Importance of macroeconomic analysis  in real estate practice

Having a view on the macroeconomic trends is critical when analyzing the real estate market. Real estate does not operate in a vacuum. Thus, it is essential for a real estate practitioner to grasp the role of the industry and knows the current events and how macroeconomic affect the real estate market, both in the aggregate supply and demand and the expectation of the buying public.

Real estate plays an important role in the economy. Residential real estate provides housing for families. It is the greatest source of wealth and savings for many families. Commercial real estate, which includes apartment buildings, create jobs and spaces for retail, offices and manufacturing. Real estate business and investment provide a source of revenue for millions.

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Real estate, renting, business and construction are both measured by, and contributes to Gross Domestic Product (GDP). As shown in the graph, its growth continues. In 2016, it contributed P1.8 trillion,  13 percent of the country’s gross domestic product. It exceeded its 2000 record of P3.5 trillion. At that time, real estate, renting and business was a hefty 9 percent component of GDP.

Private construction, which is mostly done by property developers and individuals, contributed P1.2 trillion in the gross domestic product. It is one of the contributor in  providing employment and help in lowering  unemployment rate.

Beside GDP, real estate market in the country is fueled by increasing foreign direct investment. Since 2007, the accumulated foreign direct investment totalled to P 2.1 Trillion. Meanwhile, the overseas Filipino workers remittances increases by 17% . From 22 Million in 2013 to $ 26.8 Million in 2016.

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Understanding key real estate relationships has a strategic implication on real estate decision making and portfolio management. The changing real estate environment can be linked to the macro-economy. Knowing the relationship between macroeconomic variables and real estate performance , and knowing whether these links are consistent or changing overtime ca provide a useful tool in leveling up our service to our clients and to our daily real estate practice.

Using Income Approach in Valuation

finanzmanagementThe income method is seldom used in appraisal. Most probably not used in banking institutions. But how are we sure that we are using the right method in valuing real estate properties? Properties that generate income such as apartment buildings, leasable buildings or even public owned enterprise properties subject for litigation should be appraised using the income approach. Lets dive deeper into this method.

This approach converts the income generated or projected income expected to be generated by a property into an estimate of value using one of two ways:  direct capitalization or discounted cash flows.   Both approaches use two important components:  (1) current or estimated cash flows and (2) a capitalization rate or discount rate.

Estimated cash flows should be realistic enough and comparable to the current and historical financial data of the property.  Additional considerations such as the economy or market trends can also impact estimates.  Future plans to expand or add additional assets to the property should also be considered if this will increase your cash flow generated from the property.

The capitalization rate or discount rate should be determined and derived from market data.  The capitalization rate is used to determine a sales price at a given point in time where factors of the market approach can be used.  The sales price could be a current sales price determined by capitalizing the current year’s net operating income.  Sales price could also be a future sales price determined by capitalizing the estimated net operating income of a future period.  The discount rate is the total rate of return a buyer would require to purchase an investment and is used to discount the estimated future cash flows to a present value because a peso received in the future is worth less than a peso today due to time value of money. The discount rate makes the present value of the property’s future cash flows equal.

An appraisal is extremely beneficial in providing information for valuing property.  Thus, Valuers should strive to level up their professional practice and use different methods to arrive at a justifiable and fair market value. That is, a market value that is fair to all concern.

Tips in Litigation Appraisal

downloadI attended a court hearing recently, and when the presiding judge read the facts of the case and the lawyer’s motion to nominate an Appraisal Commissioner, his (Judge) immediate response is “What is the qualification of Mr. Appraiser ?”

An appraiser play an integral role in every part of today’s civil litigation. Litigation appraisal involves taxation, estate planning, expropriation, litigation support, property settlement and others. That is why when selecting a real estate appraiser, a lawyer always perform comprehensive conflict-of-interest checks  on background and qualification before hiring or accepting appraisers.

This conflict of interest check is vital in cases where a lawyer is dealing with large business that offers myriad services and types of clients. While in checking the qualification of an appraiser, a lawyer does it in a profound way through the following attributes such us technical acumen, experience in appraisal, educator and communicator and readiness to appear and have demeanor in court.

Experience in Appraisal – An appraiser should have broad experience in appraisal of different types of properties such us office, retail, warehouse, industrial, apartments, hotels, memorial. Have knowledge in different type of appraisal like fee simple, leasehold or lease fee interest, insurable, retrospective, raw land development method and prospective appraisal.

Technical acumen – associated with professional experience, organizational experience for broader real estate and economic counselling skills capability to solve complex problems requires a greater depth of skills sets. Technical skills are key to an accurate and comprehensive expert report, thoughtful review and critique of the opposing expert report, depositions, and testimony.

Educator and communicator – an appraiser should be ready to explain and discuss  the report in the commissioners meeting or in an open court. A lawyer should pursue in selecting an appraiser’s prior publications and writings. The reasons for examining the expert’s writing are two-fold. First, this type of examination can help a lawyer to further determine the appraiser’s qualifications. Second, how an appraiser presented their arguments and the manner of reasoning and  arrived at their opinion. Is their analysis persuasive? Does the report and opinion make a sense to a lay person?  Have they presented their report in an easy to read and logical manner?

Appearance and demeanor – Lawyer have confidence that the expert will come across as professional and knowledgeable.  At trial or deposition, the appraiser knows the importance of establishing and maintaining credibility, presenting an appropriate appearance and demeanor, remaining composed, considering posed questions carefully, providing a simple and direct answer, giving opinions based on facts, following the standards of generally accepted appraisal practice, being impartial and not advocating for the client, and always telling the truth.

The above characteristics are interrelated. The expert’s qualifications should  matched to the demands of the case as it relates to areas such as property type, experience, or technical requirements. The expert’s ability to articulate his or her position will allow him to better convey his or her skills and qualifications to fellow commissioners, judge, lawyers and other officers of the court. Any aspiring appraiser to be part of this challenging job should muster the above attributes and be of help in our justice system.

See you in court.

Challenges In Appraising Warehouse Properties

Appraisal of a warehouse can appear straightforward compared to other appraisal assignments. A warehouse appraisal involves comparing a building that is primarily an open shell to similar buildings. Some appraisers tend to assume that one “box” is pretty much the same as another. However, a number of warehouse characteristics can present challenges during the valuation process.

Some appraisers end in using Cost Approach method as a generic method in appraising buildings. But there are several critical differences appraisers need to keep in mind. First, knowing the remaining economic life of a structure is a big factor in determining what method should be used. Appraising old structures using the cost approach method may generate an incorrect result. Income approach is the reasonable method in this situation. Second, the importance of solving the question of the highest and best use of the property- as vacant and as improved, gains ground when the subject property is old and located in a neighborhood where other best use is possible and more feasible.

In appraising these warehouses using Income Approach, it is essential to carefully consider the following factors in selecting comparables:

• Excess land
• Truss height
• Percent of office space
• Loading facilities
• Truck maneuvering distance
• Floor thickness/loading capacity
• Power service
• Land-to-building ratio
• Size relative to typical building size

The most important, location-related factors can differentiate warehouses located within the same community. The value of a warehouse facility is tied to the ability to move goods efficiently in and out of the warehouse. Any inefficiency reduces profitability.

In a challenging profession, an appraiser should think “out of the box” in looking methods that will result in a reliable and unbiased opinion of value.

Appraiser as an Expert Witness


Real Estate Appraisers
are often requested to provide an expert opinion as to the value of a property (an appraisal), for the purposes of determining just compensation. In an expropriation proceeding commissioners should at least be appointed to determine just compensation in accordance with the procedure in Section 5 of Rule 67 (Rules of Court). xxx the court shall appoint not more than three (3) competent and disinterested persons as commissioners to ascertain and report to the court the just compensation for the property sought to be taken.xxx

Additionally, appraisers are often requested to conduct an appraisal where the purpose is not explicitly described as being for litigation, but where litigation may result. Examples would be an appraisal completed for eviction cases, divorce proceedings, foreclosure or power of sale, or for civil forfeiture. Although appraiser’s reports are often entered into evidence for court, the appraiser is not necessarily called upon to provide expert witness testimony or to defend the report. However, it is prudent for the client ordering an appraisal to be sure the appraiser is aware of the duty of the expert witness and the court rules for report requirements, prior to engagement for an appraisal assignment.

“It is another area in our profession where we can lend services and specialize in” said Gus Agosto. Gus has been appointed by a lower court in Lapulapu City as a commissioner that will help the court in determining just compensation in expropriation case on trial. He also provided support to lawyers for litigation and court cases like eviction, judicial settlement and divorce.

The appraiser as experts may also provide retrospective appraisals, independent-appraisal analysis, appraisal review , expert witness testimony and litigation-support services in all real property valuation.

When selecting a real estate appraiser for litigation support, knowledge and experience matter. An appraiser should strive to be more knowledgeable and experienced property appraiser in providing litigation support and expert witness services.