Presentation

Valuation Methodology in Russia

Chris DrydenRegional Valuations Director

Investors’ Concerns

“a lack of trust in the integrity of the process”

“misleading statements”

“a lack of transparency”

Investors’ Concerns

Different methodologies

Assumptions that do not reflect the position at the date of valuation

Special assumptions that are not “realistic, relevant and valid”

Ownership and acquisition of rights

Planning

Future over supply

Valuation vs. Purchase Price

Off-site infrastructure and utility costs

Construction cost inflation

Valuation of minority interests

Emphasis on IPO reporting

I. Properties Held as Investments

II. Developments in the Course of Construction

III. Development Land

In all cases, we are assessing Market Value.

I. Property Held as Investment

Rent & Yield approach

Historically, values generated purely off initial yield

Rental growth, particularly for offices, has resulted in the need to appraise off equivalent yield

DCF valuation approach still prevalent in Russian market. Potential issue with forecasting of exit capitalization yield

Yield terminology

In all cases, Rents are Net Operating Income, expressed gross of costs.

Initial Yield

ReversionaryYield

= Estimated Rental Value (Market Rent) / Value or Price Paid;

Current Rent / Value or Price Paid;=

EquivalentYield

= Growth implicit IRR of a changing income stream over time;

Running Yield = AnnualRent / Value or Price Paid

Price, Value and Worth

Price: The price achieved in the sale / purchase of property(ies).

Value: An estimate of the price at which a transaction for an asset would take place in the market.

Worth: An estimate of the worth to an individual which takes account of his/her individual assessment of the property variables, and also the investor's own required return and other relevant factors. i.e. NOT a Valuation.

II. Valuation in the Course of Construction

In balance sheets, typically you will see Value expressed as price of land plus costs to date of valuation

Alternative Market Value is to calculate Gross development value and subtract outstanding costs, including cost of finance, plus element of Developer Profit

Developer Profit level will be influenced by construction and occupational risk as at date of Valuation

III. Development Land

Day One Residual or DCF?

A day one residual adopts assumptions that are fully supportable as at the date of valuation

Main Value Drivers:-

1.Rent/Sale price

2.Capitalization Rate

3.Construction costs (including infrastructure &utilities)

4.City Share

5.Developer Profit

6.Finance

III. Development Land

DCF:-

Main Value drivers as for Residual approach, but additionally:-

1. Rental/Sales Price Growth

2. Cost Growth

3. Discount Rate

4. Exit Capitalization Rate

Therefore, inherently additional risk in DCF. Robust due diligence is required prior to forecasting real growth.

Investors’ Concerns

“a lack of trust in the integrity of the process”

“misleading statements”

“a lack of transparency”

Investors’ Concerns

Different methodologies

Assumptions that do not reflect the position at the date of valuation

Special assumptions that are not “realistic, relevant and valid”

Ownership and acquisition of rights

Planning

Future over supply

Valuation vs. Purchase Price

Off-site infrastructure and utility costs

Construction cost inflation

Valuation of minority interests