VALUATION OF REITS 20th March 2015

Presented by: Amit Oberoi

National Director | Valuation & Advisory Services, and Research

COLLIERS INTERNATIONAL

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Any Business Is Inherently Risky

Triggers for Valuation of a REIT or REIT property

Responsibilities of the Appraiser

Valuation Process

Challenges to Valuation

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Triggers for Valuation

@ IPO, Calculation of NAV

Based on Valuation

Periodic Reporting -

Annual & Half Yearly

Purchase or Sale of

Property

Related Party

Transactions

Incase of Any Material Development

that may impact Valuations

REASONS

Audit / Transparency

Ascertain fairness of

transaction for related party

transactions

Regulatory Checks

Value of Assets is not less

than INR 500 cr.

> 80% of value of REIT should

be invested in Income

Generating Assets

< 10% of the value of REIT

should be invested in under-

construction & non-rent

generating assets.

> 75% of value of REIT should

be rent generating

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Responsibilities of the Appraiser

SEBI Guidelines: … ensure that the valuation of the REIT is impartial, true and fair … … ensure adequate and robust internal controls to ensure integrity of its valuation reports. … ensure that it has sufficient key personnel with adequate experience and qualification to perform property valuations… The valuer(s) and any of its employees … shall not (i) invest in units of the REIT or in the assets being valued; and (ii) sell the assets or units of REITs held prior to being appointed as the valuer.

Quality Control

In India we @ Colliers follow RICS & IVS

valuation standards. The team is certified

under ISO 9001:2008

All appraisers have at least a post

graduate degree.

Each appraiser/consultant has to

undertake 12 training courses every year

We have a standard operating procedure

and standardized templates

All reports are vetted by a senior

appraiser.

We follow the NPS system of

measurement of client satisfaction.

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Responsibilities of the Appraiser …(contd)

SEBI Guidelines: … act with independence, objectivity and impartiality in performing the valuation … The valuer shall not accept remuneration, in any form, for performing a valuation of the REIT assets from any persons other than the REIT or its authorized representative. … shall not make false, misleading or exaggerated claims in order to secure the assignment. … disclose to the trustee, any pending business transactions, contracts under negotiation and other arrangements with the manager or any other party whom the REIT is contacting with …

RICS Standards – Red Book

“As it is fundamental to the integrity of the

valuation process, all members practising

as valuers must have the appropriate

experience, skill and judgment for the task

in question and must always act in a

professional manner free from any undue

influence, bias or conflict of interest.”

PS 2 Ethics, competency, objectivity &

disclosure

Responsibility for the Valuation

Professional & Ethical Standard

Member Qualification

Independence, Objectivity and Conflict

of Interest.

Terms of Engagement

Duty to 3rd Party

Disclosures

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Valuation Process

Identification of

property rights

to be valued

Definition of

value

Date of value Limiting

conditions

Location Highest and Best

Use

Property specific

characteristics

Market (Direct

Comparison)

Cost Income

Final value estimate

Appraisal report

Subject Property Analysis

Application of Relevant Appraisal Approaches

Reconciliation of Value Estimates

Description of Problem

Report Preparation

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Approaches to Value

Market / Sales

Comparison Approach

Cost Approach

(Land + Improvements)

Income Approach

Direct Capitalization

Method

Discounted Cash Flow

Method

Valuation of …

Ready Income Generating Properties*

Under Construction Properties

Ready (non-income generating properties)

Vacant Land

Excess FSI

TDR

…

* Various types of assets

Use All Applicable Approaches to Value

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Reporting: Best Practices

Report for Valuation of a REIT should,

Be Absolutely Transparent, so that the Reader can Clearly Understand How

the Valuer has Arrived at the Numbers

All Variables must be Supported by Data Points and Clear Explanation in-case

of deviations (Since the Product is Income Producing, a DCF model would

normally be used).

Value Arrived Should be Cross Checked with Sales Data

All Disclosures Should Clearly be Mentioned in the Report

(Reporting Requirements are MORE Demanding)

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Challenges in Valuations

Lack of Market Transparency There have been few institutional sales of properties, and even for these there is limited data available for sale price per sq.ft. or to be able to derive cap rates. Organized Market Limited to Office Real Estate There is limited organized market for asset types like healthcare, industrial, research labs, prisons, etc.; therefore key valuation benchmark (like cap rates) are not available. Restricted Disclosures At times REITs do not disclose all material facts to the appraiser (e.g. related party transactions, access to lease deed, access to legal reports, any encumbrance on the property, etc). The appraiser should clearly mention these as caveats in the report. Some Assets are Challenging to Appraise e.g. TDR – Very volatile asset class, value depends on demand and supply Regulatory Challenges – Multiple interpretations to law. Unique Assets – e.g. valuation of a hotel located in cantonment Restrictive Covenants – e.g. restrictions on sale, leasehold property in an area where all else is freehold. …

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Appendix I: Office Real Estate Ready Leased Stock

Mumbai

Financial

Capital of India

Market Size

99 MN SF

Pune

Emerging IT/ITeS

destination

Market Size

42.5 MN SF

Chennai

Automobiles &

IT/ITeS Hub

Market Size

47 MN SF

Bengaluru (Bangalore)

Silicon valley of

India

Market Size

123 MN SF

Kolkata

Old administrative

capital of India

Market Size

25 MN SF

Delhi NCR

Political Capital

of India

Market Size

88 MN SF

Source: Colliers International (Data for Top 6 Cities of India)

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10

20

30

40

50

60

2008 2009 2010 2011 2012 2013 2014 F 2015 F

New Supply (In Mln sqft) Absorption  (In Mln sqft)

Year wise supply, absorption & vacancy Market Size (approx) 425 million

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Appendix II: Office REIT Ready Stock

24.58, 36%

42.50, 62%

1.34, 2%

Strata Sold REIT Ready Not Known

27.60, 57%

20.88, 43%

Strata Sold REIT Ready Not Known

1. Gurgaon: REIT Ready* Office Stock (Total = 48.48 million sq.ft.)

2. Mumbai: REIT Ready* Office Stock (Total = 68.42 million sq.ft.)

58.02 , 47%

63.81 , 51%

2.15 , 2%

3. Bengaluru: REIT Ready* Office Stock (Total = 123.98 million sq.ft.)

Embassy, 22.32

Bagmane, 9.60

RGA, 6.12

Kalyani Group, 2.45

RMZ, 1.97

Ascendas, 1.55

Salarpuria, 1.26

Mfar, 1.01

Others, 18.54

* Grade A&B, ready for occupation on lease.

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Concluding Remark

REITs will Increase Transparency

and Improve Corporate

Governance

Confidential – Colliers International 2014

Thank You!

485 offices in 63 countries on 6 continents

United States: 146

Canada: 44

Latin America: 25

Asia Pacific: 186

EMEA: 84

$2.1 billion in

annual revenue

1.46 billion square feet

under management

15,800 professionals

and staff

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Colliers International 1st Floor, Technopolis Building DLF Golf Course Road, Sector 54 Gurgaon, Haryana | India

AMIT OBEROI National Director Valuation & Advisory Services Research & Business Intelligence amit.oberoi@colliers.com

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