AI2154 | Final Exam 24 (Vocabulary) Flashcards
Market Value
an amount for which something may be sold on a given market
Investment Value
an amount for which a particular investor or group of them think an investment is worth
Fair Value
a broad measure of an asset’s worth and is an estimate of the company’s assets and liabilities found on the company’s financial statement
Anchoring
the subconscious use of irrelevant information (purchase price of a security) as a fixed reference point for making subsequent decisions on the security
Asymmetric Information
when one party in a transaction is in possession of more information than the other
Exit Yield
the yield used to capitalize the projected rent at the end of a holding period to calculate the exit value
Weighted Average Cost of Capital (WACC)
a firm’s average cost of capital from all sources including common stock, preferred stock, bonds, and other forms of debt
Expropriation
the act of the government claiming privately owned property against the wishes of the owners to be utilized to benefit the general public
generally the government pays over the market value
Operational Leverage
a measurement of a company’s fixed costs as a percentage of its total costs used to evaluate the breakeven point of a business to better understand profitability and risk
Scenario Analysis
the process of estimating the expected value of a portfolio after a given change in the values of key factors take place
generally where worst-case and best-case scenarios may be tested
Example: Analyzing different economic conditions for a project
Sensitivity Analysis
a process of examining how changes in the assumptions of an economic model impact its predictions
Example: adjusting interest rates to see impact on net present value of property
Mortgage Lending Value
the value of the property set by means of an appraisal carried out by an accredited company
the value used when applying for a mortgage from a bank
Residual Land Value
a method for calculating the value of development land that includes profit but not including cost of land
Internal Valuer
a valuer who performs a valuation for their employer
External Valuer
a valuer who performs a valuation for a third party
What-if Analysis
another name for Scenario Analysis
a technique that is used to determine how projected performance is affected by changes in the assumptions that projections are based upon
best case, worst case, ideal case
Transaction Based Valuation
a way to value properties base on historical transaction records
Smoothing
the practice of averaging out fluctuations or irregularities in financial data over time to provide a more stable and reliable estimate of value
Capitalization Rate
A capitalization rate is used in real estate valuation to convert income into value by dividing the property’s net operating income (NOI) by the capitalization rate to determine its market value.
Discount Rate
A discount rate is used in discounted cash flow (DCF) analysis to discount future cash flows back to their present value, considering the time value of money and the risk associated with those cash flows.
Discount Rate
a metric that represents an investor’s required rate of return on a commercial real estate investment
Discount Rate = Risk Free Rate + Inflation + Property Risk
Average discount rate is between 7.5 to 9.5 percent
Illiquidity
something not easily exchanged for cash
Market Rent Distribution
normal bell curve:
market rents when the data exhibits a bell-shaped curve and rent variations are relatively symmetric around the mean
Vacancy Rate Distribution
lognormal bell curve
Mortgage Interest Rate Distribution
lognormal bell curve
Optionality in Property Development
Optionality in property development refers to the flexibility and potential for future value enhancement or adaptation of a property, allowing developers to capitalize on changing market conditions or emerging opportunities, thus maximizing returns on investment. It involves incorporating features or design elements that offer potential for alternative uses, expansions, or reconfigurations over time.
Real Options
flexibility to adapt or change property use
Financial Options
Rights to buy/sell property at set price
Embedded Options
implicit in property contracts, like lease renewal
What is the Red Book?
The Red Book refers to the RICS Valuation - Global Standards, commonly known as the “Red Book” due to its distinctive cover. It sets out mandatory rules, best practice guidance, and technical standards for valuations.
