This video relates to both (Property Investment = Risk) and (Jazz = Improvisation) there fore it belongs in this Blog. enjoy.
"Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it.
Avoiding danger is no safer in the long run than outright exposure.
Life is either a daring adventure, or nothing." Just do it!!!
With out a doubt....the BEST most crazy sh*d on the net...I LOVE IT !!!!!!!!!!!! But im gunna stick to my Snowboard as my balls are 32% the size of his.. ( i just did a quick calc... )
Sunday, October 10, 2010
Why is there so much interest in Japanese real estate?
Prices vs Rents
On Friday, The Economist revisited its 'fair-value measure for property' based on the ratio of Real Estate acquisitions to rents, which is similar notion to the price-to-earnings ratios used by stock market analysts to value companies.
It found that prices looked cheap only in Japan, where steadily falling property prices mean the price-to-rents ratio is 34% below its average since 1975. Switzerland's ratio is also less than its long-run average and possibly also in Germany.
But it said that in Britain, where prices are increasing again, Real estate still looks 'expensive':
Undervalued property markets
Source: The Economist
On Friday, The Economist revisited its 'fair-value measure for property' based on the ratio of Real Estate acquisitions to rents, which is similar notion to the price-to-earnings ratios used by stock market analysts to value companies.
It found that prices looked cheap only in Japan, where steadily falling property prices mean the price-to-rents ratio is 34% below its average since 1975. Switzerland's ratio is also less than its long-run average and possibly also in Germany.
It also estimates that even American Real Estate prices are now 3% below their fair value by the third quarter of 2009 - based on the S&P/Case-Shiller house price index - following big falls from the peak of 2006.
But it said that in Britain, where prices are increasing again, Real estate still looks 'expensive':
Overvalued property markets
Spain - 55%
Hong Kong - 53%
Australia - 50%
France - 40%
Sweden - 35%
Ireland - 30%
Britain - 29%
Canada - 20%
Italy - 15%
Hong Kong - 53%
Australia - 50%
France - 40%
Sweden - 35%
Ireland - 30%
Britain - 29%
Canada - 20%
Italy - 15%
Undervalued property markets
US - 3%
Switzerland - 9%
Germany - 15%
Japan - 34%
Switzerland - 9%
Germany - 15%
Japan - 34%
As The Economist admits, 'no valuation measure is perfect'. The data goes back different lengths for each country: 'If the average price-to-rents ratio is calculated from 1990 onwards, Spain's market is overvalued by 24%, rather than the 55% shown in the table (based on figures from 1975),' the report said. 'That would make both markets similarly overpriced.'
It's also worth noting that rents, which recovered slightly in 2009, are also likely to come under pressure in 2010 unless a strong economic recovery materialises.
Source: The Economist
Sun Not Rising on Japan's Flat Real Estate Domain
Business Monitor International reports the global economic recession impacted Japan severely and especially affected the real estate industry. A weak economic recovery is now under way, helped by government stimulus spending and tax reforms.
"We expect growth to remain weak, just managing to stay in positive territory, to reach about 1.2% year-on-year (y-o-y) in 2012 and 2013," the research group states.
However, the economy has racked up chronic fiscal deficits and a huge public debt worth around 200% of GDP. "The outlook is not bright, as the country moves from net saver to net debtor status," according to Business Monitor International.
The real estate market is also problematic. Japan's residential sector is suffering from record low levels of new construction.
According to the Japan Real Estate Institute (JREI), residential land prices have slid more than 40% from their 1991 peak and land prices in Japan's six largest cities fell 7.8% (9.2% in real terms) year-over-year (y-o-y) in H109.
The Tokyo office market has reached its highest vacancy level for six years. There were dramatic rental falls in Tokyo office space to late 2009: Tokyo (Inner City) rents plunged 23.3% y-o-y, while Tokyo (Outer Central) rents dropped 21.9% y-o-y. Osaka saw a similar tale of increases in vacancies.
In Tokyo, retail rentals dropped by about 50% y-o-y in 2009, and industrial rents were down by 10-20% y-o-y. In Osaka, retail rentals dropped by 15-20% y-o-y in 2009 and industrial rents were down by 10- 20% y-o-y. In Yokohama, rental rates for all types of commercial property fell by 20-30% y-o-y in 2009.
In the longer term, while the weakness in the economy and the lack of funding seem likely to keep housing prices under downwards pressure, demand, driven by population necessity, will pick up, requiring supply to meet it, according to the research group.
In general, commercial real estate rents and prices also seem likely to soften further, given the rising vacancy rates and the tendency for companies to downsize.
Also, "there is little scope for improvement in the industrial sector, given the likelihood that the economy will remain fairly stagnant over the next year or so. However, there are signs that retail property may be on the rebound, as a result of increasing consumer spending as the economy recovers," states Business Monitor International.
"We expect growth to remain weak, just managing to stay in positive territory, to reach about 1.2% year-on-year (y-o-y) in 2012 and 2013," the research group states.
However, the economy has racked up chronic fiscal deficits and a huge public debt worth around 200% of GDP. "The outlook is not bright, as the country moves from net saver to net debtor status," according to Business Monitor International.
The real estate market is also problematic. Japan's residential sector is suffering from record low levels of new construction.
According to the Japan Real Estate Institute (JREI), residential land prices have slid more than 40% from their 1991 peak and land prices in Japan's six largest cities fell 7.8% (9.2% in real terms) year-over-year (y-o-y) in H109.
The Tokyo office market has reached its highest vacancy level for six years. There were dramatic rental falls in Tokyo office space to late 2009: Tokyo (Inner City) rents plunged 23.3% y-o-y, while Tokyo (Outer Central) rents dropped 21.9% y-o-y. Osaka saw a similar tale of increases in vacancies.
In Tokyo, retail rentals dropped by about 50% y-o-y in 2009, and industrial rents were down by 10-20% y-o-y. In Osaka, retail rentals dropped by 15-20% y-o-y in 2009 and industrial rents were down by 10- 20% y-o-y. In Yokohama, rental rates for all types of commercial property fell by 20-30% y-o-y in 2009.
In the longer term, while the weakness in the economy and the lack of funding seem likely to keep housing prices under downwards pressure, demand, driven by population necessity, will pick up, requiring supply to meet it, according to the research group.
In general, commercial real estate rents and prices also seem likely to soften further, given the rising vacancy rates and the tendency for companies to downsize.
Also, "there is little scope for improvement in the industrial sector, given the likelihood that the economy will remain fairly stagnant over the next year or so. However, there are signs that retail property may be on the rebound, as a result of increasing consumer spending as the economy recovers," states Business Monitor International.
Lee Ritenour - Papa was a Rolling Stone - Funk yeah!!!
This is some serious Funked up brain calculus stuff that can be appreciated by Miles Davis fan all the way across to the monosyllabic block head.
The vocal contributions by Kenya Hathaway in particular, and Grady Harrell are superb like everything else about this concert - beautifully on point. Each musician makes a meaningful statement on their instrument that stands out without being overpowering.
Feel the Funk.
Very tight Funk groove.
The vocal contributions by Kenya Hathaway in particular, and Grady Harrell are superb like everything else about this concert - beautifully on point. Each musician makes a meaningful statement on their instrument that stands out without being overpowering.
Feel the Funk.
Very tight Funk groove.
Cap Rate Follies
Cap Rate Follies
Avoid These Pitfalls When Calculating Commercial Property Values.
Capitalization rates are often controversial and misunderstood variables in commercial real estate valuation equations. To value properties, most buyers and sellers prefer an income approach, which analyzes cash flows to determine debt service and investor return — typically the internal rate of return — so it's easy to see why cap rates are scrutinized.
In fact, no other valuation aspect is debated as heavily as cap rates because unsupported data often lead to inaccurate commercial property valuations. By understanding the fallacies that exist, real estate professionals can perform more thorough financial analyses for their clients.
Valuation PrimerEssentially, a cap rate converts income into value: A property's net operating income is divided by the cap rate, and the resulting figure reflects a return on and of capital. The income approach begins by estimating property income and subtracting a vacancy/collection loss allowance and expenses to achieve the NOI. Then the NOI is divided by the cap rate to obtain the property's value.
Commercial real estate owners, lenders, analysts, appraisers, and assessors typically obtain similar projections for a property's income, vacancy/collection loss, and expenses. Minor variances in these figures have little effect on a property's value, especially when compared to historical projections on a stabilized income stream. However, value opinions usually differ in the cap rate selection.
The importance of the cap rate to a property's value conclusion using the income approach is significant. In Table 1, the value conclusion ranges from $3.6 million to $5.3 million — 44 percent — depending on the cap rate. Even a 1 percent or 0.5 percent difference in the cap rate can affect a transaction's outcome.
Cap Rate FallaciesSince cap rates strongly affect properties' values, commercial real estate professionals should avoid the following fallacies that can blunt their projections' accuracy.
The Cap Rate Is Always 10 Percent. Many in the industry consider a 10 percent cap rate as a good rule of thumb for a quick estimate of a property's performance. Although this shortcut may be helpful at times, even a small variance is critical to the actual value. Set cap rates should not be relied upon as a firm industry benchmark.
Data Services Are Accurate. A decade ago, obtaining sales transaction data from a national or local service was almost impossible, but today several companies gather and sell comparable sales data. Though services may claim to provide verified data, commercial real estate professionals should conduct their own due diligence by carefully reviewing financial details, such as income, vacancy rates, expenses, NOI, and cap rates, in data service reports. Beware round numbers: If the income is a round $200,000, vacancy an even 5 percent, and the expense-to-income ratio a flat 50 percent, the data cannot be trusted.
Data services' use of unique terms also points to inconsistencies. For instance, data probably are unreliable if the service provides potential gross income when the property owner only reported effective gross income. Potential gross income typically indicates the service has used rounded figures in the cap rate calculation, which likely results in inaccurate data.
Sale Disclosures Are Valid. About a dozen non-disclosure states do not require sellers and buyers to document sales prices. Unless a state requires a separate disclosure instrument for determining the sales price, actual sales prices must be verified.
A problem in many non-disclosure states is inconsistent sales data. The buyer, seller, or another party involved in the transaction should be a reliable source for verification. At least two different sources should confirm the sales price.
All Cap Rate Components Are Included. Data services usually only report sales above a certain dollar amount — generally $500,000 to $1 million minimum. These sales frequently include business elements that are not denoted in the sales price. For example, car dealerships often include a business value component as part of the price, but this is rarely separate from the real property value. Comparing sales prices that mix real estate and business values to real-estate-only situations produces skewed results.
Historical Projections Are Reliable. Real estate professionals frequently overlook this fallacy, but differences become magnified when using older data. Cap rates usually are calculated based on the prior year's income and expenses. Although the income projection is for the next 12 months, the cap rate is based on the prior 12 months. This discrepancy can produce inaccurate results when the economy or the local real estate market is changing.
Buyer Expectations Are Clear. A common explanation for low cap rates is unclear buyer expectations. Did the buyer expect to expand a business or renovate the building? Was the purchase price heavily based on upside potential? Was there a particular reason why the buyer needed this property, such as its unique location? Buyer compulsions might result in higher selling prices and lower cap rates. Therefore, if a market shows a wide range of cap rates, rely on the median rate for the most accurate assessment.
Cap Rates Reflect Total Value. Some types of real estate, such as hospitality properties and marinas, allow owners to pocket cash that does not appear on financial statements. Such properties' listing prices may reflect value that is both on and off the books. When data services use financial information that reflects only value on the books, the resulting cap rate may be skewed significantly lower.
The Math Is Correct. Investors often want to know an appropriate cap rate for a particular property type or market. However, real estate professionals' cap rate conceptions can result in market values that do not provide buyers with sufficient return on investment.
For instance, consider the investor's requirements in Table 2. The property has a 70 percent loan-to-value ratio, an 8.5 percent interest rate, monthly mortgage payments, and a 25-year amortization rate.
The investor's equity return ranges from 7.45 percent to 20.79 percent depending upon the cap rate. The equity return then must be compared to more-liquid, safer investments to determine if capital would be attracted to this investment. If the first-year equity return is not sufficient for investors to compare it with other investment vehicles, the only way to generate that return is to bank on appreciation, which no longer is considered a good investment strategy.
When real estate is listed at prices resulting in poor equity returns, financially savvy owners and investors may make significantly below-market offers. These low-ball offers reflect the purchaser's return on investment requirements without considering appreciation factors. Many potential buyers refuse to make an offer on properties in these situations because the spread for negotiation is too great.
Frequently when a property's projected equity return is very low or negative, the cap rate also is too low to attract capital to the project.
Cap Rates Always Should Be Developed From Sales. Several techniques other than sales prices, such as the band of investment technique, mortgage equity technique, and hybrids of these two approaches, can be used to derive cap rates.
Like sales-based calculations, these techniques build cap rates from the components necessary to create a deal. Each attempts to model investor and lender requirements by weighting the cap rate for each deal participant. For example, using the loan terms in Tables 1 and 2 and a 15 percent return for the purchaser, a built-up cap rate would be calculated as shown in Table 3.
Mortgage equity and other techniques use the general calculations shown in Table 3 with modifications for variables such as equity increases for paid-down loans and property value appreciation if applicable.
In today's low interest rate environment, it is critical to note that the calculations in Table 3 imply cap rates are heavily dependent upon the current mortgage interest rate. Although this is accurate to some degree, risk parameters are difficult to gauge. For instance, examining the cap rates reported in the Korpacz Investment Survey during the past five years shows relatively little variation, yet during this time a recession began and several other factors affected many commercial real estate markets' performances. Therefore, when relying on these cap rate calculation techniques, fully consider the risks inherent in the equity rate portion of these equations.
Nishi-Shinjuku / Shinjuku Station, South Exit,Tokyo.
(1) Location
- These areas are located to the west and south, respectively, of JR Shinjuku Station, a major terminus.
- Shinjuku Station is a major nodal point for transportation rivaling Tokyo Station. Numerous subway lines and private railways extend outwards into the Tokyo suburbs.
- These areas are located to the west and south, respectively, of JR Shinjuku Station, a major terminus.
- Shinjuku Station is a major nodal point for transportation rivaling Tokyo Station. Numerous subway lines and private railways extend outwards into the Tokyo suburbs.
(2) Overview
Nishi-Shinjuku was Tokyo's first major foray into building skyscrapers with the first appearing in the 1970s with Keio Plaza Inter-Continental. Kenzo Tange's Tokyo Metropolitan Government Building being the current latest. Tower I was also the tallest building in Japan at this time.
Progress continues in Nishi-Shinjuku and in West Shinjuku which is heading away from the city center and has the site of the proposed Nishi-Shinjuku 3-Chōme Redevelopment with plans for what will be three of the four tallest buildings in Japan.
The Nishi-Shinjuku (west shinjuku) area is a skyscraper district developed on the former site of a water purification plant. Numerous skyscrapers have been built here since the early 1970s, including the Shinjuku Mitsui Building and the Shinjuku Sumitomo Building. Including non-office buildings, the number of skyscrapers is more than thirty. The number of department stores and specialty stores connected to Shinjuku Station is increasing and many large-scale electronics stores are competing for space around the station.
The Nishi-Shinjuku area still has dense, older residential areas and several redevelopment plans are currently underway. This area has been developed under well thought out city planning. It has become a mature district and there are few new construction projects. Since the sizes and the qualities of buildings are comparatively uniform, the area reflects changing trends in the office market and it is often used as a reference index to explain changes in other areas.
(3) Profile Data
1. Major office buildings: year completed, major owner
Shinjuku Mitsui Building: 1974, Mitsui Fudosan
Shinjuku Sumitomo Building: 1974, Sumitomo Trust and Banking
Shinjuku Nomura Building: 1978: Nomura Real Estate Office Fund, Nomura Real Estate Development
Shinjuku NS Building: 1982, Nippon Life Insurance, Sumitomo Realty & Development
Shinjuku Park Tower: 1994, Tokyo Gas Urban Development
Shinjuku Maynds Tower: 1995, daVinci Advisors
Shinjuku Opera City: 1996, Nippon Life Insurance, NTT Urban Development
Odakyu Southern Tower: 1998, Odakyu Electric Railway
2. Major companies
McDonald's Holdings Japan, Orimpus, Microsoft, Apple, Texas Instruments, East Japan Railway, Odakyu Electric Railway, Nomura Real Estate Development
3. Major facilities
Department stores: Odakyu, Keio, Takashimaya
Specialty store: Takashimaya Times Square "Tokyu Hands, Kinokuniya, HMV"
Hotel: Keio Plaza Hotel, Century Hyatt Tokyo, Park Hyatt Tokyo, Hilton Tokyo, Hotel Century Southern Tower
Museum: Seiji Togo Memorial Sompo Japan Museum of Art
Hospitals: Tokyo Medical University Hospital, JR Tokyo General Hospital
Schools and Universities: Tokyo Medical University, Kogakuin University, Educational Foundation Bunka Gakuen, Mood Gakuen (under construction)
Nishi-Shinjuku 3-Chome Redevelopment 西新宿三丁目西地区再開発 - 338m, 2x 245m, 190m
- Nishi-Shinjuku 3-Chome Redevelopment 西新宿三丁目西地区再開発 (highest 338m)
This is the only real plan for a supertall skyscraper in Tokyo situated just outside of Shinjuku's skyscraper cluster. The whole plan consists of 4 towers but only one of them will be taller then 300m. The tallest will be an office tower the other 3 will be residential buildings that with 245m will be the highest residential towers in Japan.
East Tower 東オフィス棟:
height: 338m
stories: 77
function: Office
North Tower 北住宅棟:
height: 245m
stories: 66
function: Residential
South Tower 南住宅棟:
height: 245m
stories: 66
function: Residential
West Tower 西住宅棟:
height: 190m
stories: 50
function: Residential
Starting date: 2011 (previously 2007)
Completion date: main tower = 2014, the whole complex = 2018 (previously 2010)
The only problem is that it has become completely quiet around this project, the official website was taken down and the last real news was in November 2007. That's makes it highly unlikely that they will start in 2011, especially with the economic climate. I'll keep my eye open for any news, we just have to wait see what will happen.
Skyscrapers in Nishi-Shinjuku
 Keio Plaza Hotel (1971) |  Shinjuku Sumitomo Building (1974) |  Shinjuku Mitsui Building (1974) |  Shinjuku KDDI Building (1974) (ex-KDD Honsha Building) |
 Shinjuku Sompo Japan Building (1976) (ex-Yasuda Kasai Kaijo Building) |  Shinjuku Nomura Building (1978) |  Shinjuku Center Building (1979) |
 Century Hyatt Tokyo (1980) |  Shinjuku Dai-ichi-seimei Building (1980) |  South Tower, Keio Plaza Hotel (1980) |  Shinjuku NS Building (1982) |
 Shinjuku Washington Hotel (1983) |  Tokyo Medical University Hospital (1986) |  Shinjuku Green Tower (1986) |  Kougakuin University S-Tec Building (1989) |
 Shinjuku L Tower (1990) |  Shinjuku Monolith Building (1990) |  S-Tec Building (1992) | ||||
 Shinjuku Park Tower (1994) |  Shinjuku I-town Square (1994) |  Shinjuku I-land Tower (1995) |  Tokyo Opera City Tower (1996) | |||
 Nishi-Shinjuku Mitsui Building (1999)
 |
Markets to Watch Japan
Japan — continues to see strong cross-border interest in quality assets, according to Jones Lang LaSalle. Among several notable 2Q10 transactions were Mori Trust Sogo REIT’s $1.2 billion purchase of a 50 percent joint ownership in the Tokyo Shiodome Building and a $200 million retail portfolio sale. Overall, investment sales volumes were up 21 percent in 2Q10 from 2Q09. Though the region saw a 34 percent decline in overall sales volume from 1Q10 to 2Q10, several large transactions are pending, and improving fundamentals are expected to fuel an uptick in investment activity before year-end.
How to determine ROI in an unsteady market? Cap Rate Calculations
Cap Rate Calculations
How to determine ROI in an unsteady market?A capitalization rate is the overall or non-financed return on a real estate investment, akin to the return on total assets in accounting terms. A cap rate is calculated as a mathematical relationship between net operating income and an asset’s value. Most commonly cap rates are extracted from transactions of buyers and sellers competing in a marketplace; but they are related to the current state of capital markets as well as the future growth outlook. So how can real estate professionals extract cap rates in today’s market, where few sales exist?
Generally, cap rates are derived from real property sales via the formula cap rate (RO) = NOI ÷ value. In first quarter 2008, this cap rate derivation may have sufficed. However, since then, the conclusions would be misstated not only because of changes in time, but also because of the subprime lending crisis’ impact and U.S. capital markets’ failure. Thus, real estate professionals not only must be able to interpret market data, but they also must understand the capital markets’ effect on cap rates — especially in illiquid markets, where sales data is limited.
Credit Crisis and Cap Rates
The relationship between cap rates and their respective capital markets often is overlooked. Leverage, or the effect of borrowed funds on return on investment, is a key component of a cap rate. Leverage generally varies from market to market and is affected by supply and demand as well as interest rates.
As a reminder, it is noteworthy that cap rates and discount rates, or internal rates of return, are not mutually exclusive. A discount rate is a measure of investment performance over a holding period that accounts for risk and return on capital. Cap rates not only account for return on capital, but also return of capital. A discount rate can be built up from a cap rate if income and growth both change at a constant rate. The buildup is derived by the formula Y = R + CR, where Y = discount (yield) rate, R = cap rate, and CR = constant rate of change.
Thus, if a market-extracted cap rate is 7 percent and the market constant rate of change is 3 percent, the discount rate is 10 percent. This calculation represents an investor’s yield expectations on investment, but not return of investment. Return of investment must be calculated separately.
Since the 2008 financial meltdown, the commercial mortgage-backed securities market essentially has stopped functioning, halting most available financing for commercial real estate. Thus, how is the lack of leverage in determining a cap rate accounted for and how do the pre-crash cap rates differ from the post-crash cap rates? A look at appraisal mathematicians L.W. Ellwood’s and Charles B. Akerson’s analyses provides a quantifiable explanation.
The Anatomy of a Cap Rate
Cap rate quantification began with Ellwood, who is credited with developing financial valuation models at a time when appraisers commonly were using physical residual techniques such as land and buildings. In 1959, Ellwood published “Ellwood Tables for Real Estate Appraising and Financing,” which showed that by analyzing market mortgage terms and equity yields for a particular property, an appraiser could identify a suitable cap rate and thus property value. This valuation technique became known as mortgage-equity analysis. Ellwood’s method allowed appraisers to incorporate and explain financing’s impact on value.
From his research, Ellwood created a formula that “builds up” a property’s cap rate on the basis of assumptions concerning mortgage and equity requirements. Using Ellwood’s formula, a cap rate results through application of an investor’s equity yield requirements, structure of debt, total change in income over the projection period, and change in total property value over the projection period. The resulting cap rate is then divided by NOI to produce a value estimate that explicitly reflects the property’s financial considerations. (See “Ellwood’s Formula.”)
One flaw of Ellwood’s formula is its complexity. It not only requires capital markets knowledge, but also algebraic operations. Several years later, Charles Akerson simplified Ellwood’s formula by altering the calculations to a series of simple arithmetic steps based on a band of investment calculations in his article “Ellwood Without Algebra,” in the July 1970 issue of The Appraisal Journal. The Akerson formula uses similar components to build up a cap rate; however, it succeeds in simplifying the steps without sacrificing results. (See “Akerson Format.”)
Sensitivity to Leverage
In addition to providing a helpful mortgage-equity valuation technique, Akerson’s formula also can be used to illustrate the effects of financial leverage or debt on a particular investment. Leverage can be measured by the loan-to-value ratio (M). An LTV change can increase or decrease the equity return (Ye) depending on the specific terms: The higher the risk to the investor, the higher the equity rate an investor will seek to compensate. Leverage is considered positive when the cap rate is greater than the mortgage cap rate or mortgage constant (Rm), while negative leverage occurs when the cap rate is lower than the mortgage cap rate.
Using the Akerson model, the effect of leverage change on equity yield rates can be illustrated. (See “Akerson Format in Action.”) Assume that NOI is level at $100,000 and the subject property can be financed with a 75 percent loan paid monthly at 8 percent annual interest over 25 years. The required market return on equity for 75 percent financing is 14 percent, and the property is expected to be sold in year 10, at which time the value is expected to have increased (∆) by 10 percent. Thus, M = .75, E = .25, Rm = .092618 (The present value per payment of $1 at 8 percent annual interest, amortized monthly over 25 years), Ye = .14 and ∆ = .10. The percentage of loan paid off in the holding period (P) can be determined by dividing the amortization rate of the 8-percent, 25-year full-term loan by the amortization rate of the 8-percent, 10-year holding-period loan. The percentage of loan paid off in the holding period is thus equal to 19.24 percent. The sinking fund factor (the future value per payment of $1 amortized annually over 10 years at 14 percent equity investment rate) is 0.0517. In applying the Akerson formula, the resulting overall cap rate is .0918 or 9.18 percent. At a level NOI of $100,000, the value of the subject property is $1,100,000 rounded. (See chart 5.)
In this example, if the LTV is increased from 75 percent to 80 percent, the equity yield rate will increase as well from 14 percent to 15.09 percent at the same value estimate and at the same cap rate (chart 1). Since there is greater risk when less money is put down, an investor requires a higher equity yield rate for the same return. If the required equity return is unchanged, a higher value will result due to an increase in leverage and a decline in the cap rate (chart 2). Similar relationships exist with changes in the mortgage constant or equity yield rate. Increases in the mortgage constant produce decreases in the equity yield rate. Thus, leverage analysis is important as risk levels directly impact the returns to equity.
Application in 2009
So what does this mean in the current market? Consider this example: Two apartment properties were sold in July 2008 for $1 million each. The properties sold at cap rates of about 6.50 percent. The properties were financed with new loans at 65 percent of value at interest rates of 6.00 percent for 25 years.
How would these transactions differ if they occurred in June 2009? By example, two lenders still active in the market currently quote 55 to 65 percent LTV ratios with interest rates of 6.50 to 7.50 percent (and rising) for these deals. If investors desire the same equity yields, what are the effects on value?
Based on the transaction terms and cap rates at which the apartments sold in 2008, the respective equity yield rate is about 9.00 percent and the mortgage constant is 7.73 percent at 65 percent LTV, 6.00 percent interest for 25 years, and at a 6.50 percent cap rate, all else remaining constant (chart 3).
In holding the investor’s equity yield rate constant in the current credit crisis scenario, an average increase of interest rates by 100 basis points along with a 5 percent LTV ratio decline results in a 68 basis point increase in cap rates to 7.18 percent. The cap rate increase from market conditions results in a June 2009 value of $900,000 (rounded); a value decline of 10 percent from the pre-credit crisis scenario value of $1 million in this example (chart 4).
As revealed through dissection of Ellwood’s and Akerson’s formulas, a cap rate is more than merely the NOI divided by its selling price. As Akerson said in his Appraisal Journal article, “Understanding the composition of the cap rate is the key to understanding and applying mortgage-equity capitalization. Once the anatomy of the capitalization rate is exposed, the rationale of the method becomes apparent.”
By making sense of cap rate sensitivity, one gains a better understanding of how changes in financial markets correspond to changes in investment perceptions of the future, and more importantly, where the market seems to be headed in times of economic turbulence.
Ellwood’s Formula
Ro = YE – M (YE + P1/Sn – RM) – DO1/Sn
(1+ DIJ) or (K)
Ro = cap rate that is used to convert income into value
YE = equity discount or yield rate is rate of return on equity capital
M = loan-to-value ratio is ratio between a mortgage loan and a property’s value
P = percentage of loan paid off in holding period
1/Sn = sinking fund factor is an element in yield and change formulas that converts the total change in capital value over the projection period into an annual percentage
Rm = mortgage capitalization rate or mortgage constant reflects the relationship between annual debt service to the principal amount of the mortgage loan
∆O = change in total property value over the projection period
∆I = total change in income over the projection period
J = an income stabilization factor used to convert an income stream changing on a curvilinear basis into its level equivalent
K = an income stabilization factor used to convert an income stream changing at a constant ratio into its stable or level equivalent
Source: The Appraisal of Real Estate, 13th edition
Akerson Format
Loan ratio (M) x annual constant (RM)
+ Equity ratio (1-M) x equity yield rate (YE)
- Loan ratio (M) x % paid off in projection period (P) x 1/Sn
= Basic rate (r)
+ Depreciation or – gain x 1/Sn
= Overall cap rate (RO)
Tables 1 - 5 (scroll below for text-only version)
Table 1 - Akerson Format Steps
Increase in LTV to 80%, with cap rate constant at 9.18%
1 M x Rm
2 + E x Ye
3 - M x P x 1/Sn
4 = r
5 +/- Dep/(Gain) x 1/Sn
6 = Ro
1 0.80 x 0.0926 = 0.0741
2 + 0.20 x 0.1509 = 0.0302
3 - 0.80 x 0.1924 x 0.0490 = -0.0075
4 = r 0.0967
5 +/- 0.10 x 0.0490 = -0.0049
6 = 0.0918
Cap rate 9.18%
NOI $100,000
Value $1,088,955
Rounded $1,100,000
Table 2 - Akerson Format Steps
Increase in LTV from 75% to 80% with Ye at 14%
1 M x Rm
2 + E x Ye
3 - M x P x 1/Sn
4 = r
5 +/- Dep/(Gain) x 1/Sn
6 = Ro
1 0.80 x 0.0926 = 0.0741
2 + 0.20 x 0.1400 = 0.0280
3 - 0.80 x 0.1924 x 0.0517 = -0.0080
4 = r 0.0941
5 +/- 0.10 x 0.0517 = -0.0052
6 = 0.0890
Cap rate 8.90%
NOI $100,000
Value $1,124,042
Rounded $1,125,000
Table 3 - Akerson Format Steps
Apartment Sale Example - Original Sale
1 M x Rm
2 + E x Ye
3 - M x P x 1/Sn
4 = r
5 +/- Dep/(Gain) x 1/Sn
6 = Ro
1 0.65 x 0.0773 = 0.0503
2 + 0.35 x 0.0898 = 0.0314
3 - 0.65 x 0.2365 x 0.0659 = -0.0101
4 = r 0.0716
5 +/- 0.10 x 0.0659 = -0.0066
6 = 0.0650
Cap rate 6.50%
NOI $64,970
Value $1,000,000
Table 4- Akerson Format Steps
Apartment Sale Example — June 2009 Sale
1 M x Rm
2 + E x Ye
3 - M x P x 1/Sn
4 = r
5 +/- Dep/(Gain) x 1/Sn
6 = Ro
1 0.50 x 0.0930 = 0.0465
2 + 0.50 x 0.0898 = 0.0449
3 - 0.50 x 0.3323 x 0.0659 = -0.0109
4 = r 0.0805
5 +/- -0.05 x 0.0659 = 0.0033
6 = 0.0838
Cap rate 8.38%
NOI $64,970
Value $775,608
Table 5 -Akerson Format Steps
LTV at 75% and Ye at 14%
1 M x Rm
2 + E x Ye
3 - M x P x 1/Sn
4 = r
5 +/- Dep/(Gain) x 1/Sn
6 = Ro
1 0.75 x 0.0926 = 0.0695
2 + 0.25 x 0.1400 = 0.0350
3 - 0.75 x 0.1924 x 0.0517 = -0.0075
4 = r 0.0970
5 +/- 0.10 x 0.052 = -0.0052
6 = 0.0918
Cap rate 9.18%
NOI $100,000
Value $1,088,955
Rounded $1,100,000.
Akerson Format in Action
Problem: A property produces an income of $100,000. The property was financed with a 75 percent loan to be paid monthly at 8 percent interest over 25 years. The property is expected to be sold in year 10 at which time the value is expected to have increased by 10 percent. Equity investors expect a 14 percent return on their investment. What is the property’s cap rate and estimated value?
The loan ratio (M) is equal to 75 percent of value or 0.75; therefore, the equity ratio (1-M) is equal to 1 - 0.75 or 0.25. In the problem the equity yield rate (YE) is specified at 14 percent and gain at 10 percent or 0.10. However, in this case the annual constant (RM), paid off in projection period (P), depreciation or gain, and sinking fund factor (1/Sn) are yet to be calculated.
Annual constant (RM) can be calculated based on the mortgage interest rate, frequency of amortization, and loan term. Alternatively, it is also the sum of the interest rate and the annual amortization rate (the ratio of the periodic amortization amount to be amortized). Using a financial calculator, the annual amortization rate of the mortgage loan (8.00 percent interest rate loan at 25 years, monthly payments), is equal to 1.26 percent, while the interest rate is 8 percent, resulting in a mortgage constant of 9.26 percent.
The percentage of loan paid off in the holding period (P) can be determined by dividing the amortization rate of the 8 percent, 25-year loan by the amortization rate of the 8-percent, 10-year holding period loan. The percentage of loan paid off in the holding period is thus equal to 19.24 percent ([9.26 – 8.00] ÷ [14.56 – 8.00] = .1924).
The calculation for depreciation or gain is the estimated percentage change in total property value multiplied by the sinking fund factor used for the equity growth. In this example, the sinking fund factor is calculated on a 14 percent equity yield and a 10-year hold. The result is 0.0517. Multiplied by 10 percent growth, this becomes 0.0052. As this is a gain, it will be deducted.
Therefore, the cap rate results by the following arithmetic steps:
0.75 (M) x 9.26% (RM) = 0.0695
+ 0.25 (1-M) x 14.00% (YE) = 0.0350
- 0.75 (M) x 19.24% (P) x 0.0517 (1/Sn) = 0.0075
= 0.0970
- 0.0052
= 0.0918 or 9.18%
The cap rate via Akerson is equal to 9.18 percent and the estimated value is $1.1 million rounded ($100,000 NOI ÷ 9.18 percent = $1,088,955). This model also can be used for changing income streams when modified by a J or K factor, as it is with the Ellwood formula. If the same terms were applied to the Ellwood model, the same result would be reached. Akerson format, however, is the standard due to its simplicity. The calculation (rounded) and value are displayed in chart 5.
Akerson Format
Loan ratio (M) x annual constant (RM)
+ Equity ratio (1-M) x equity yield rate (YE)
- Loan ratio (M) x % paid off in projection period (P) x 1/Sn
= Basic rate (r)
+ Depreciation or – gain x 1/Sn
= Overall cap rate (RO)
Transactions of office buildings in the Greater Tokyo area Cap rates.
I have attached a chart of recent Tokyo greater area office cap rates which also includes Total price of building and price per m2. The top field in the attached chart includes a new 11 story office building in central Ginza district total lease-able space is 6093 m2 based on 100% tenanted - JPY 98,400,000. @ 3.7% cap rate.
The net operating income used for calculating the cap rates is based on an estimation and reflects the standard closing rent and vacancy rate for each area at the time of the transaction.
The cap rates assume that all floors are office floors and that new tenants were contracted for empty buildings. The prices of the properties and transaction prices per m2 of rent-able floor space are also provided in the attachment Jpeg.
Cap rate estimated using the following formula considering net income (NOI) under the assumption that vacant buildings are occupied with new tenants. Cap rate (%) = estimated rent based on closed contracts in the neighborhood × rentable floor space × average office building occupancy rate in the area × 12 months × (100% - expense rate) ÷ selling price × 100. When the rent-able floor space is unknown, the total floor space is multiplied by a coefficient assigned for each level of total floor space. The coefficient is set as follows: 30,000 m2 or more = 57%, 20,000 m2 or more and less than 30,000 m2 = 64%, 10,000 m2 or more and less than 20,000 m2 = 65%, 7,000 m2 or more and less than 10,000 m2 = 69%, 3,000 m2 or more and less than 7,000 m2 = 72%, 2,000 m2 or more and less than 3,000 m2 = 78%, and less than 2,000 m2 = 84%. The expense rate is set as follows: five central Tokyo wards = 27%, other greater Tokyo areas = 33%, regional districts = 37%, and buildings completed within the past five years = -7%. “Own use” in the Purpose column refers to buildings that are entirely or partially used by the buyer. The Floor Space column basically refers to the total floor space, except for “(CO)” which refers to the floor space for the compartmentalized ownership of the transaction and “(CS)” which refers to the floor space for the co-ownership share. The Number of Floors column refers to stories “above ground / underground.” The Price per m2 column refers to the selling price per m2 of rent-able floor space.
The net operating income used for calculating the cap rates is based on an estimation and reflects the standard closing rent and vacancy rate for each area at the time of the transaction.
The cap rates assume that all floors are office floors and that new tenants were contracted for empty buildings. The prices of the properties and transaction prices per m2 of rent-able floor space are also provided in the attachment Jpeg.
Cap rate estimated using the following formula considering net income (NOI) under the assumption that vacant buildings are occupied with new tenants. Cap rate (%) = estimated rent based on closed contracts in the neighborhood × rentable floor space × average office building occupancy rate in the area × 12 months × (100% - expense rate) ÷ selling price × 100. When the rent-able floor space is unknown, the total floor space is multiplied by a coefficient assigned for each level of total floor space. The coefficient is set as follows: 30,000 m2 or more = 57%, 20,000 m2 or more and less than 30,000 m2 = 64%, 10,000 m2 or more and less than 20,000 m2 = 65%, 7,000 m2 or more and less than 10,000 m2 = 69%, 3,000 m2 or more and less than 7,000 m2 = 72%, 2,000 m2 or more and less than 3,000 m2 = 78%, and less than 2,000 m2 = 84%. The expense rate is set as follows: five central Tokyo wards = 27%, other greater Tokyo areas = 33%, regional districts = 37%, and buildings completed within the past five years = -7%. “Own use” in the Purpose column refers to buildings that are entirely or partially used by the buyer. The Floor Space column basically refers to the total floor space, except for “(CO)” which refers to the floor space for the compartmentalized ownership of the transaction and “(CS)” which refers to the floor space for the co-ownership share. The Number of Floors column refers to stories “above ground / underground.” The Price per m2 column refers to the selling price per m2 of rent-able floor space.
Japan to pump yen into economy
THE BANK of Japan this week pledged to pump more funds into the struggling economy and keep rates virtually at zero, surprising markets and stealing a march on the US Federal Reserve in providing a dose of economic stimulus.
The yen initially fell, but later reversed course to be firmer against the dollar.
For months, the central bank had rejected government calls for more decisive action, such as buying more government bonds, focusing instead on a limited funding scheme.
But in the face of growing evidence that the yen's strength was hurting the economy, it carried out what governor Masaaki Shirakawa described as "comprehensive monetary easing".
It cut its overnight rate target to between zero and 0,1 percent, from 0,1 percent, reinstating the "zero-interest" policy that ended only in July 2006, and pledged to buy ´5-trillion (60 bn) worth of assets.
It said it would keep its benchmark rate effectively at zero until price stability is in sight, adopting a US Federal Reserve-style commitment to ultra-loose policy. Core consumer prices have been falling from year-earlier levels since early last year and the country has been in and out of deflation for about 15 years.
"The latest measures individually may be considered as not having a major effect, but we want to maximise the effect by implementing the steps as a package," Shirakawa said, adding that there were elements both of credit easing and an expansion of fund supply.
The asset purchases would roughly match the size of extra stimulus being mulled by the government, which is running out of policy options in the face of public debt twice the size of the 5-trillion economy.
The assets, ranging from government bonds and short- term government securities to commercial paper and corporate bonds, would come under a temporary scheme that would also cover ´30-trillion of such assets as collateral under an existing loan programme.
But analysts were sceptical. "The initial reaction was positive, but it's not clear how they're going to prevent deflation from intensifying ," said Tim Condon, chief economist at ING Financial Markets in Singapore. The scepticism was reflected in markets.
After initially weakening to almost 84, the yen rebounded to 83,40 before midday. The Japanese government bond yield curve steepened, with most yields falling, but 30-year yields rose on disappointment the measures were not more aggressive. The Nikkei stock average rose 1,5 percent though, its biggest gain in almost three weeks, in the hour-and-a-half of trading that remained after the Bank announcement.
Bank policy makers have signalled in past weeks they were considering easing policy further, after Tokyo's intervention last month to check yen strength offered only temporary relief.
Most market players, however, had expected the bank to opt for a relatively minor adjustment of its ´30-trillion loan scheme that supplies banks with funds at 0,1 percent rate.
This week's decision drives the bank closer to full quantitative easing it conducted between 2001 and 2006, under which it flooded market systems with excess cash and left markets to set the overnight call rate. But this week it said it would keep paying 0,1 percent interest on excess reserves held with it, providing a floor for market rates and suggesting it would only temporarily allow rates to fall below 0,1 percent.
Growth slipped from a healthy annualised rate of 5,0 percent in the first quarter to 1,5 percent in the second quarter. Data last week showed exports growth slipped for a sixth straight month in August. "Governor Shirakawa used the phrase 'comprehensive easing' instead of 'quantitative easing' .... He liked to differentiate from the previous easing measures," said Susumu Kato, chief economist at Credit Agricole in Tokyo.
The yen initially fell, but later reversed course to be firmer against the dollar.
For months, the central bank had rejected government calls for more decisive action, such as buying more government bonds, focusing instead on a limited funding scheme.
But in the face of growing evidence that the yen's strength was hurting the economy, it carried out what governor Masaaki Shirakawa described as "comprehensive monetary easing".
It cut its overnight rate target to between zero and 0,1 percent, from 0,1 percent, reinstating the "zero-interest" policy that ended only in July 2006, and pledged to buy ´5-trillion (60 bn) worth of assets.
It said it would keep its benchmark rate effectively at zero until price stability is in sight, adopting a US Federal Reserve-style commitment to ultra-loose policy. Core consumer prices have been falling from year-earlier levels since early last year and the country has been in and out of deflation for about 15 years.
"The latest measures individually may be considered as not having a major effect, but we want to maximise the effect by implementing the steps as a package," Shirakawa said, adding that there were elements both of credit easing and an expansion of fund supply.
The asset purchases would roughly match the size of extra stimulus being mulled by the government, which is running out of policy options in the face of public debt twice the size of the 5-trillion economy.
The assets, ranging from government bonds and short- term government securities to commercial paper and corporate bonds, would come under a temporary scheme that would also cover ´30-trillion of such assets as collateral under an existing loan programme.
But analysts were sceptical. "The initial reaction was positive, but it's not clear how they're going to prevent deflation from intensifying ," said Tim Condon, chief economist at ING Financial Markets in Singapore. The scepticism was reflected in markets.
After initially weakening to almost 84, the yen rebounded to 83,40 before midday. The Japanese government bond yield curve steepened, with most yields falling, but 30-year yields rose on disappointment the measures were not more aggressive. The Nikkei stock average rose 1,5 percent though, its biggest gain in almost three weeks, in the hour-and-a-half of trading that remained after the Bank announcement.
Bank policy makers have signalled in past weeks they were considering easing policy further, after Tokyo's intervention last month to check yen strength offered only temporary relief.
Most market players, however, had expected the bank to opt for a relatively minor adjustment of its ´30-trillion loan scheme that supplies banks with funds at 0,1 percent rate.
This week's decision drives the bank closer to full quantitative easing it conducted between 2001 and 2006, under which it flooded market systems with excess cash and left markets to set the overnight call rate. But this week it said it would keep paying 0,1 percent interest on excess reserves held with it, providing a floor for market rates and suggesting it would only temporarily allow rates to fall below 0,1 percent.
Growth slipped from a healthy annualised rate of 5,0 percent in the first quarter to 1,5 percent in the second quarter. Data last week showed exports growth slipped for a sixth straight month in August. "Governor Shirakawa used the phrase 'comprehensive easing' instead of 'quantitative easing' .... He liked to differentiate from the previous easing measures," said Susumu Kato, chief economist at Credit Agricole in Tokyo.
17 year old Aussie - Joe Robinson - "Lethal Injection"
The Awesomely talented 17 year old Aussie Joe Robinson - Lethal Injection
Joe is a very young guy who has already reached the level of a master and is still growing. He is nearly on par with his mentor TOMMY EMMANUEL.
Great band, Great Groove, Great stuff.
Joe is a very young guy who has already reached the level of a master and is still growing. He is nearly on par with his mentor TOMMY EMMANUEL.
Great band, Great Groove, Great stuff.
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