Special Township Valuation Paper Presented by Mohit Mehta Director Value Add Consultant during Institution of Valuers Seminar in Rodas Hotel Mumbai

1. Special Township
Feasibility Study & Valuation
Value Add Consultant presents:
Presented By : Mohit Mehta
Masters of Valuation , ( Accredited by R.I.C.S)
MRICS,U.K;FIV;AMIE;MISSE
Bachelors of Engineering
Director
Value Add Consultant
Real Estate Advisors
Registered Valuers under Wealth Tax Act.India
Email : vac@consultant.com
Phone : +91-98924 89265 / +91-22-2808 2583

2. Topics
• Why Special Township Valuation ?
• Economics and Its Role in Valuation
• Role of Law in Valuation
• Overview : How to Start Valuation ?
• Valuation Approach
• Key Regulation of Special Township Policy
• Land Marks in Approval Process
• Case Study
• Various Possible Scenarios Valuer may come across
• Valuation Methodology
• Factors which may impact land valuation
• How to Develop Financial Model for Valuation
• Scenario and Sensitivity Analysis
• Discounting Rate & Capitalization Rate
• Key Performance Indicators
• Conclusion and Recommendation
• Quick Reference Card
• Question and Answers
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3. Why Special Township Valuation
• Valuers are generally consulted for land valuation for various purposes.
• Land Valuation methods and outcomes varies depending on the purpose
• Scope of this paper is to demonstrate how a prior knowledge of “Township Policy and
Discounted Cash Flow Modeling Techniques” helps in valuation
• Unlike other valuation, a valuer has to perform more complex and intelligent tasks of analyzing
past, current and future projected information for valuing Township Land
• There are many proposals of special townships under consideration due to tremendous interest
amongst local as well as international investors
• See Recent news published in ET few days back HDIL Township Policy.jpg
• Many local and international funds are set up to invest in such real estate development projects
• In recent time developer become more capable of undertaking such large projects after listing
there companies in capital markets
• Huge demand of real estate in metropolitan city like Mumbai and scarcity of developable land
are pushing developers to undertake such special township projects on the out skirts
• Hence efforts are made to make delegates aware about due diligence a valuer needs to carry
out before issuing final valuation report using Thane Township Policy
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4. Economics and It’s Role in Valuation
• Globalization of Economies made entire a world as a Global Village
• Top Down Approach
• Macro Economics Factor
• County’s Economic Outlook, Country Rating
• Key Growth Indictors , Capital Markets, Inflation, Currency Movement
• Sector Specific Activities, Market Research, Trends, FDI Inflows & Outflows,
• Risks needs to be considered to value assets like Country Risks, Geo
Political Risks, Currency, Cultural Heritage, Market, Operation Risks etc.
• Micro Economics Factors
• In Real Estate Valuation Land Economics Plays a Vital Role
• Urban Land is Scare, Supply is controlled By State
• Value of Assets depends on Demand and Supply
• Country’s Laws and Ownership Restrictions
• Master Planning , Investments in Infrastructure
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5. Role of Law in Valuation
• Ownership Rights
• Transfer of Property Act.
• Types of Ownership A. Leasehold B. Freehold
• Company’s Law
• Indian Contract Act .
• MRTP Act ( Development Control Regulation)
• Land Acquisition Act.
• BMC Act. / Environment Act. / Easements
• Succession Act. / Rent Control Act. / Urban Land Ceiling Act.
• Insurance
• Amendment of FDI in Real Estate Press Note No.-2
• Special Economic Zone’s / Special Township Notifications
• Arbitrations
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6. Overview: How to Start Valuation?
Basics to start an assignment
Prepare for the assignment using following steps
1. Prepare Brief about assignment after consulting client
2. Define Purpose of Valuation
3. Identify Date of Valuation
4. Define Scope of Assignment
5. Define Terms of Reference and Limitations
6. List of Documents and Information Required
7. List of Documents available and Information Provided
8. Prepare strategy to manage the gap of documents &
information
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7. Which are the approaches used for valuation ?
Approaches Types of Assets Important Methods used
Used
Internationally
Cost For Service Assets A.Replacement Cost
Approach Like Public Non Income B.Book Value Method
Producing Assets etc.
Income For Income Producing A.Capitalization of Earnings
Investments Assets
Approach B.Discounted Cash Flow Method
(Estimation of Present
Worth of the future
benefits)
Market For Assets Traded in A. Direct Sale Comparison Method
Established Markets and B. Thumb Rule Method
Approach
Enough Comparable Sale C. Relative Methods
Most Widely Used Instances available
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8. Land Valuation Techniques
• There are many methods used to value Special Township Land
• It is very useful to know that all are derived form three fundamental approach
• Land Value depends on the Purpose of Valuation and Date of Valuation
• Current Use / Zoning ( Non Agriculture Land ) as well future use
• Discounted Cash Flow technique is widely used for special township land
valuation as it can incorporates Highest and Best Use Analysis
• Comparable Sale Instances
• Income Capitalization Method
• Global FSI concept is permissible in Special townships
• Global FSI means total FSI of Township remains constant
• Entire township is master planned with different zones for different uses and if
one particular zone of the township did not utilize entire permissible FSI due to
low density development the remaining FSI out of total permissible can be
transferred to any other zone within township to build high density high-rise
developments
• This make entire proposal of township viable as well as marketable
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9. Market Approach Widely Used Concept in Township Land Valuation
• Market Approach is mostly widely used method in valuation of land for townships
• It is very easy to find out comparable instances for an apartment and arrive a fair
market rate on per sq.fts. Basis in Mumbai ,where plenty of market transaction
data’s are available
• However, as you all know market approach is most complex assessment
technique used by an experts
• In this technique finding a most comparable instance is a key and unfortunately it
is very difficult to know what is the correct consideration amount as far as land
deals are concerned hence arriving per sq.fts land rate does not make sense
• Even if reliable information's are available it is very difficult to find exact
comparables as every special township land has different potential & unique
selling points
• Due care should be taken in selecting instances for the comparison
• Adjustment or allowances should be made depending on various differences in
factors contributing value
• A SWOT analysis is must for attaching premium or discounts to land value
• Market survey is must to know latest trends
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10. Valuation Tables ( Present Value Concept)
• Table No.1 Amount of Re.1 at the end of given number of years
Formula = (1+i)n Where i = interest rate, n=no. of years
• Table No.2 Amount of Re.1 per annum in given numbers of years
Formula =(1+i)n – 1 / i
• Table No.3 Annual Sinking Fund for the redemption of Re.1 capital invested
Formula = i/(i+i)n-1 However you can able to value easily using three
fundamental approach
• Table No.4 Years Purchase
Y.P = ((1+i)n – 1) / ((1+i)n x i)
Single Rate Y.P. =100/i Here i = interest rate
Dual Rate Y.P. = 1/ i+s where s= allowance for sinking fund
• Table No.5 Present value of Re.1 receivable at the end of given term
PV = 1/(1+i)n
• Table No.6 Depreciation Formula = Amount of Re.1 for the age passed
Amount of Rs.1 for the full life
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11. Income Approach
• Income Approach is widely used for Income Producing Investments Assets
• Two Popular Methods
A. Capitalisation Technique
B. Discounted Cash Flow Technique
• Capitalised Value = Net Income x Year’s Purchase
CV = NOI x Y.P.
Y.P. in perpetuity = 100/i where i = capitalization rate or yield
• DCF Technique
Present Value = PV1+PV2+PV3 +….+ PVt
Here PV1 = Present Value of first year earnings and so on
Present Value of Terminal Sale Value
Terminal Sale Value = Forward Earnings x Y.P ( Perpetuity )
• Capital Appreciation due to yield compression phenomenon
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12. Township Land Valuation Using Income Approach
• A Special Township Developer will consider investing in a project with a set financial
goals and it’s future earning capacity
• This is a critical valuation process land value is dependent on future earnings
• Net Operating Income (NOI) before Debt Service needs to be ascertained
• Debt Coverage Service Ration is one of the important aspects to understand project
liquidity
• Cost of Capital & Leveraging plays a big role in deciding value of land
• IRR and ROI criteria's and KPI are used to identify potential investment value
• Net Present Value of NOI for project duration will determine value of Land
• However to allow for taxation in the presented paper effect of interest has been
considered. Interest is tax deductible and result in effective lesser tax rate on NOI
due to interest deduction form NOI. This has been considered for arriving land value
• Selection of discounting rate & capitalization rate is key in the entire exercise
• Structure of the private equity deal and deal terms as well as preferences in paying
to investors essentially determines what discounting rate needs to be used
• One of the ways to find out discounting rate is going on yields of similar projects or
discount rate reflected in similar transactions transacted and offered in the market
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13. Selection of Capitalisation Rate
• Fishers Equation
Total Return = R = L + i + RPr
L = Reward for Liquidity Preference
i = Current Inflation Expectations
Rpr = Default Risk Premium
• Fishers Equation and Bonds
• Indexed Linked Govt. Bonds R=L
• Non Indexed Govt. Bond R = L + i = Rfr = Risk Free Rate
• Rfr is Nominal Interest Rate on Govt. Bonds = 6.05% for GOI 2019 Bond
• In India 10 Year Bond , UK 10 – Year Gilt, US 30 Year Treasury Bond
• Belgian 10 Year OLO
• Bond Yields Increases as Price Fall and Vice a Versa
• Required Return R = C( Dividend Yield) + G ( Growth)
• C = R – G+D ( Depreciation)
• Property Cap Rate (C )= L (real rate) +i + Rpr-G+D
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14. Valuing Different Asset Classes
Required Return R Your expectation
Asset Real Inflation Risk = Yield Growth Depreciation
Class Rate Premium
Real +i + RPR = C +G -D
Rate
Indexed Govt. Bonds 3.5 5 1 9.5 4.5 5 0
Non-Indexed Govt. 3.5 5 0 8.5 8.5 0 0
Bonds (safe)
Equities 3.5 5 4 12.5 3.5 9 0
Property Development 3.5 5 3 11.5 0 12.5 1
Scheme
Property Mature 3.5 5 2 10.5 8 4.5 2
Building
Japanese Bonds 3.5 0 -2 1.5 1.5 0 0
Cash 3.5 5 -1 7.5 9.5 0 -2
Selection of Cap Rate depends on number of factors
Security of Income, Regularity of Income, Liquidity of assets ,Transferability of assets ,
Chances of Capital Appreciation, Ease of Management and Maintenance, Remaining
Life of Asset
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15. Financial Model
We have used many assumptions to prepare a Hypothetical
Township Development Scheme a perspective developer may
execute depending on prevailing market conditions.
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16. Conclusion and recommendations
Conclusion :
There is a very fine line between various techniques used for valuing special township land. It is useful to use
combination of the various methods to get more accurate results. Hence to arrive at accurate value, we should
emphasis on right information, documents as well as purpose of valuation.
Recommendations :
1. Please always visit land under valuation
2. Prepare a neighborhood analysis map and write all the comparables on map
3. Proper methods needs to follow for measurement or due checks are necessary
4. Carry out proper due diligence before certifying value
5. Try to find out as many instance for sale as you can to compare with asset under valuation
6. Sort out genuine Instances and use those for the comparison
7. If Instances are not exactly comparable make certain adjustment before comparing them
8. Jot down all the information you have observed during your visit to site
9. Use photographs to make the report more presentable and clear
10. Please adopt due care in applying capitalisation rate or discounting rate as it is a key to valuation
11.Perform Scenario analysis and Sensitivity Checks to have a value range to depend upon
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17. Networking Internet Group
Valuation Groups for exchanging Information and Future learning as well
as networking with others
Value Add Consultant has formed Linked In group as under to
communicate with interested
Group Name : Indian Business Valuers and Networkers
Link to Join :
http://www.linkedin.com/groups?gid=1447867&trk=hb_side_g
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18. Value Add Consultant is committed to
implements best practices in the profession
Mohit R Mehta
Director
Value Add Consultant
India
Tel : +91 22 28082583 /
+91 98924 90265
Email:vac@consultant.com
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