User Manual ARGUS EstateMaster IA 3.50 July-2018 ARGUS EstateMaster User Manual Table of Contents Part I Introduction 4 1 Program... .In..t.e..g..r.i.t.y..................................................................................................................... 5 2 System. .R..e..q.u..i.r.e..m...e.n..t.s............................................................................................................... 6 Part II Introduction to Investment Appraisal 7 1 Capitali.s..a.t.i.o..n.. o..f. .N..e..t. I.n..c..o.m...e....................................................................................................... 8 2 DCF Ana..l.y.s..i.s............................................................................................................................ 8 3 Discou..n..t. R..a..t.e......................................................................................................................... 10 4 Glossa..r.y.. o..f. .T..e.r..m..s................................................................................................................... 11 Part III Starting the Application 13 1 The Ap..p..li.c..a..t.io..n.. .L.a..u..n..c.h..p..a..d...................................................................................................... 14 2 Region..a..l .S..e..t.t.i.n.g..s.................................................................................................................... 15 3 Produ.c.t. .T..a..b.s.......................................................................................................................... 17 Part IV Navigation 19 1 Quick .S..t.a..r.t............................................................................................................................ 20 2 Openin..g.. .a.n..d.. .C..lo..s..i.n.g.. .F.i.l.e..s........................................................................................................ 21 3 Naviga..t.io..n.............................................................................................................................. 24 4 Keybo.a..r.d.. S..h..o..r.t.c..u..t.s................................................................................................................ 26 5 Menus.. a..n..d.. T..o..o..lb..a..r.s................................................................................................................ 27 6 Status. .B..a..r............................................................................................................................. 33 7 Dashb.o..a..r.d............................................................................................................................. 33 8 Goal S.e..e..k.............................................................................................................................. 35 9 Resizi.n.g.. .t.h..e. .M...o.d..e..l................................................................................................................. 36 10 Data V.a..l.i.d.a..t.i.o..n....................................................................................................................... 36 11 Emaili.n.g.. .F.i.l.e..s......................................................................................................................... 37 12 Export.i.n..g.. t.o.. .E..x.c..e..l.................................................................................................................. 39 Part V Preferences 41 1 Gener.a.l................................................................................................................................. 43 2 Calcul.a..t.io..n..s........................................................................................................................... 47 3 Financ.i.n..g............................................................................................................................... 49 Part VI Step-By-Step Instructions 50 1 Set Pr.e..f.e.r..e.n..c..e..s..................................................................................................................... 51 2 Inputti.n..g. .D..a..t.a......................................................................................................................... 51 3 Projec.t. .I.n..t.r.o..d.u..c..t.i.o.n................................................................................................................. 52 4 Setup................................................................................................................................... 53 5 Tenan.t.s................................................................................................................................. 58 6 Outgo.in..g..s.............................................................................................................................. 80 7 Capita.l. .E.x..p..e..n.d..i.t.u..r.e................................................................................................................. 82 8 Taxes. .&.. .D..u.t.i.e..s....................................................................................................................... 83 9 DCF An..a..l.y.s..i.s.......................................................................................................................... 84 10 Invest.m..e..n..t. .A..n.a..l.y.s..i.s................................................................................................................ 85 Part VII Custom Worksheets 88 © 2018 Altus Group 2 User Manual 1 Names................................................................................................................................... 91 2 Export.i.n..g.. D..a..t.a.. .t.o. .t.h..e.. E..n..t.e..r.p..r.i.s.e.. .D..a..t.a.b..a..s..e................................................................................. 92 Part VIII Application Templates 95 1 Select.i.n..g. .a.. .T.e..m...p..la..t.e.. .F.o..l.d.e..r..................................................................................................... 96 2 Creati.n.g.. .a.. T..e..m...p.l.a..t.e................................................................................................................ 97 3 Using .a.. T..e..m...p.l.a..t.e.................................................................................................................... 98 4 Manag..in..g.. .T.e..m...p..la..t.e..s............................................................................................................... 99 Part IX Integration with Microsoft Excel and Word 104 1 Linki.n.g.. .t.o.. E..x..c..e.l. .F.i.l.e..s............................................................................................................. 105 2 Linki.n.g.. .t.o.. W...o..r.d.. .F.i.l.e..s............................................................................................................. 110 Part X Valuation and Investment Reporting 119 1 Exec.u..t.iv..e.. S..u..m...m...a.r..y.............................................................................................................. 120 2 Capit.a..l.is..a..t.i.o.n.. .S..u..m..m...a..r.y......................................................................................................... 123 3 DCF................................................................................................................................... 126 4 Inves.t.m...e..n..t. C..a..s..h.. F..l.o.w............................................................................................................. 130 5 Char.t.s................................................................................................................................. 132 Part XI Printing Reports 137 1 Custo..m... .W...o.r..k.s..h..e..e.t.s.............................................................................................................. 139 Part XII Using the Enterprise Database 140 1 Introd..u..c..t.io..n.. .t.o. .t.h..e.. E..n..t.e..r.p..r.i.s.e.. .D..a..t.a.b..a..s..e................................................................................... 141 2 Prep.a.r..in..g.. .D..a.t.a.. .f.o..r. .E.x..p..o..r.t.i.n.g................................................................................................... 141 3 Expo.r.t.i.n..g. .t.o.. .t.h.e.. .D..a..t.a.b..a..s..e...................................................................................................... 142 4 Impo.r.t.i.n..g. .f.r.o..m... .t.h.e.. .D..a..t.a.b..a..s..e.................................................................................................. 144 © 2018 Altus Group 3 Part I ARGUS EstateMaster Introduction 1 Introduction ARGUS EstateMaster IA is a cash flow program designed for property valuation and investment analysis. It calculates property sale and purchase prices, and investment returns including internal rate of return and net present value based on a comprehensive set of inputs. The Program can be used to: · Financially appraise a property’s purchase price using the industry standard Capitalisation and DCF approaches; · Estimate the property value for acquisition purposes based on monthly discounted cash flows; and · Assess the feasibility of a property investment based on key performance indicators. 1.1 Program Integrity Every effort has been made to provide a quality product that is simple, flexible and detailed in its analysis. The ARGUS EstateMaster IA program has been sealed to safeguard the integrity of the program and formulae. If the seal is broken the validity of the formulae and program calculations cannot be guaranteed any more. Therefore, we recommend that the authors be notified of any problems rather than the user attempting to rectify the problem by removing the protection facility. To this end any modifications to the ARGUS EstateMaster IA program are prohibited without the express written approval of the authors EstateMaster Pty Ltd. Also, we cannot guarantee that the program is or will remain error free for every possible input permutation. To retain the integrity of the programs we recommend you audit the models on a regular basis with manual reality checks on the output results. Furthermore the program assumes certain tax assumptions such as rates of stamp duty. These may change in time and it is important for the user to keep abreast of such changes and know how they effect the model's assumptions. © 2018 Altus Group 5 ARGUS EstateMaster Introduction 1.2 System Requirements To install and operate ARGUS EstateMaster IA efficiently, the following is recommended: · PC with an Intel Pentium 4 2.4GHz minimum processor (or equivalent). · Microsoft Windows Vista SP2 Pro or later -or- Windows Server 2008 or later · Microsoft .Net Framework 4.5.2 or higher.. · 4Gb RAM or higher. · Internet connection (for downloading files and activating licences). Note to Apple Mac Users: EstateMaster can only run on Mac's via a Windows Virtualization tool such as VMWare or Parallels. © 2018 Altus Group 6 Part II ARGUS EstateMaster Introduction to Investment Appraisal 2 Introduction to Investment Appraisal 2.1 Capitalisation of Net Income The Capitalisation of Net Income (or Income Capitalisation) approach to property investment appraisal involves assessing the net rental income of the property and capitalising this in perpetuity to derive a capital value. As well as being used to value income-producing assets such as retail, commercial and industrial properties, the Income Capitalisation approach is also often used to value specialised income- generating 'going concern' properties (such as hotels), where the net operating income can be capitalised. Net Income Capitalised Value = Cap Rate The Capitalisation Rate used to capitalise the net rental income is market-derived and reflects the investor's desired return for that particular type of investment in the market. It can also be seen as the income from an investment expressed as a percentage of the investment's Capital Value. Net Income Cap Rate = x 100 Market Value/Price The Capitalisation Rate is the simplest measure of return calculated as the net income divided by price or value. As the Capitalisation Rate is often based on the net income when the property is sold, it is often based on and referred to as the Initial Yield although technically, the Capitalisation Rate and Yield are not the same thing. Yield is a return on the investment/value while the Capitalisation Rate is the rate used to capitalise net income to determine value/price. In the U.K., the term ‘Capitalisation Rate’ is often used synonymously with the Discount Rate for any analysis that does not project annual cash flows over a holding period; various yields are used to measure property performance, the terms ‘all risks yield’ and ‘initial yield’ often used to describe the cap rate. In the U.S. it appears that the terms ‘Capitalisation Rate’, ‘Overall Rate’ and ‘Overall Cap Rate’ are used interchangeably to mean the above described. 2.2 DCF Analysis Discounted Cash Flow (DCF) is a method of financial performance analysis that attempts to determine the current value of a financial investment by computing all future cash flows associated with an investment and reducing them to their present financial values. It does this by taking into account the time value of money, given the expectation of a given rate of return on funds per period of time. By reducing future cash flows by the expected rate of return the value of an asset can be determined based on the present value of its expected future cash flows. Property value has been defined as the present value of all future rental income. This definition would be useful in a perfect market, but property investment involves a complexity of costs and revenues that makes simple analysis problematic. Over time actual investment properties suffer obsolescence that affects their yields and vacancy expectations, and they require intermittent capital expenditures to keep the building in optimum condition. The capitalisation method of valuing income producing property computes capital value from rent but it relies on assumptions imbedded in the selection of the capitalisation rate to overcome its evident simplicity in approach. The DCF approach overcomes the shortcomings of the capitalisation method by making explicit all assumptions about the future costs and revenues associated with the property. It therefore offers the attraction of precision in forecasting the financial performance of property investments. DCF versus Capitalisation © 2018 Altus Group 8 ARGUS EstateMaster Introduction to Investment Appraisal At first sight DCF analysis would appear to be superior to valuation using capitalisation. However, this must be balanced against the fact that virtually all quantities entered into a cash flow model are forecasts of future events, and this reliance on forecasting introduces a significant risk to the precision of the result. The capitalisation method relies on market facts, current rentals and current comparable capitalisation rates. If it can be accepted that the market is rational in setting capitalisation rates and does so with some consideration of the future events likely to impact on the property, then the explicit detail of the DCF approach may be implicit in the market determination of the capitalisation rate. Moreover, since the capitalisation rate is a public fact in the market that results from the commercial decision of a large number of persons, then the capitalisation rate may be a better estimate of future events than the individual DCF analysis. For these reasons the selection between the two methods is not clear cut. If robust market evidence is available then the capitalisation method should be adopted as the most direct approach. However, often properties often display characteristics that make adoption of a local capitalisation rate difficult. This is especially difficult for complex properties in thin markets. In these cases DCF analysis becomes more attractive. In order to understand DCF analysis it is necessary to consider the notion of the time value of money and the mathematics of discounting. It is also important to be cognisant of the conventions applicable to the use of DCF for property analysis. Time Value of Money To demonstrate the time value of money, consider the case in which an individual receives a sum of $1,000 and invests it at a return of 10% per annum compounded in Government Bonds. The $1,000 will grow to $1,100 at the end of year 1 and $1,210 at the end of year 2 and so on. It is assumed that this 10% return represents the best use for the funds at a risk free rate. In this example, the investor should value $1,100 in a years time or $1,210 in two years time as equivalent to $1,000 now (ie. its present value). The reduction of future dollars to its equivalent value in money today is known as discounting. Discounting is the reciprocal of compounding and is expressed in the following formula: FV PV= (1+i)n Where: PV = Present Value; FV = Future Value (predicted amount); i = Discount Rate per period of time; and n = number of periods. The first requirement of DCF analysis is to create a tabulation of money and time with cash flow items along one axis and time on the other axis. In other words the same cash items used in the traditional approach (except interest on finance), are tabulated against equal time periods (months, quarters or years) and the values of those cash items are recorded in the time period are forecasted. Interest is excluded because this is incorporated in the discount rate as demonstrated above. The value of all cash items are totalled for each time period (with cost items being negative and revenue items being positive) resulting in a net cash flow range through time. This range of net cash flows is discounted to present value. The resultant net present value (NPV) measures the difference between the discounted revenues and the discounted costs. This is the first and perhaps the most important performance indicator. A positive NPV implies that the present value of incomes exceeds the present value of costs and the project/investment is therefore feasible. The other primary indicator is the internal rate of return (IRR). This is the discount rate at which the net present value equals zero. Possibly a better way to understand its meaning is to express it as the maximum interest rate that can be charged to a fully funded project/investment before the project/investment would show a net loss. © 2018 Altus Group 9 ARGUS EstateMaster Introduction to Investment Appraisal Time Period A reasonable time period is necessary for DCF analysis of property. It is necessary to adopt a consistent time period to avoid possible comparative errors due to the impact of differing time periods. 10 years is usually adopted as a balance between reasonable investment length and forecast reliability. 2.3 Discount Rate Discount Rate (or Target IRR) is the DESIRED RETURN on funds invested. For discounted cash flow analysis the discount rate is the rate at which future cash flows are discounted to present value. For a property to be feasible the discounted value of future cash flows (Net Present Value) must be greater than zero. A feasible investment will have an internal rate of return (FORECAST RETURN) greater than the discount rate (DESIRED RETURN). A simple and popular method for choosing a discount rate in discounted cash flow analysis is an 'Opportunity Cost of Capital' rate, which is given, in the following formula: Discount Rate = Inflation + Risk Free Rate of Return (Cost of Capital) + Risk Premium The risk free rate of return or cost of capital reflects the opportunity cost in not proceeding with the development. It may be defined by the current 5-10 year Government Bond rate. Note this includes an expectation of long-term inflation. If a zero inflation model is adopted then a medium term market forecast of inflation should be subtracted from the Government Bond rate to calculate the real risk free rate of return. Risk Premium Risk Premium is the level of discounting over and above the risk free rate (or cost of capital), which reflects the level of risk in the project. Weighted Average Cost of Capital A more sophisticated method of calculating the discount rate is the WACC which is the weighted required rate of return on debt and equity funding. The formula is as follows: D E WACC = * R + *R D E (D+E) (D+E) Where: D = Total Debt E = Total Equity R = Cost of Debt (risk free rate of return plus debt premium based on the credit rating of the company); and D R = Cost of Equity (required return on equity) E A popular method of calculating the required return on equity is the capital asset pricing model (CAPM). The formula is: R = R + ß * (R - R ) E F M F Where: R = expected return on equity; E R = risk free rate of return (10 year Commonwealth Bond rate); F ß = sensitivity of an investment's return to the return on the hypothetical market portfolio of shares; R = expected nominal return on the market portfolio (approximated by the yield on the market portfolio of common equity M shares); and (R - R ) = the market risk premium, or additional return demand by investors for holding risky assets. M F © 2018 Altus Group 10