The premium for low liquidity of real estate takes into account the impossibility of immediate return of investments made in real estate. When determining the amount of the adjustment for low liquidity, we proceed from the premise that the period of exposure of the object from the moment it is put up for sale is long. The riskier and more complex the investment, the more competent management it requires.

The investment management premium ranges generally from 1% to 5%. It is advisable to calculate the premium for investment management taking into account the coefficient of underutilization and losses during collection rental payments.

Calculation of the various components of the risk premium:

the premium for low liquidity takes into account the impossibility of investment; according to expert estimates from most sources, it is usually taken at the level of 3-5 percentage points;

the premium for the risk of investing in real estate takes into account the possibility of accidental loss of the consumer value of the object and can be accepted in the amount of the norm of insurance contributions in insurance companies of the highest category of reliability;

the premium for investment management is determined taking into account the fact that the more risky and complex the investments, the more competent management they require, which means the higher the value of this premium will be.

The rate of return on capital can be calculated in one of the following three ways.

straight-line return of capital (Ring method);

return of capital based on the replacement fund and the rate of return on investment (Inwood method). It is sometimes called the annuity method.

return of capital based on the compensation fund and the risk-free interest rate (Hosksld method).

Let's give brief description each of these methods.

Ring's method. This method is appropriate to use when it is expected that the principal amount will be repaid in equal installments. Annual norm Return on capital is calculated by dividing 100% of the asset's value by its remaining useful life, i.e. It is the reciprocal of the asset's service life. In this case, it is considered that the funds allocated to the compensation fund are not reinvested. The capitalization ratio formula takes the following form:

Rk = Rd + 1/n, where:

n is the remaining economic life.

The Inwood method is used if the return on capital is reinvested at the rate of return on the investment. In this case, the rate of return as a component of the capitalization ratio is equal to the replacement fund factor at the same interest rate as for investments:

Rk = R + SFF(n,Y), where:

Compensation fund factor;

Y = R - rate of return on investment.

The Hoskold method is used in cases where the rate of return on the initial investment is somewhat high, making reinvestment at the same rate unlikely. For reinvested funds, it is assumed that income will be received at a risk-free rate:

Rk = R + SFF(n,Yb), where:

Yb - risk-free interest rate.

The lowest rate of return is obtained using the Inwood method, the highest - according to the Ring method. When the price of an asset falls, regardless of whether the rate of return is calculated using the Ring, Hoskold or Inwood method, the rate of return on investment is less than the capitalization rate Rk > R.

Rint's method is most applicable for “old” objects.

Another way to calculate the capitalization ratio is the market squeeze method (market extraction method).

There is no market squeeze method separate accounting return on capital and return on capital, and also does not take into account separately the growth rate of income. These components are taken into account in the overall capitalization ratio on an “all-inclusive” basis and do not require separate analysis, which is one of the advantages of this method.

Based on market data on sales prices and NAV values ​​of comparable properties, capitalization rates are calculated using the following formula:

Where CHOD is the net operating income of the i-th analogue object;

Vi is the sale price of the i-th analogue object.

Calculating the capitalization ratio using the market squeeze method allows one to reduce the subjectivity of the appraiser to a minimum. In addition, the capitalization ratio determined in this way takes into account the rate of return of capital and the expected changes in the value of similar objects - on an all-inclusive basis. Accordingly, there is no need to carry out a separate calculation of these components of the capitalization ratio, an error in the calculation of which using the cumulative method can significantly affect the result. And the accumulated error in the cumulative method of determining risks can further affect the result.

When determining the capitalization ratio, it is also necessary to pay attention to taking into account the tax component (if the NIR is before tax, then the capitalization ratio should be calculated for income before tax: or vice versa, the NIR and the capitalization ratio are calculated as “after tax”).

is a term used to describe the difference in value of investments of varying liquidity. Liquidity characterizes how easy it will be for an investor to convert into . As a rule, the higher the liquidity of the asset, the lower the . Liquid investments are less risky because the investor is not tied to the asset for a long period. Thus, he can easily sell an asset if a more promising investment option appears or if it does not live up to expectations. The liquidity premium refers to the added value of a liquid investment.

Assets: liquid and illiquid

One of the most liquid assets for an investor is public shares - they are more liquid than shares of private organizations and, for example, real estate. Public shares can be sold at stock market at any time - the investor is not constrained by any period during which they must be in his hands.

However, investments in less liquid assets there are advantages that make up for the lack of liquidity. For example, investments in real estate can bring significantly greater benefits than investments in, or be characterized by minimal market risk (the material talks about this type of risk and investor premium). When an investor chooses an investment object, he needs to make a multifaceted assessment, and not be limited to just one criterion.

Bond liquidity

The liquidity premium also depends on the difference in interest rates between short-term and long-term securities. Short-term securities are always more liquid - this is due to the fact that they provide the opportunity to receive in the near future, and not in several decades, like a long-term security. The lack of liquidity of long-term paper is compensated by a higher interest rate. However, an investor who owns long-term paper still loses - if government interest rates rise, he does not have the opportunity to get rid of current assets in order to acquire new, more profitable ones. A short-term bond is a more flexible instrument in terms of liquidity.

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Liquidity premium- this is additional income paid (or intended to be paid) to the investor in order to compensate for the risk of financial losses associated with the low liquidity of investment objects. The indicators “liquidity of investments over time” and “level of financial losses when selling investment objects” are inversely related to each other.

The economic content of this connection is that if an investor agrees to a greater level of financial losses when selling an investment object, he will be able to sell it faster and vice versa. The presence of such a connection allows the investor not only to assess the level of liquidity of investment objects, but to manage the process of their conversion into monetary assets, varying the level of financial losses.

Assessing the liquidity of investment objects based on the level of financial losses is carried out by correlating the amount of these losses and the amount of investment. Financial losses in the process of converting investment objects into monetary assets are considered:

• low if their level to the volume of funds invested in the object does not exceed 5%;
• average, if this figure fluctuates between 6-10%;
• high - if it varies in the range of 11-20%;
• very high if this level exceeds 20%.

The economic behavior of the investor is aimed at selecting highly liquid investment objects, other equal conditions, since this provides him great opportunity for maneuver financial resources in the management process investment portfolio. In order for an investor to be interested in choosing medium- and low-liquid investment objects, he must receive certain incentives in the form of additional investment income.

The lower the liquidity level of the investee, the higher the investment income or liquidity premium should be.

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Real estate risk premium . IN in this case the possibility of accidental loss of the consumer value of the object is taken into account. In practice, the premium for the risk of investing in real estate is calculated based on an analysis of all possible cases of loss of the property being valued by summing up the average market insurance premiums for these cases of insurance companies of the highest category of reliability, licensed to carry out insurance activities.

Low liquidity premium . When calculating this component, the impossibility of immediate return of investments made in the property is taken into account. The premium for low liquidity (p 2) can be calculated using the formula:

p 2. = 1 – 1/(1 + r f) Texp, (4.12)

where p 2 is the premium for low liquidity of real estate;

r f – risk-free rate of return (annual);

T exp – exposure period of the assessed object based on data for a specific segment of the real estate market (in years).

In practice, an approximate calculation of this premium is often used using the formula:

p 2.. = r f ∙ Texp. (4.13)

Investment Management Award . The riskier and more complex the investment, the more competent management it requires. It is advisable to calculate the premium for investment management taking into account the coefficient of underutilization and losses when collecting rental payments for the property being valued. In practice, it is often assessed using the expert method.

Methods for calculating the rate of return as part of the capitalization rate.

The rate of return actually translates the rate of increase in value per n years in annual measurement.

There are three ways to calculate the rate of return on capital ( r 1 ) :

straight-line return of capital (Ring method);

return of capital according to the replacement fund and the rate of return on investment (Inwood method), it is sometimes called the annuity method;

return of capital based on the compensation fund and the risk-free interest rate (Hoskold method).

Ring's method.

This method is appropriate to use when it is expected that the principal amount will be repaid in equal installments. The annual rate of return on capital is calculated by dividing 1 or 100% by the period over which the value of the property is expected to change. The rate of return is the annual share of the initial capital placed in the interest-free compensation fund:

r 1 = 1 / n, (4.14)

R = r e + dep · (1/ n), (4.15)

where R is the capitalization rate;

r e – rate of return on equity;

dep – share of decrease in real estate value through n years.

The Ring method is used primarily when the value of a property is expected to increase in n years.

The Ring method is also used when investments in an object are not available, and a risk-free instrument is either not found on the market or has an unstable rate of return.

Inwood method used if the capital return is reinvested at the rate of return on the investment. In this case, the rate of return as a component of the capitalization rate is equal to the recovery fund factor at the same interest rate as for the investment.

r 1 = sff (P, r e) = r e / ((1+ r e) n – 1), (4.16)

where r e is the rate of return on equity;

r 1 – rate of return of capital;

sff (P, r e)– compensation fund factor.

The Inwood method is applied if a decline in the value of the property is predicted and investments in the property being valued or similar properties are available on the market.

Hoskold's method. Used when the rate of return on the initial investment is somewhat high, making reinvestment at the same rate unlikely. Reinvested funds are expected to receive income at a risk-free rate.

r 1 = sff(P, r f) = r f / ((1+ r f) n – 1), (4.18)

r 1 – rate of return of capital;

r f – risk-free rate;

sff (P, r f)– compensation fund factor.

An available instrument on the market is selected as the risk-free rate of return, so if the value of the property decreases in the future, there are no restrictions on the use of this method.

Table 4.2.Example of calculating capitalization rate

Calculation of the capitalization rate using the market extraction (market squeeze) method

Based on market data on sales prices and net operating income values ​​of comparable properties, the capitalization ratio can be calculated:

where NOI i is the net operating income of the i-th analogue object;

V i – sale price of the i-th analogue object:

n – number of similar real estate objects..

Table 4.3

Calculation of the capitalization rate using the market squeeze method

Calculation of the capitalization rate using the linked investment method.

If a property is purchased using equity and borrowed capital, the capitalization rate must meet the return requirements for both parts of the investment. The capitalization rate is determined by the related investment method, or investment group technique. The capitalization rate for borrowed capital is determined based on the mortgage rate. Mortgage constant is the ratio of annual loan payments to the loan amount.

R m = i / (1– (1+ i) - n), (4.20)

where R m is the mortgage constant;

i – interest rate on the loan;

n – the period for which the loan was issued.

The capitalization rate for equity capital is calculated by the method taking into account the reimbursement of capital costs discussed above (formula 4.5)

The total capitalization rate (Rо) is determined as the weighted average:

R o = M R m + (1 – M) R e (4.21)

where M is the mortgage debt ratio (share of credit in total amount invested capital);

R e – capitalization ratio for equity.

Example. Share of equity capital – 40%; interest rate on the loan – 15%; the loan is provided for 20 years; the capitalization rate on equity is 10%, then the total capitalization rate is:

a) the mortgage constant for a loan granted for 20 years at 15% per annum is determined as a contribution factor for the depreciation of the unit iaof (i,n)

R m = 0.15 / (1– (1+ 0.15) -20) = 0.15976;

b) the total capitalization rate is calculated using formula (4.21):

R o = 0,6 ٠ 0,15976+ 0,4 ٠ 0.10 = 0.135857 (or 13.59%);

c) if the NPV of an object is 100 thousand dollars per year, then the investment value of the object is determined by formula (4.1):

V = 100,000/0.1359 = $735,835

The positive or negative impact of borrowed funds, as well as the intensity of this impact, are determined by the relationship between the rates of return on the entire investment and borrowed capital. The effectiveness of this influence (as if leverage) is determined by the ratio of the amount of borrowed capital to the total amount of invested funds, i.e., the mortgage debt ratio.

If we denote R m as the mortgage constant and R o as the total capitalization rate, then the fluctuation of leverage can be written:

R T < R о - область положительного влияния левереджа, кредит эффективен и увеличение доли кредита приведет к увеличению отдачи на собственный капитал;

R T> R o - area of ​​negative influence of leverage, credit is ineffective and an increase in the share of credit will lead to a decrease in the return on equity capital.

Determining the premium for low liquidity

Premium for low liquidity, there is an adjustment for the duration of exposure when selling real estate. This premium is calculated using the formula:

P – premium for low liquidity;

jb - risk-free rate;

L- exposure period (in months);

Q is the total number of months in a year.

As of the date of assessment, the adjustment for low liquidity is assumed to be 3.25%, which corresponds to six months of exposure of the object.

Determination of the investment management premium

Experts estimate the premium for investment management at 5%.

Table No. 17. Calculation of the discount rate

Below is the final calculation market value object of assessment when using the income approach.

Table No. 18 Calculation of the market value of the valuation object using the income approach