGS

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 Class B buildings  have rental rates considerably lower than Class A buildings.  While they are well maintained and have a good quality design and finish  located in less expensive office parks or suburban areas.  Class B buildings are often older Class A buildings  Examples – The Pacific Star,

OFFICE BUILDINGS 

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Class C buildings  tend to be more utilitarian than aesthetic.  are often more than 20 years old, but still have steady occupancy.  Many are located in mixed use buildings, often on the upper floors above retail or service businesses, or in industrial parks.  Class C space rents for less than Class B space, typically in the lower 20 percent of a given market.

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OFFICE BUILDINGS  It is important to note, however, that while these buildings need to meet more than one requirement to be categorized within a building class, there is no specific formula and there may be a judgment call required in a final analysis.

VALUATION OF OFFICE BUILDINGS

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 Office buildings are valued to a great degree as a function of their income - ultimately the tenancies and leases.  A fully tenanted building boasting long-term leases and national tenants will be valued considerably higher in the market place than an empty one.  Office Building appraisals use a combination of three methodologies to value a building:  the cost approach,  the sales approach, and  the income approach.

VALUATION OF OFFICE BUILDINGS

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Cost Approach  Under the cost approach, appraisers calculate how much it would cost to rebuild the structure from scratch, including the purchase of the underlying land.  Appraisers typically assign more weight to this approach for buildings less than five years old or if they are highly specialized, such as medical offices.  The building value is estimated using the depreciated replacement / reproduction cost method by determining its reproduction or replacement cost less depreciation.  The land value is estimated using the market data approach.

VALUATION OF OFFICE BUILDINGS

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Sales Comparison or Market Data Approach  The second method is the sales comparison or market data approach.  Appraisers conduct extensive research, looking at similar buildings in the market and comparing square footage, location and a host of other factors before calculating an estimated sales price that could be achieved for the subject property if it was listed for sale.

VALUATION OF OFFICE BUILDINGS Income Capitalization Approach

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

Perhaps the most useful method for office investors conducting due diligence



Value is based on the net income a building owner makes on the spaces that are leased.



Monthly rent payments are added to calculate the buildings gross income.



Allowance for vacancies and bad debts are deducted from the gross income to get the Effective Gross Income (EGI)



Net operating income (NOI) is then determined by subtracting the expenses from the effective gross income.



The value of the office building including the land is estimated by capitalization, based on the formula V = Income / Rate

VALUATION OF OFFICE BUILDINGS

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Income Capitalization Approach 

Capitalization Rate



or “cap rate”, is a ratio of net income and capital cost.



It is calculated by taking the NOI for the building and dividing by the purchase price.



For example, a building purchased for P1 million that generates P100,000 in net operating income has a cap rate of 10 percent.

P100,000 / P1 million = 10% cap rate

VALUATION OF OFFICE BUILDINGS

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Income Capitalization Approach 

Capitalization Rate



When valuing properties it is useful to think of the cap rate the same way you would look at a rate of return for any other investment.



The higher the cap rate, the higher the rate of return on the investment, but also the higher the perceived risk.



Cap rates vary depending on the location, size and history of the property and will be lower for Class A buildings than it will be for more risky Class C ones.

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VALUATION OF OFFICE BUILDINGS EXAMPLE



EXAMPLE: VALUATION OF OFFICE BUILDINGS MOD III

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SUBJECT OFFICE BUILDING Newly built Within Fort Global City, office bldg area Complete with amenities



SUBJECT OFFICE BUILDINGS MOD III

Use of Cost Approach is reasonable since building is relatively new.



VALUATION BY COST APPROACH

BUILDING VALUE

Building Reproduction Cost including building machinery & equipment

B1

931.74

sq.m. @ P

16,000

per sq.m.

P

14,907,840.00

B2

1,020.02

sq.m. @ P

16,000

per sq.m.

P

16,320,320.00

B3

1,020.02

sq.m. @ P

16,000

per sq.m.

P

16,320,320.00

B4

1,020.02

sq.m. @ P

16,000

per sq.m.

P

16,320,320.00

B5

1,020.02

sq.m. @ P

16,000

per sq.m.

P

16,320,320.00

GF

817.98

sq.m. @ P

36,000

per sq.m.

P

29,447,280.00

2F

866.94

sq.m. @ P

36,000

per sq.m.

P

31,209,840.00

3F

790.65

sq.m. @ P

36,000

per sq.m.

P

28,463,400.00

4F

790.65

sq.m. @ P

36,000

per sq.m.

P

28,463,400.00

5F

790.65

sq.m. @ P

36,000

per sq.m.

P

28,463,400.00

6F

782.14

sq.m. @ P

36,000

per sq.m.

P

28,157,040.00

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 Income Approach – Direct Capitalization MOD III VALUATION BY INCOME APPROACH

GROSS REVENUE FROM RENTALS (GR)

Gross Leasable

Monthly Rental

Monthly

Annual

Level

Area (sq.m.)

Rate (P/sq.m.)

Rental (P)

Rental (P)

GF

653.81

750

490,358

5,884,290

2F

688.76

550

378,818

4,545,816

3F

663.36

550

364,848

4,378,176

4F

737.22

550

405,471

4,865,652

5F

737.22

550

405,471

4,865,652

6F

728.71

550

400,791

4,809,486

7F

428.95

550

235,923

2,831,070

8F

428.94

550

235,917

2,831,004

9F

428.94

550

235,917

2,831,004

10F

428.94

550

235,917

2,831,004

Income Approach – Discounted Cash Flow



PV1 + PV2 + PV3 + PV4 + PV5 + EV = MV

0

2

1 pwf x I 1

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4

3

5

I1

pwf x I 2

I2

pwf x I 3

I3 pwf x I 4

I4

I5

pwf x 51 pwf x EMV

Exit Market Value (end of period)



Income Approach – Discounted Cash Flow

VALUATION BY INCOME APPROACH

GROSS REVENUE FROM RENTALS (GR) - YEAR 1 & 2 Gross Leasable

Monthly Rental

Monthly

Annual

Level

Area (sq.m.)

Rate (P/sq.m.)

Rental (P)

Rental (P)

GF

653.81

750.00

490,358

5,884,290

2F

688.76

550.00

378,818

4,545,816

3F

663.36

550.00

364,848

4,378,176

4F

737.22

550.00

405,471

4,865,652

5F

737.22

550.00

405,471

4,865,652

6F

728.71

550.00

400,791

4,809,486

7F

428.95

550.00

235,923

2,831,070

8F

428.94

550.00

235,917

2,831,004

9F

428.94

550.00

235,917

2,831,004

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

Income Approach – Discounted Cash Flow

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GROSS REVENUE FROM RENTALS (GR) - YEAR 3 & 4 Gross Leasable

Monthly Rental

Monthly

Annual

Level

Area (sq.m.)

Rate (P/sq.m.)

Rental (P)

Rental (P)

GF

653.81

800.00

523,048

6,276,576

2F

688.76

600.00

413,256

4,959,072

3F

663.36

600.00

398,016

4,776,192

4F

737.22

600.00

442,332

5,307,984

5F

737.22

600.00

442,332

5,307,984

6F

728.71

600.00

437,226

5,246,712

7F

428.95

600.00

257,370

3,088,440

8F

428.94

600.00

257,364

3,088,368

9F

428.94

600.00

257,364

3,088,368

10F

428.94

600.00

257,364

3,088,368

11F

428.94

600.00

257,364

3,088,368

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Income Approach – Discounted Cash Flow

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GROSS REVENUE FROM RENTALS (GR) - YEAR 5 Gross Leasable

Monthly Rental

Monthly

Annual

Level

Area (sq.m.)

Rate (P/sq.m.)

Rental (P)

Rental (P)

GF

653.81

850.00

555,739

6,668,862

2F

688.76

650.00

447,694

5,372,328

3F

663.36

650.00

431,184

5,174,208

4F

737.22

650.00

479,193

5,750,316

5F

737.22

650.00

479,193

5,750,316

6F

728.71

650.00

473,662

5,683,938

7F

428.95

650.00

278,818

3,345,810

8F

428.94

650.00

278,811

3,345,732

9F

428.94

650.00

278,811

3,345,732

10F

428.94

650.00

278,811

3,345,732

11F

428.94

650.00

278,811

3,345,732



Income Approach – Discounted Cash Flow

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DISCOUNTED CASH FLOW ANALYSIS YEAR

NOI

PW Factor

NPV

1

35,073,000

0.9259

32,474,091

2

35,073,000

0.8573

30,068,083

3

37,877,000

0.7938

30,066,763

4

37,877,000

0.7350

27,839,595

5

40,682,000

0.6806

27,688,169 148,136,700

FMV (today) Land

90,000,000

Building

355,000,000

Total

445,000,000

0.6806

302,867,000 451,003,700