Income Approach in Commercial Property Valuation

INCOME APPROACH IN Commercial Property Valuation

1. INCOME APPROACH TO COMMERCIAL PROPERTY ASSESSMENT
In order to share information about KJPP Y&R Presented by: Ir. Muhammad amin, MSc, mappi (cert.) nipp : pb mappi : 92-s-00212

2. INCOME APPROACH BASIC CONCEPTS OF INCOME APPROACH

The Income Approach Can Be Used In Valuation of Income Generating Properties, In Colloquial Commercial Property “The value of a property is a function of the income it is expected to generate” Income Generating Properties

3. (PROPERTY INCOME PROPERTY)

Commercial Property (INCOME PRODUCING PROPERTY) Property whose rooms can generate rental income or are measured by rental income and are marketed generally, such as: Office Space Sports Center Retail Space Convensesment Hour Town Hotel

4. ADVANTAGES & WEAKNESS OF THE INCOME APPROACH IN PROPERTY ASSESSMENT

Can be used as an alternative approach if no comparison data is obtained Able to follow market dynamics Very suitable (true and fair) for the assessment of Income Generating Properties Difficult to make accurate projections Full of risk of change (there is an element of uncertainty) )

5. Analysis Methods in Property Valuation Approach
GROSS INCOME SWITCHERS (GIM) CAPITALIZATION OF CASH FLOWS ENGINEERING RESIDUAL INCOME DISCOUNTS

6. DIGIER GROSS INCOME (GIM)

This is a very simple method of estimating market value with the income approach. This method is analogous to the “payback period” method in investment analysis “how many periods of certain gross income, up to the total investment cost or return value” Value = GIM x Gross Income Value GIM = Gross Income

7. EXAMPLE What is the value of office space per M2 around the survey site, if the rental rate is Rp. ,-/M2/Month? Gross Income = Rp x 12 = Rp Value = GIM x Gross Income = 6.16 x Rp = Rp

8. INCOME CAPITALIZATION METHOD

Property Value is the Annual Net Operating Income generated by the property converted to a certain capitalization rate NOI value = i Where: NOI = Annual Net Operating Income i = Capitalization Rate Net Operating Income is Gross Income minus operating expenses. Gross Revenue is the potential income that a property can generate minus any possible vacancies. Capitalization Rate, a percentage that reflects the rate of return on investment capital (i = NOI / Value).

9. EXAMPLE An office building has a rental area of ​​M2, the rental rate is Rp. /M2/month, service charge Rp/M2/month, vacancy rate 10%, operational cost Rp. /M2/month. What is the market value of an office building if the rate of return on investment is 9%. M2 Lease Area Empty Loss (10% x M2) M2 Area Rent M2 Gross Income (1,800 xx 12) + (1,800 xx 12) = Rp. Operating Expenses (2,000 xx 12) = Rp. Net Operating Income = Rp. Value = NOI / i = ( / 9%) = Rp ,-

10 Examples of Stamping. Value Based on Research Results

11 CONDITIONS FOR USE OF THE DIRECT CAPITALIZATION METHOD IN PROPERTY ASSESSMENT

Properties that are considered to have the same or almost the same income every year Properties that are considered to have a constant market cycle so that annual average income can be calculated that can represent the condition of property income

12 DISCOUNT CASH FLOW METHOD NOI = INCOME – OPERATIONAL EXPENSES

APPROPRIATE PROPERTY MARKET VALUE IS TOTAL NOW VALUE OF NET INCOME ADDED TO THE CURRENT VALUE OF TERMINAL VALUE V = PVNOI PV TV OPERATING NET INCOME IS INCOME = INCOME GENERATED WITHOUT VALUE OF PROOPERATION VALUE = COST OF VALUE OF PROOPERATION Discount x Upcoming Value

13 1 Discount Factor = (1+i)t

THE DISCOUNT FACTOR, IS THE DISCOUNT LEVEL WHICH MAKES THE VALUE WILL BE THE CURRENT VALUE. THIS DISCOUNT FACTOR IS DETERMINED BY TWO VARIABLES, IE THE DISCOUNT LEVEL THAT AFFECTS THE RATE OF INVESTMENT AND THE TIME. 1 Discount Factor = (1+i)t Where: i = discount rate t = time Discount factor is inversely proportional to the discount rate and length of time, the greater the discount rate, the smaller the discount factor, and the longer the time, the smaller the discount factor . Terminal value, is the estimated value of the property at the end of the projection period. There are two ways to find out the terminal value, namely (1) by estimating the market value at the end of the projection period by taking into account the growth in the market value of the property itself, (2) by capitalizing the net profit in (n+1) periods.

14 DISCOUNT CASH FLOW METHODS

15 BASIC FORECASTING OF HISTORICAL DATA FROM OBJECTS (Previous Performance)

EXISTING MARKET CONDITIONS FUTURE MARKET CONDITIONS THE ABILITY OF THE OBJECT TO ACHIEVE MARKET SHARE IN THE EXISTING CONDITIONS, IS CHANGED INTO A PREDICTION OF FUTURE MARKET CONDITIONS

16 BASIC CONCEPTS OF SOIL ENGINEERING

One of the methods used to assess vacant land (usually large areas of land) that has the potential to be developed Used when there is no comparable market data in terms of area, designation, location and other characteristics Basis of analysis: o Site Development Planning/Masterplan Site Plan and Use Best

17 SOIL RESIDUAL ENGINEERING SCHEMES

18 STAGES OF IMPLEMENTATION OF THE ASSESSMENT WITH THE “LAND RESIDUAL TECHNIQUES” METHOD

1. Determine the development concept based on the master plan or the highest & best use of the site
2. Determine product development based on the development concept
3. Determine the sales program to get Gross Development Value (GDV)
4. Determine development costs to obtain Gross Development Cost (GDC)
5. Subtract GDV from GDC to get Land Residual Value
6. Land Residual Value Discount with a certain discount rate to get the current Property (Land) Value.

19 RENTAL FEES & RESIDUAL LEASEHOLD TECHNIQUES

This concept applies to the valuation of property/land leased in the long term, for example in the case of BOT Property Value is the Value of the Lessor’s Interest plus the Value of the Lessee’s Interest, as in the formula below: V = V LF + V LH The closer to the lease expiration date, the greater the value of the lease and vice versa.

20 ASSESSMENT GUIDELINES WITH INCOME APPROACH
PPL 30 SKP BAPEPAM-FPPM MAPPI

21 Guidelines for Valuation with an Income Approach

A. In the event that the Property Appraiser uses the Income Approach, the following provisions apply: The Income Approach can only be used to appraise properties that meet the following criteria:
a) income generating property;
(1) property that generates income and is already in operation; and
(2) property that generates income and is not operated or used alone (occupied by the owner).
b) land that meets the principle of highest and best use (HBU) to be developed as an income generating property; or
c) land that meets the principle of highest and best use (HBU) to be developed as a property that can be sold part by part (lot per plot) verifying and analyzing each data used; perform cash flow analysis and income statement for the last 3 (three) years or since its establishment if it has been established for less than 3 (three) years obtained from management.

22 Guidelines for Valuation With Income Approach
4) make adjustments to the statement of cash flow and profit and loss as referred to in number 3) based on the condition of comparable and similar property market data. 5) adjustments as referred to in number 4) as far as possible use at least 3 (three) comparative characteristics and are similar to the object of the assessment. 6) in the event that the object of the assessment is in the form of property that generates income and is not yet operating as referred to in number 1) number a) number (2), then the provision of number 5) is not required. 7) make income projections and projected net operating income of the valuation object 8) disclose data regarding the comparison property as referred to in number 5) in the Property Appraisal Report 9) after adjustments are made to relevant items in the cash flow and income statement, Property Appraiser must present projected income and projected net operating income in the Property Valuation Report. .

23 Guidelines for Valuation with an Income Approach
b. The methods used in the Income Approach are as follows: Discounted Cash Flow Method (DCF Method) Direct Capitalization Method Residual Technique Method; and Gross Income Multiplier (GIM) c. In the event that the Property Appraiser uses the discounted cash flow method, the following provisions apply: In the event that the projected income level is unstable and with a certain income period, the Property Appraiser is required to use the discounted cash flow method. The value of the valuation object is obtained by multiplying a series of projected future income streams with a certain discount rate into the present value. The steps that must be taken in using the discounted cash flow method are at least: a) perform an analysis of the income and expenses of the valuation object and the comparison property;

24 Guidelines for Valuation With Income Approach
b) estimate the potential gross income, taking into account at least: (1) the reliability of the assumptions used; (2) historical data used; and (3) rental costs and building area. c) add up other income and potential gross income after deducting vacancies and collection losses to obtain an estimate of effective gross income (EGI) d) determine operational costs, taking into account at least: (3) building maintenance costs. e) subtract effective gross income from operating expenses to obtain net operating income before interest and taxes; f) determine the discount rate

25 Guidelines for Valuation With an Income Approach
g) determine the discount procedure; h) discounting net operating income to estimate an indication of the value of the valuation object; and i) in the event that there is a terminal value as one of the elements forming a value indication, the Property Appraiser may use the terminal capitalization rate in calculating the terminal value by considering the Initial Capitalization Rate which is the benchmark to ensure the magnitude of the terminal capitalization rate. d. In the event that the Property Appraiser uses the direct capitalization method, the following provisions apply: The value of the object of valuation is obtained by dividing the projected annual income that reflects and represents the annual income in the future by a certain Capitalization Level. In conducting an assessment using the direct capitalization method, at least the following requirements must be met: a) net profit per year during the investment period which is estimated to be a fixed amount; and

26 Guidelines for Valuation With Income Approach
b) unlimited investment period (perpetuity). The steps that must be taken in using the direct capitalization method are at least: a) analyzing the income and expenses of the object of valuation and comparison of property; b) estimate the potential gross income of the object of assessment; c) estimate the level of vacancies and potential loss of income from the object of assessment; d) make a reduction between the total potential gross income with the vacancy rate and the potential loss of income to obtain an effective gross income; e) estimating total operating costs consisting of fixed costs, variable costs and reserves; f) make a reduction between the effective gross income and total operating costs to obtain net operating income; g) determine the capitalization rate; and h) capitalize net operating income to estimate the indication of the value of the object of valuation.

27 Guidelines for Valuation with an Income Approach
e. In the event that the Property Appraiser uses the residual technique method, the following provisions apply: This method is used to appraise the valuation object which is part of a single property. The value of the valuation object is obtained by capitalizing the income component which is part of the property component, including land and buildings as well as machinery and equipment. Subtracting net income from property operations as a whole with annual income from other property components that are not the object of the valuation to obtain the income component of the object of the valuation. The techniques used in the residual method are as follows: a) Land Residual Techniques; b) Building Residual Technique (Building Residual Technique); and/or c) Building Equipment Residue Engineering.

28 Guidelines for Valuation with Income Approach
5) In the event that the Property Appraiser uses the Land Reservation Technique, the following provisions apply: a) determination of the projected annual income from the property and the Capitalization Rate as referred to in the direct capitalization method in letter d number 3); b) determination of the projected annual income generated by land specifically by subtracting the projected annual income from the property as a whole from the projected annual income generated by the property other than land (buildings, infrastructure, machinery and other equipment); c) properties other than land as referred to in point b) can be in the form of existing properties or in the form of projections if they are built/developed according to the best and highest land use principles; d) determination of certain Capitalization Rates for land; and e) capitalize the projected annual income from the land as referred to in point b) with the Land Capitalization Rate to obtain an indication of the land value

29 Guidelines for Valuation with an Income Approach
6) In the event that the Property Appraiser uses the Building Reservation Technique, the following provisions apply: a) determination of the projected annual income from the property and the Capitalization Level as referred to in the direct capitalization method in letter d number 3) ; b) determining the projected annual income that is specifically generated by buildings by subtracting the projected annual income from the property as a whole with the projected annual income generated by properties other than buildings (land, machinery and other equipment); c) determination of certain Capitalization Rates for buildings; and d) capitalize the projected annual income from the building as referred to in point b) with the Building Capitalization Level to obtain an indication of the value of the building. 7) In the event that the Property Appraiser uses Engineering Remaining Machinery and Building Equipment, the following provisions shall apply: a) determination of the property’s annual income projection and Capitalization Rate as referred to in the direct capitalization method in letter d letter d 3);

30 Guidelines for Valuation With an Income Approach
b) determination of projected annual income that is specifically generated by building machinery and equipment by subtracting the projected annual income of the property as a whole from the projected annual income generated by property other than building machinery and equipment (land, buildings and infrastructure); c) determination of special Capitalization Rates for building machinery and equipment; and d) capitalize the projected annual revenue of building machinery and equipment as referred to in point b) with the Capitalization Rate of building machinery and equipment to obtain an indication of the value of building machinery and equipment f. In the event that the Property Appraiser uses the Gross Income Multiplier (GIM), the following provisions apply: The value of the object of valuation is obtained by converting the annual gross income (gross income potential) which reflects and represents the annual income in the future with certain constants. In conducting the valuation using the gross income multiplier method, the following requirements must be met: a) availability of market data for sales and rentals of comparable and similar properties;

31 Guidelines for Valuation with an Income Approach
b) comparative properties analyzed with the object of assessment must be comparable in terms of physical, location, and investment characteristics; and c) the income data used by the comparison property must match the income data used by the valuation object. 3) The steps that must be taken in using the gross income multiplier method are at least: a) estimating the selling value of comparable and similar properties to the object of valuation; b) estimate the potential gross income of comparable and similar properties to the object of the valuation; c) dividing the selling value of the property in proportion to the potential gross income of the comparable and similar property to obtain a gross income multiplier; d) estimate the potential gross income of the object of assessment; and e) multiplying the gross income multiplier by the gross income potential of the valuation object to obtain an indication of the value of the valuation object.

32 Guidelines for Valuation With Income Approach
g. The Property Appraiser in determining the projected income and projected net operating income as referred to in letter a number 9) at least fulfills the following provisions: using income projections based on financial projections obtained from management to estimate the income stream of the object of the appraisal. . and make adjustments to income projections in accordance with market conditions; Financial projections must be disclosed in the Property Valuation Report; 2) it is prohibited to base revenue projections solely on historical trends and trends; 3) responsible for customized projections; 4) analyze the income statement and cash flow statement of the object of the assessment by taking into account market conditions in the form of data and information regarding the operational level of comparison companies in comparable and similar industries to make adjustments as referred to in number 1); 5) pay attention to conditions that occur after the Cut Off Date that may affect revenue projections; 6) consider the projected growth of the object of assessment in accordance with the level of income generated by the object of the assessment and the business interests of the object of the assessment; PPL 30 SKP BAPEPAM-FPPM MAPPI

33 Guidelines for Valuation With Income Approach
7) adjustments as referred to in number 1) are used as appraiser working papers; Adjusted financial information should be disclosed in the Property Valuation Report. 8) in making adjustments to the income statement and cash flow statement as referred to in number 1), the Property Appraiser is obligated to do the following: a) analyze and present the financial data of the valuation object consistently, using the same data. currency as the currency used in the financial statements; b) adjust the value presented in the income statement and cash flow statement to fair value; c) adjust revenues and expenses to levels that are reasonable and reflect sustainable results; d) classify and adjust all non-operating income and expenses; and e) make adjustments to unusual income and expenses. PPL 30 SKP BAPEPAM-FPPM MAPPI

34 Guidelines for Valuation With Income Approach
9) after adjusting the income statement and cash flow statement, the Property Appraiser is required to present projected income and projected net operating income in the Property Appraisal Report; and 10) revenue projections and net operating income projections must be made for at least the next 3 (three) years, or adjusted to the remaining life of the main production facility that is the object of the assessment. h. Property Appraiser in determining the Discount Rate as referred to in letter c number 3) letter f) can be determined from: market data, by comparing the annual rate of return (rate of return) of the object of assessment with comparable and similar property investments. . , according to market conditions ; addition method, by increasing or decreasing the risk-free rate with the level of business risk from comparable and similar property investments; investment band, by: a) calculating the cost of equity by taking into account: (1) the rate of return on the placement of funds in risky investments; (2) inflation forecast set by the government; and PPL 30 SKP BAPEPAM-FPPM MAPPI

35 Guidelines for Valuation With Income Approach
(3) the beta coefficient must be obtained from the industry average data in the same sector as the object of assessment. b) taking into account the return on investment in the market of comparable and similar industries; c) taking into account the existing capital structure in similar and similar industrial markets; d) consider industry risks and similar property conditions; e) considering the specific risks of the object of assessment; and f) at least carry out the following procedures: (1) calculate the percentage of investment capital structure based on the average state bank in carrying out the financing function on the Cut Off Date; (2) using loan interest rate data from the average state bank in carrying out the financing function in determining the cost of debt on the Valuation Date. (3) calculate the average cost of capital proportionally based on the weight of each type of capital structure and the cost of each type of capital structure; or PPL 30 SKP BAPEPAM-FPPM MAPPI

36 Guidelines for Valuation with an Income Approach
adds the estimated growth rate from the Capitalization Rate used in the direct capitalization method. The Property Appraiser is required to disclose in the Property Valuation Report the reasons, assumptions and the process for calculating the Discount Rate. In determining the Property Appraiser’s Capitalization Level, it is obligatory to distinguish: the applicable Capitalization Rate (only used in the Direct Capitalization method); and Terminal Capitalization Rate (only used in the discounted cash flow/DCF method) j. The Property Appraiser in determining the Capitalization Level as referred to in letter c number 3) number i) and letter d number 3) letter g) can be determined from: market data, by comparing the annual net income of the valuation object with the comparison property value, according to market conditions. addition method by increasing or decreasing the risk-free rate with the level of business risk of comparable and similar property investments. 3) investment band, by: a) calculating cost of equity by taking into account: PPL 30 SKP BAPEPAM-FPPM MAPPI

37 Guidelines for Valuation with an Income Approach
(1) rate of return on placement of funds in risky investments; (2) inflation forecast set by the government; and (3) the beta coefficient must be obtained from the industry average data in the same sector as the object of assessment. b) taking into account the return on investment in the market of comparable and similar industries; c) taking into account the existing capital structure in similar and similar industrial markets; d) consider industry risks and similar property conditions; e) taking into account the specific risks of the object of the assessment; and f) at least carry out the following procedures: (1) calculate the percentage of investment capital structure based on the average state bank in carrying out the financing function on the Cut Off Date; (2) using loan interest rate data from the average state bank in carrying out the financing function in determining the cost of debt on the Valuation Date. PPL 30 SKP BAPEPAM-FPPM MAPPI

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