real estate private equity valuation techiniques
does anyone have info on the type of valuation methods used in analyzing PE real estate investments?
the structure I am dealing with is one where a group of PE professionals raise money from investors, pool it into a fund, and use cash from the fund to acquire distressed real estate in development (commercial/residential). They acquire the properties through making a down payment (10-20%) using cash in the fund, and continually finance the development through pre-sales of the property. Entire property is sold within 6 months of project completion and money is returned to investors.
thanks in advance
bump
PM international Pymp
Is this for work or is this something you are just curious about? Because if this is for work, you should know how to do this or your boss/coworkers can show you. It would be annoying and difficult to explain over the internet.
Check old threads. Evaluating a potential RE investment is pretty simple.
generally speaking, at least at my firm, when we're looking at a project that's already been started like that and that we're presumably buying a discount from market value, we pretty much rely on DCF as the primary valuation. The intrinsic value of the property is the future cash flows, and with a distressed property you typically aren't going to spend as much time on market comps. You're going to be looking at DCFs and also replacement cost (which will involve looking at land comps, perhaps), etc.... what you'll likely be responsible as an analyst for doing in that situation is all DCF related. Just know the basics there and you should be good for an interview. If you're buying individual assets, not companies, the modeling isn't as complex.
This is right. One question that I have is: Why isn't the seller pre-selling units to finish the development. If a half completed building is in distress it is because they current owner has run out of bank financing. The seller then wouldn't be the equity holder, but the bank. So yes the bank could take a haircut on the debt and sell you the property at a distress price, but more financing will be needed because it will be difficult to execute on the business plan unless something materially changes (like a huge unit cost reduction). Adding debt into the mix will obviously change your valuation.
^^
Let's say there is $100m of debt on the property and it required another $100m to finish development and the bank is willing to sell it to you at $0.5 on the $1. So you acquire the half finished building for $50m. The development will take 2 more years to complete.
Let's say there are 200 units that can be sold and each unit is now worth $1m. If you believe that you can achieve 50% pre-sales then you should be OK, but let's say for example your pre-sale profile is t1 = 10%, t2=30% t3=40%, t4=20%
Your cash flows would be as follows
t0 = -$50m (to buy the property) t1 = -$50m (construction costs) + $20m (presales) = -$30m t2 = -$50m (construction costs) + $60m (presales) = +$10m t3 = +$80m (sales) t4 = +$40m (sales)
you would needed extra financing for year 1 if you didn't want to add more equity than what was originally put in for the property purchase. That financing is usually debt. Based on this example, you would need $30m of debt to cover your shortfall and interest would accrue on that as well. That would affect your cash flow.
If you were working on an exercise to figure out what to pay, you would have t0 as your unknown and do a DCF on your unlevered and levered cash flows using your required rate of return. The npv would be what you are willing to pay.
Thanks a lot for all this you've been a great help. I owe u like 20 SBs ill get you back one day :)
Minus omnis expedita et voluptas vero possimus. Maxime itaque autem voluptates quia. Qui nostrum error cum autem quo. Illum nihil ut ea laborum vel. Aut accusantium quia repellendus perspiciatis. Nisi commodi distinctio veritatis maiores rerum nostrum modi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...