Presentation to Al Faisal University

MBA Class on Valuation

MBA 590 Real Estate Analysis Ross McLaughlin MRICS

Associate Director, JLL

AbdulRahman Al Jafar

Manager, JLL

Agenda

Introducing JLL 1

Example: Income Capitalisation & DCF

3 3

Example: Residual Land Valuation (RLV) 4

Valuation Practice and Regulation in KSA

5

5

Questions & Answers 6

Defining Valuation, its Purpose and Methods

2

Introducing JLL

Ross & AbdulRahman Ross McLaughlin MRICS

Associate Director – Valuation Advisory MENA

+971 50887 6098

ross.mclaughlin@jll.com

Ross is an Associate Director within the firm’s Valuation Advisory team and has a

broad understanding and experience of the MENA region’s real estate markets

having lived and worked in Bahrain, Saudi Arabia and the UAE during the past

seven years.

Ross’ recent valuation experience includes portfolio investment valuations, residual

land valuations of large masterplanned schemes, comparable land valuations and

development feasibility on mixed-use projects. He has undertaken valuations for a

wide range of purposes including loan security, IPOs, corporate M&As and financial

reporting.

Ross has worked on high-profile projects across KSA including Kingdom Tower,

Riyadh Business Gate, Burj Rafal, Jabal Omar, Um Al Qura and Al Balad Al Ameen.

Ross’ notable clients include Al Balad Al Ameen, Umm Al Qura for Development &

Construction Company, Al Muhaidib Group, Abdul Latif Jameel, Jadwa Investment

and a number of local, regional and international banks including Al Rajhi Bank, Al

Rajhi Capital, NCB Capital, Al Khabeer Capital, Samba Bank, Saudi Fransi Capital.

Ross holds a Masters of Science (MSc) in Real Estate from the University of

Glasgow (UK) and is a member of the Royal Institution of Chartered Surveyors

(RICS).

3

Abdulrahman Al Jafar

Manager – Advisory

+966 11 218 0303

abdulrahman.aljafar@jll.com

In his role with JLL, Abdulrahman's responsibilities include undertaking a wide

variety of commercial valuation reports for developers, financers, corporate

occupiers and institutional investors throughout the Middle East and North Africa.

Abdulrahman brings four years of real estate experience from MENA region and

Saudi Arabia in particular where he has worked in the Transaction Real Estate

Advisory Services in Ernst & Young (EY). Abdulrahman has provided strategic

advisory on a significant number of feasibility and highest and best use studies in

addition to valuation assignments for large and high-profile developments in the

Middle East and North Africa.

Abdulrahman has worked with a range of clients including Capital Market Authority,

Real Estate Development Fund, Human Resource Development Fund, Saudi

Commission for Tourism and Antiquities, Fransi Capital, Jadwa Capital, Al Aqaria

Company, Al Olaibi Group, Al Dakheel Company, Al Rashed Contracting Company,

Bin Seadan Group, Ajlan and Bros, Al Rajhi Holding, NEO Holding, Dar Al Bayan

Holding and other professional firms.

Abdulrahman holds a Bachelor degree in Finance and Economics with Honours

from King Fahd University of Petroleum and Minerals (KFUPM) and is a member of

International Association of Consultants, Valuators and Analysts (IACVA).

2013 revenue

$4B

S.F. under management

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53,000

Corporate offices

200+

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and equivalents

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300+

We are the only global real estate services and

investment management company with

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Americas

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One Company. One Experience. Around the Globe.

4

Experience in Middle East & Africa (MEA)

Across the Middle East, North and Sub-Saharan

Africa, Jones Lang LaSalle (JLL) is a leading

player in the real estate market and hospitality

services market. The firm has worked in 40 Middle

Eastern and African countries and has advised

clients on more than US$ 1 trillion worth of real

estate, hospitality and infrastructure developments.

JLL employs over 160 internationally qualified real

estate and hospitality professionals of 30

nationalities with regional offices in Dubai, Abu

Dhabi, Riyadh, Jeddah and Cairo. Combined with

the neighbouring offices in Casablanca, Istanbul

and Johannesburg, the firm employs more than

450 professionals and provides comprehensive

services across the wider Middle East and African

(MEA) region.

Dubai Abu Dhabi

Riyadh

Jeddah

Cairo

Istanbul

Casablanca

Johannesburg

Mauritius

Seychelles

Maldives

Zanzibar

Malta

Djibouti

5

Property &

Asset Management Research

Retail

Agency

Middle-East & Africa Integrated Services

• Property Management Advisory

Services

• Facilities Management

• Estate & Community

Management

Advisory

VALUATION ADVISORY

• Project appraisal

• Residual land valuation

• Financing & loan security

• IPOs & Listings

• Balance sheet / Accounting

STRATEGIC CONSULTING

• Development & Asset Strategy

• Market & Feasibility Analysis

• Land Best Use Analysis

• Master Plan Development and

Financial Advisory

LEASING

• Development Consultancy

• Leasing

• Brokerage

TENANT REPRESENTATION

• Office & Industrial Acquisition

• Lease Regear

• Lease Renewal

CONSULTING

• Strategic Advisory

• Development Consultancy

• Feasibility Study & HBU

LEASING

• Leasing & Brokerage

• Lease Regear / Renewals

• Retailer Mandates

Capital Markets

CORPORATE FINANCE ADVISORY

• Portfolio & Fund Advisory

• Capital Raising

• Value Recovery Services

INVESTMENT TRANSACTIONS

• Asset & Portfolio Acquisition

• Asset & Portfolio Disposal

• London Residential Sales

• Regular market commentaries

• One off thought leadership

• Tailored market research

• Insight on current & future

market conditions

Project & Development

Services

Hotels

OWNERS SERVICES

• Asset Management

• Operator Selection & Negotiations

• Value Recovery Services

CAPITAL MARKETS

• Asset & Portfolio Acquisition

& Disposal

• Structured Transactions

• Investment Planning

ADVISORY

• Development & Strategic Advisory

• Market & Feasibility Studies

• Valuations / feasibility

• Project Management

• Development management

• Due diligence & project

consultancy

• Cost Management

6

London Residential

• Land & Development

• Consultancy & Advisory

• New Homes

• Property Management

• Residential Investment – Capital

Markets

Introducing JLL: Saudi Arabia

7

• 30 staff based in Riyadh and Jeddah.

• Full service capability including research, valuations, consulting, tenant representation, leasing and asset management supported by regional team headquartered in Dubai.

• 10 years track record in KSA

• Advisor to Saudi Aramco, PPA, GOSI, Al Rajhi

Bank, Samba Bank, NCB, JEC, Jabal Omar, Al

Balad Al Ameen and Umm Al Qura.

7

Defining Valuation, its

Purpose and Methods

Defining Valuation, its Purpose and Methods

9

What is a valuation?

• Professional independent opinion of value

• Represents the figure that would appear in hypothetical contract of sale

• What would the property sell for in the open market?

Regulation

• International Valuation Standards (IVS)

• Royal Institution of Chartered Surveyors (RICS)

• RICS Valuation – Professional Standards 2014 (“Red Book”)

• RICS Valuer Registration Scheme (VRS)

Defining Valuation, its Purpose and Methods

10

Basis of Value

• A statement of the fundamental measurement assumptions of a valuation

• Conceptual framework of the International Valuation Standards Council (IVSC), which is also adopted by the RICS:

• Market Value, Market Rent, Investment Value (Worth), Fair Value

• Market Value is the most commonly adopted basis for valuations:

“The estimated amount for which an asset or liability should exchange on the

valuation date between a willing buyer and a willing seller in an arm’s length

transaction after proper marketing and where the parties had each acted

knowledgeably, prudently and without compulsion”

Defining Valuation, its Purpose and Methods

11

What is the Purpose of a valuation?

• They underpin all financial decisions

• Buying/Selling, Renting, Financing, IPOs, PPMs, Sukuk, Financial Reporting, M&As

• Demonstrate independence and to comply with Best Practice, e.g. IFRS

• Informed decision making

• Efficient and effective management of opportunities and exposure

• Risk management

Defining Valuation, its Purpose and Methods

12

Valuation Methodology

• Five methodologies within three approaches:

Market Approach

• Comparable Method (Sales Approach)

Income Approach

• Income Capitalisation/DCF

• Profits Method

• Residual Land Valuation (RLV)

Cost Approach

• Depreciated Replacement Cost (DRC)

Defining Valuation, its Purpose and Methods

13

Fundamental Principle of Income Approach

• Converting future cashflows to present value

• Considers the income that a property will generate over its useful life and coverts to a single capital sum by capitalising at an appropriate discount rate/yield

Income Approach Methodology

• Income Capitalisation

All Risks Yield (ARY) is applied to the income stream. ARY is growth Implicit

All risks and rewards of the property are reflected in the ARY

• Discounted Cashflow

A discount rate is applied to a series of cashflows to calculate a Net Present Value (NPV). Growth modelled explicitly in cashflow

Example: Income

Capitalisation and DCF

Example: Income Capitalisation and DCF

15

• Market Value is determined by Net Operating Income and multiplier (derived from All Risk Yield)

• All Risk Yield is derived from transactional evidence for similar properties in the market

Parameter Inputs

Gross Income

(Rent, service charge, other income) 1,000,0000

- Operating Costs 250,000

= Net Income 750,000

Net Initial Yield 8%

x YP Perp 12.5

Capital Value 9,375,000

Growth is reflected implicitly

in the All Risks Yield

Example: Income Capitalisation and DCF

16

• Market Value is determined by applying a market derived discount rate to a series of future cashflows

• Growth is modelled explicitly in the cashflow

CF Period 1 2 3 4

Growth 2% 2% 2% 2%

Gross Income 1,000,000 1,020,000 1,040,400 1,061,208

Operating Costs 250,000 255,000 260,100 265,302

Net Income 750,000 765,000 780,300 795,906

Terminal Value @ 8% 9,948,825

DR @ 9.55% 0.912807 0.833216 0.760565 0.694249

DCF 684,605 637,410 593,469 7,459,516

NPV 9,375,000

Example: Residual

Land Valuation (RLV)

Example: Residual Land Valuation (RLV)

18

• Also known as the Development Method

• Used to value land and projects under construction

• Used where there is a potential to put the land to higher value use (masterplans)

• Maximum price that a hypothetical developer would pay for the land to achieve acceptable hurdle rates based on the most probable development option for the land

Example: Residual Land Valuation (RLV)

19

RLV Process

There are 4 stages in the residual method:

• Highest and Best Use

Establish the development or redevelopment/refurbishment potential within the market for that parcel of real estate in that location

• Calculate Gross Development Value

The GDV is calculated using the comparative or income approach

• Deduct Development Costs (including profit)

Assess all the development costs, including an amount for normal profit, allowing for risks and timing of the project, and for the finance costs and interest charges on the capital (money) needed to fund the whole of the scheme

• The costs are added together and deducted from GDV to arrive at a Residual Land Value (RLV)

Valuation Practice &

Regulation in KSA

Valuation Practice & Regulation in KSA

21

• Historically an unregulated real estate market in KSA

• Increased regulation and sophistication as the market matures including:

•Taqeem (Accredited Valuers Law)

•Mortgage Law

•Off-plan sales/Land subdivision Law

•Capital Market Authority (CMA) Fund Valuations

•More stringent corporate auditing/compliance

JLL Corporate biography

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24

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25

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26

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This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of

Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of

this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party

resulting from reliance on this publication.