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One Step Further. Practical Implementation of Guide Note 12. The Problem.

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## One Step Further

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**One Step Further**Practical Implementation of Guide Note 12**The Problem**• Equilibrium - The theoretical balance where demand and supply for a property, good or service are equal. Over the long run, most markets move toward equilibrium, but a balance is seldom achieved for any period of time.**The Problem**• Real estate markets characterized by cycles (gradual or boom-and-bust) • An appraisal can quickly become outdated**The Problem**The Appraiser’s Role: • The appraiser’s perspective • The client’s perspective Point of Agreement: • Value at a single point in time may not be adequate for some intended uses**The Solution – Guide Note 12**• Two risks in use of an appraisal: • Value opinion is unreliable due to lack of quality data (or analysis) • Value might not be sustainable over time**The Solution – Guide Note 12**• Factors of change vs. symptoms of change • Capital markets and fundamental markets each cause markets to change • Market analysis (6 steps) allows the appraisal to be forward looking • Unforeseen events can invalidate conclusions of market analysis**The Solution – Guide Note 12**• As appropriate, reconciliation should discuss the likelihood the value might not be sustainable into the foreseeable future**Concerns about Guide Note 12**• Predictions are not meaningful • Risk of a lawsuit • Clients will not like it • More work with no additional compensation**Real Estate Market Cycles**• Capital markets • Equity capital (investors) • Debt capital (lenders) • Fundamental markets • Space users**Tools for Analyzing Cycles**• Entrepreneurial Incentive • Minimum necessary to justify construction • Not potential profit at a given point in time • Concept of positive external obsolescence • Challenges to application**Tools for Analyzing Cycles**Frictional Vacancy – vacancy unrelated to disequilibria in supply and demand… a typical vacancy rate in a given market operating in equilibrium.**Tools for Analyzing Cycles**Feasibility Rent – the rent necessary to justify new construction. • When the market is at equilibrium, the rental rate for new, fully functional space is equal to feasibility rent.**Tools for Analyzing Cycles**Equilibrium Rent – what market rent should be for a subject property, assuming the market is at equilibrium (hypothetical)**Tools for Analyzing Cycles**Affordability Analysis Affordability Index – a measure that indicates potential buyers’ ability to purchase a home**Tools for Analyzing Cycles**• Market Analysis (6 step process) • Property productivity analysis • Market delineation • Demand analysis • Supply analysis • Marginal demand analysis (comparison of supply & demand) • Projection/forecast of subject capture**Contraction**Expansion Equilibrium Equilibrium Recovery Recession Midvale Office Market Reporting Conclusions Midvale Office Market**Analyzing Capital Markets**• Equity market • Capitalization rates and yield rates • R = Y - CR • Debt Market • Interest rate and terms • Underwriting criteria (LTV, • Marginal demand analysis (comparison of supply & demand • Projection/forecast of subject capture**Conclusions**One step further called for by Guide Note 12 means: • Appraisal becomes more valuable tool • Future of appraisal profession is brighter

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