How do institutional buyers analyze purchase prices?
I've been tasked with creating internal valuations for a series of strategic dispositions for my firm's portfolio (raw land; mixed-use potential). I've been able to create the valuations, but there are so many different methods of analyzing the proper raw land sales price. I'm trying to evaluate the properties as a potential buyer might.
How do institutional buyers (REPE, REITs, etc.) analyze their purchases? Stabilized ROE? IRR? CAGR? My assumption has been IRR, but the time frame makes a big difference. For a mid-sized mixed-use development, do institutional developers look at the short-term flips (say, less than 5-year time horizon) or are they looking at 10 years DCFs with complementary IRRs? Any insight might be helpful.
Oh yeah, and are IRRs, for example, for the large institutional buyers typically in the lower range (say, 5-7%) or in the higher range (say, 10-15%) for development?
I worked on a few redevelopment acquisitions (not ground-up development) while with a REIT and I can tell you we primarily looked at a 10 yr unlevered DCF value to guide our purchase price. Also looked at a 10 yr unlevered IRR and average yield over the hold period, but they were very much secondary to the DCF value. Doesn't exactly answer your question, but hopefully it helps.
for the 10yr unlevered DCF, how do you decide what discount rate to use? Do you use a tiered discount rate every year?
Used our estimated WACC which was provided by bankers.
Thanks, that's definitely helpful.
I love you guys right now. Thanks for the info!
Also, be careful when you say institutional buyers. REITs are big "institutions", but institutional investment traditionally refers to PE real estate. PE shops will raise capital for portfolios with defined strategies (core north American office, opportunistic health care, value added logistics...).
For a development deal.. levered irr over say 5 years or so. For multifamily deals alot of guys are developing and selling as soon it stabilizes because its a hot market.. it deoends
For a development deal you want a 20+ project level levered IRR.. 15-18 net to investor... unless its nyc or some place
Understand your suppliers' cost structures, negotiate prices effectively and strategically time purchases with commodity price forecasts, supplier cost models and buying recommendations.
With any purchase of goods or services, including sole source items, some type of cost analysis is required. A part of this analysis is verification of pricing. There are many ways to analyze the pricing of a product or service. Some of the techniques recommended includes
Comparison of Competitive Bids Comparison of Prior Quotations Comparison of Published Price List Prices Set by Law or Regulation Similar Item Comparison Rough Yardstick Comparisons
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