Description
In the case study presented here, we analyse the critical aspects related to the financialization of the real estate market, we review some of the methodologies employed to evaluate risk in real estate investments and provide an example of appraisal of the so-called “embedded value”.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
1/8
Evaluating risk in real estate investments in areas of special value and
environmental beauty
Antonio CABRAS, Italy
Key words: Risk in Real Estate Investments, Valuation, Environment.
SUMMARY
In the case study presented here, we analyse the critical aspects related to the financialization
of the real estate market, we review some of the methodologies employed to evaluate risk in
real estate investments and provide an example of appraisal of the so-called “embedded
value”, using the approach developed by the Appraisal Research Lab of the University of
Cagliari.
In the context of real estate located in small areas characterised by high tourist and
environmental value, such as the area selected for our case study - "Costa Smeralda"
Arzachena (OT), Italy - real estate value is typically subject to strong appreciation. In many
instances, the unit value of real estate in such prestigious areas can exceed that of more
upmarket segments of the world’s main capital cities.
The analysis of real estate investment risk is supposed to take into account a large number of
factors, not always related to the actual quality of the building, including factors that are
notoriously difficult to identify and evaluate, such as the permanence of those environmental
characteristics that originated the real estate success of settlements like the one we examine
here.
The standard methodology to evaluate the risk of real estate investments may not work in this
kind of locations.
Analysing real estate investment risk should therefore be oriented towards:
1. assessing the actual capacity to preserve the same environmental quality that had made the
location’s success in the first place, and
2. the relationship between the overall value of the estate and the value that can be directly
attached to its external characteristics (quality of the built and environmental context).
The combined appraisal of both factors above, in the case of sites characterised by high
environmental value, is an adequate methodology to complement the existing techniques for
the valuation of risk in real estate investments.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
2/8
Evaluating risk in real estate investments in areas of special value and
environmental beauty
Antonio CABRAS, Italy
1. INTRODUCTION
As the world economic crisis intensified and expanded, the real estate sector – traditionally
considered to be a refuge sector, generally immune from recession shocks – was also dragged
down, a result of the growing trend towards financialisation of the real estate markets.
This trends, which was practically non-existent in Italy some time ago, has created new
players and generated speculative phenomena which rapidly modified the entrenched cycles
of construction and real estate and their very stable patterns. Furthermore, the action of global
investors has altered the values
previously exhibited by the
local market, usually generating
a strong increase in prices.
However, in the case of
buildings of the highest band,
located in particularly
fashionable tourist areas or in
valuable locations of the
world’s top capital cities, the
disengagement of global
investors could rapidly
determine the decline of the
local real estate market to the
benefit of new or more
prestigious locations.
In Italy the integration of finance with the real estate sector in the last decade, however, has
produced very positive effects as well, as it made real estate operators more aware of their
role, which in turn improved the general culture of real estate valuation, with greater diffusion
of valuation methods that are more compliant with the international standards and strong
growth of specific training and learning in this area.
As the banking sector became strongly involved with the real estate sector, those lending
institutions who developed and implemented transparent procedures for the valuation of real
estate assets used as credit security are especially rewarded. In Italy this trend was very strong
and motivated the publication of specific guidelines for asset valuation in 2010.
The issues highlighted above, however mitigated by the counter-measures adopted by the
banking sector, have determined a strong demand for research focussed on rating systems for
assets and real estate market appraisal as well as methodology for risk analysis and valuation
in the real estate sector.
Figure 1 - Marina di Porto Cervo
Source: www.sardegnadigitallibrary.it
Photographer: Paolo Magnanelli
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
3/8
2. RISK ANALYSIS OF REAL ESTATE ASSETS
The case study analyses the effect of the financialisation of the real estate market, and
provides an example of the so-called “embedded value” approach to valuation, using the
methodology developed by the Valuation Research Lab of the University of Cagliari, to
analyse and evaluate the risk of real estate investments in locations of outstanding
environmental value.
In the context of real estate located in small areas characterised by high tourist and
environmental value, such as the area selected for our case study - "Costa Smeralda" in Italy -
real estate value is typically subject to strong appreciation, especially for the most exclusive
properties. In many instances, the unit value of real estate in such prestigious areas can exceed
that of more upmarket segments of the world’s main capital cities.
The development of this type of location has often been strongly influenced by the decisions
of those foreign investors who had set up major residential and tourist developments on the
basis of the high quality of the local natural environment.
The analysis of real estate investment risk is supposed to take into account a large number of
factors, not always related to the actual quality of the building. The analysis should include
factors that are notoriously difficult to identify and evaluate, such as the permanence of those
environmental characteristics that originated the real estate success of settlements like the one
we examine here.
The standard methodology to evaluate the risk of real estate investments may not work in this
kind of locations.
Analysing real estate investment risk should therefore be oriented towards assessing the actual
capacity to preserve the same environmental quality that had made the location’s success in
the first place, as well as the relationship between the overall value of the estate and the value
that can be directly attached to its external characteristics (quality of the built and
environmental context).
Figure 2 - Porto Cervo
Source: www.sardegnaterritorio.it
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
4/8
The first of the two factors (preservation of environmental quality) has been evaluated
through the analysis of those local characteristics which drive the value of the area, assessing
which factors could cause those characteristics to deteriorate and finally selecting indicators
to express the a priori probability that such deteriorating events may actually occur.
The second factor (based on the extrinsic characteristics of the building) is evaluated by
determining the coefficient of the relationship between "embedded value" and "market value",
highlighting what percentage of the value is permanently embedded in the building relative to
its market value.
The combined appraisal of both factors above, in the case of sites characterised by high
environmental value, is an adequate methodology to complement the existing techniques for
the valuation of risk in real estate investments.
In the areas understudy other issues need to be considered, which can be even more
unpredictable, such as any radical change in investors’ intentions that may determine the
success or decline of entire tourist areas or construction sectors.
3. ACTIONS TO CONTAIN RISK IN REAL ESTATE INVESTMENT - THE
CURRENT STATE IN ITALY
In Italy, the sector that developed the most forceful actions to reduce the risk of real estate
investments is the banking sector, following the international Basil II accord.
One of the most important by-products of the containment of real estate risk is the
acknowledgement, on the part of the profession, of the need to elevate its knowledge level and
to adopt international standards for appraisal.
For the Italian valuators’ community, the following standards are especially relevant:
- IVS - International Valuation Standards (from the IVSC - International Valuation
Standards Committee);
- EVS - European Valuation Standards (from TEGoVA - The European Group of
Valuers’ Associations); and the four versions of the Code of Valuations -
Tecnoborsa (this is the first attempt to propose an Italian valuation standard that
takes into account the peculiarities of valuations in Italy).
Further steps in the same direction were taken by ABI (the Association of Italian Banks) who
published “Guidelines for the valuation of real estate as security of credit exposures” (also
published in reply to the circular from the Bank of Italy N. 263/2006) and with the activation
of the certification system ISO 17024 (CRIF Certification Services).
An intense and wide-ranging promotion of the international standards and of professional
training was carried out nationally by the association Geo.Val.Esperti (Expert Valuator
Surveyors), with the patronage of the Fondazione Geometri Italiani (Italian Surveyors
Foundation) CNG - Consiglio Nazionale Geometri e Geometri Laureati (National Council of
Surveyors and Graduate Surveyors) and C.I.P.A.G.L.P.; this decade-long activity has been the
driver of several initiatives carried out by other players as well.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
5/8
4. RISK ASSESSMENT
Among the many solutions available for risk assessment in real estate investments, the
following are worth mentioning:
-the “Property and Market Rating (MoriX)” system, designed by the HVB -
HypoVereinsBank Expertise banking group (part of the Unicredit group of companies) and
tested by the Laboratory of the University of Cagliari using the GMMA software.
-the RER (Real Estate Risk) model, which is the result of the research promoted by Deutsche
Bank Fondimmobiliari and Larry Smith Italia and carried out by the Economics department of
the University of Parma (Prof. Claudio Cacciamani).
They (above all the first), evaluate the key variables that need to be considered when
assessing real estate:
-Dependency on market;
-Individuality;
-Tied to a location;
-Benefit / yield.
These systems are aimed at identifying a set of standard criteria to measure real estate risk, to
support investors’ decision making and to protect credit exposures.
5. EMBEDDED VALUE
5.1. Geographic localisation
The area we focus on is called Costa
Smeralda [the Emerald Coast] and is
a stretch of the North Eastern coast
of Sardinia – the second largest
Italian island of the Mediterranean -
within the municipality of
Arzachena.
The area has an overall surface of
3'500 hectares along nearly 55 km of
coastline, even though presently the
term Costa Smeralda is often used to
identify an even larger area.
The most well-known resorts of the
area are Porto Cervo, Cala di Volpe,
Capo Ferro, Grande Pevero, Liscia di Vacca, Liscia di Ruja, Munti Tundi, Pantogia, Piccolo
Pevero, Piccolo Romazzino, Pitrizza, Razza di Juncu and Romazzino.
5.2. A brief history
The consortium of Costa Smeralda, which comprises the area we focus on, was established in
1962 by Prince Aga Khan Karim IV (Imam of the Muslim Ishmaelites).
Geographic localisation - Costa Smeralda -
Arzachena (OT) - Sardinia - Italy
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
6/8
The first phase of the development took place in a virgin coastal territory made up of granite
boulders and Mediterranean maquis of great environmental beauty. This phase featured
residential and tourist buildings characterised by an original Costa Smeralda architectural
style, known as “spontaneous”
or “neoMediterranean”, which
eventually spread out to other
tourist areas.
This original architectural style,
questionable as it may be, was
especially mindful of the way
buildings blended with the
surrounding natural
environment, whereas the later
building stage did not maintain
those original standards.
5.3. The Local market
From the beginning, the area of
the Costa Smeralda and
surroundings has become the
favourite destination of a
national and international high
level clientele, following its
unique, well integrated tourist
development in an environment
blessed with outstandingly
beautiful coastline overlooking
a superb body of water.
The real estate market has some
of the highest values in Italy and
features unique sea front
properties (even by international
standards) endowed with
panoramic views, large parks,
sporting facilities and private marinas. Also, whether or not the property was owned by
famous people may influence the sales price.
In markets like this, with great environmental value, the usual methods of valuation of the real
estate risk previously highlighted may be difficult to apply and may yield unreliable results.
5.4. Estimating the embedded value
Considering that:
- in the real estate market under study exhibits unit values higher than those of the top
capital cities in the world;
Figure 3 - NeoMediterranean style
Source: www.sardegnadigitallibrary.it
Photographer: Pietro Paolo Pinna
Figure 4 - Liscia di Vacca
Source: www.sardegnadigitallibrary.it
Photographer: Paolo Magnanelli
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
7/8
- the buyers may come from any part of the world, as they are attracted by the uniqueness of
the landscape and environment;
it becomes apparent that the analysis of real estate risk has to address the preservation of the
environmental quality which in fact determined the real estate success of the Costa Smeralda
and of other comparable locations.
The traditional methods of real estate risk analysis are unlikely to return reliable valuations in
this kind of locations, with few actual sales transactions to analyse.
In particular, the assessment of the real estate risk must evaluate which qualitative
environmental features are currently observable, which factors may compromise them and to
what extent.
The research carried out at the University of Cagliari allows to separate the share represented
by the intrinsic features of the property from its overall Market value (Mv).
For new buildings, the property’s features are represented by the Technical cost of
construction (Tccv), which has little influence over market variations. The value obtained
separating the Technical cost of construction (Tccv) from the Market value (Mv) is the so-
called Embedded Value (Ev) = (Mv – Tccv), which includes, quoting the University research,
the “most stable and permanent value elements, if they are supported by a high
probability that those quality levels are maintained which give ‘uniqueness’ to the
environmental context ”.
The ratio Ev/Mv produces the coefficient K; and the results of the study reported above and
of the field work conducted, show us that:
-if Tccv > Mv then K < 0, as is the case in depressed markets;
-if Tccv = Mv then K = 0; as is the case when market and construction value coincide;
-if Tccv < Mv then 0 < K < 1; and the closer to one, the greater the value of environmental
opportunities/enhancements.
For established rather than new properties, the equivalent of Technical construction cost
(Tccv) can be attained through the reproduction cost of the same property, less the accrued
depreciation of the property at the time of the valuation.
In the following, we will apply the scientific method developed by the University of Cagliari,
to real property values surveyed in the local market, regarding a Villa (not recently built)
located in one of the best sites in Costa Smeralda (Cala di Volpe).
Figure 5 - Cala di Volpe
Photographer: Walter Rosa
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
8/8
The ascertained market value (Mv) of this property is 40'000.00 €/m
2
, the depreciated
technical construction cost (Tccv) is 5'000.00 €/m
2
, which yields an embedded value (Ev) of
35'000.00 €/m
2
(40'000.00 - 5'000.00).
The K coefficient is 0.875 (35'000.00/40'000.00).
In our case study of a property located in a site of outstanding natural beauty, the high
construction cost turns out to be an almost negligible share (12.5%) of the total property
value.
BIBLIOGRAPHY
[1] Marchi G. - Argiolas M. - Valore d’uso, produttività e qualità ambientale: fattori del
capitale fondiario e valutazione del rischio di investimento immobiliare (2007); in Estimo e
Valutazione. Metodologie e Casi di Studio - DEI - Tipografia del Genio Civile - Roma;
[2] Raymond Trotz (Editor). Property and Market Rating [M] - HVB Expertise GmbH (2004);
[3] La valutazione dei rischi immobiliari: il modello RER, in Claudio Cacciamani (a cura di),
Il rischio immobiliare. Una soluzione di rating dell’investimento immobiliare, Egea (2003);
[4] www.ivsc.org;
[5] www.tegova.org;
[6] AA.VV. Tecnoborsa (2000) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - I edizione - Roma - Tecnoborsa S.c.p.a.;
[7] AA.VV., Tecnoborsa (2002) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - II edizione - Roma - Tecnoborsa S.c.p.a.;
[8] AA.VV., Tecnoborsa (2005) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - III edizione - Roma - Tecnoborsa S.c.p.a.;
[9] AA.VV., Tecnoborsa (2011) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - IV edizione - Roma - Tecnoborsa S.c.p.a.;
[10] ABI (Associazione Bancaria Italiana) delle “Linee guida per la valutazione degli
immobili in garanzia delle esposizioni creditizie“ - Roma (2010-2011);
[11] circolare della Banca d’Italia n. 263/2006 (2006);
[12] www.crifcertification.com;
[13] www.geoval.it;
[14] Guida d’Italia - SARDEGNA - Quinta edizione - Milano 1984 - Touring Club Italiano;
[15] www.consorziocostasmeralda.com;
[16] Simonotti M. (2005) - Manuale delle stime immobiliari - Roma - Geo.Val.Esperti;
CONTACTS
Geom. Antonio Cabras MRICS
Geo.Val. Esperti
Collegio dei Geometri e Geometri Laureati della Provincia di Cagliari
Cagliari - Italy
Telephone / Fax: 0039070403112
e-mail: [email protected]
doc_475562216.pdf
In the case study presented here, we analyse the critical aspects related to the financialization of the real estate market, we review some of the methodologies employed to evaluate risk in real estate investments and provide an example of appraisal of the so-called “embedded value”.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
1/8
Evaluating risk in real estate investments in areas of special value and
environmental beauty
Antonio CABRAS, Italy
Key words: Risk in Real Estate Investments, Valuation, Environment.
SUMMARY
In the case study presented here, we analyse the critical aspects related to the financialization
of the real estate market, we review some of the methodologies employed to evaluate risk in
real estate investments and provide an example of appraisal of the so-called “embedded
value”, using the approach developed by the Appraisal Research Lab of the University of
Cagliari.
In the context of real estate located in small areas characterised by high tourist and
environmental value, such as the area selected for our case study - "Costa Smeralda"
Arzachena (OT), Italy - real estate value is typically subject to strong appreciation. In many
instances, the unit value of real estate in such prestigious areas can exceed that of more
upmarket segments of the world’s main capital cities.
The analysis of real estate investment risk is supposed to take into account a large number of
factors, not always related to the actual quality of the building, including factors that are
notoriously difficult to identify and evaluate, such as the permanence of those environmental
characteristics that originated the real estate success of settlements like the one we examine
here.
The standard methodology to evaluate the risk of real estate investments may not work in this
kind of locations.
Analysing real estate investment risk should therefore be oriented towards:
1. assessing the actual capacity to preserve the same environmental quality that had made the
location’s success in the first place, and
2. the relationship between the overall value of the estate and the value that can be directly
attached to its external characteristics (quality of the built and environmental context).
The combined appraisal of both factors above, in the case of sites characterised by high
environmental value, is an adequate methodology to complement the existing techniques for
the valuation of risk in real estate investments.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
2/8
Evaluating risk in real estate investments in areas of special value and
environmental beauty
Antonio CABRAS, Italy
1. INTRODUCTION
As the world economic crisis intensified and expanded, the real estate sector – traditionally
considered to be a refuge sector, generally immune from recession shocks – was also dragged
down, a result of the growing trend towards financialisation of the real estate markets.
This trends, which was practically non-existent in Italy some time ago, has created new
players and generated speculative phenomena which rapidly modified the entrenched cycles
of construction and real estate and their very stable patterns. Furthermore, the action of global
investors has altered the values
previously exhibited by the
local market, usually generating
a strong increase in prices.
However, in the case of
buildings of the highest band,
located in particularly
fashionable tourist areas or in
valuable locations of the
world’s top capital cities, the
disengagement of global
investors could rapidly
determine the decline of the
local real estate market to the
benefit of new or more
prestigious locations.
In Italy the integration of finance with the real estate sector in the last decade, however, has
produced very positive effects as well, as it made real estate operators more aware of their
role, which in turn improved the general culture of real estate valuation, with greater diffusion
of valuation methods that are more compliant with the international standards and strong
growth of specific training and learning in this area.
As the banking sector became strongly involved with the real estate sector, those lending
institutions who developed and implemented transparent procedures for the valuation of real
estate assets used as credit security are especially rewarded. In Italy this trend was very strong
and motivated the publication of specific guidelines for asset valuation in 2010.
The issues highlighted above, however mitigated by the counter-measures adopted by the
banking sector, have determined a strong demand for research focussed on rating systems for
assets and real estate market appraisal as well as methodology for risk analysis and valuation
in the real estate sector.
Figure 1 - Marina di Porto Cervo
Source: www.sardegnadigitallibrary.it
Photographer: Paolo Magnanelli
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
3/8
2. RISK ANALYSIS OF REAL ESTATE ASSETS
The case study analyses the effect of the financialisation of the real estate market, and
provides an example of the so-called “embedded value” approach to valuation, using the
methodology developed by the Valuation Research Lab of the University of Cagliari, to
analyse and evaluate the risk of real estate investments in locations of outstanding
environmental value.
In the context of real estate located in small areas characterised by high tourist and
environmental value, such as the area selected for our case study - "Costa Smeralda" in Italy -
real estate value is typically subject to strong appreciation, especially for the most exclusive
properties. In many instances, the unit value of real estate in such prestigious areas can exceed
that of more upmarket segments of the world’s main capital cities.
The development of this type of location has often been strongly influenced by the decisions
of those foreign investors who had set up major residential and tourist developments on the
basis of the high quality of the local natural environment.
The analysis of real estate investment risk is supposed to take into account a large number of
factors, not always related to the actual quality of the building. The analysis should include
factors that are notoriously difficult to identify and evaluate, such as the permanence of those
environmental characteristics that originated the real estate success of settlements like the one
we examine here.
The standard methodology to evaluate the risk of real estate investments may not work in this
kind of locations.
Analysing real estate investment risk should therefore be oriented towards assessing the actual
capacity to preserve the same environmental quality that had made the location’s success in
the first place, as well as the relationship between the overall value of the estate and the value
that can be directly attached to its external characteristics (quality of the built and
environmental context).
Figure 2 - Porto Cervo
Source: www.sardegnaterritorio.it
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
4/8
The first of the two factors (preservation of environmental quality) has been evaluated
through the analysis of those local characteristics which drive the value of the area, assessing
which factors could cause those characteristics to deteriorate and finally selecting indicators
to express the a priori probability that such deteriorating events may actually occur.
The second factor (based on the extrinsic characteristics of the building) is evaluated by
determining the coefficient of the relationship between "embedded value" and "market value",
highlighting what percentage of the value is permanently embedded in the building relative to
its market value.
The combined appraisal of both factors above, in the case of sites characterised by high
environmental value, is an adequate methodology to complement the existing techniques for
the valuation of risk in real estate investments.
In the areas understudy other issues need to be considered, which can be even more
unpredictable, such as any radical change in investors’ intentions that may determine the
success or decline of entire tourist areas or construction sectors.
3. ACTIONS TO CONTAIN RISK IN REAL ESTATE INVESTMENT - THE
CURRENT STATE IN ITALY
In Italy, the sector that developed the most forceful actions to reduce the risk of real estate
investments is the banking sector, following the international Basil II accord.
One of the most important by-products of the containment of real estate risk is the
acknowledgement, on the part of the profession, of the need to elevate its knowledge level and
to adopt international standards for appraisal.
For the Italian valuators’ community, the following standards are especially relevant:
- IVS - International Valuation Standards (from the IVSC - International Valuation
Standards Committee);
- EVS - European Valuation Standards (from TEGoVA - The European Group of
Valuers’ Associations); and the four versions of the Code of Valuations -
Tecnoborsa (this is the first attempt to propose an Italian valuation standard that
takes into account the peculiarities of valuations in Italy).
Further steps in the same direction were taken by ABI (the Association of Italian Banks) who
published “Guidelines for the valuation of real estate as security of credit exposures” (also
published in reply to the circular from the Bank of Italy N. 263/2006) and with the activation
of the certification system ISO 17024 (CRIF Certification Services).
An intense and wide-ranging promotion of the international standards and of professional
training was carried out nationally by the association Geo.Val.Esperti (Expert Valuator
Surveyors), with the patronage of the Fondazione Geometri Italiani (Italian Surveyors
Foundation) CNG - Consiglio Nazionale Geometri e Geometri Laureati (National Council of
Surveyors and Graduate Surveyors) and C.I.P.A.G.L.P.; this decade-long activity has been the
driver of several initiatives carried out by other players as well.
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
5/8
4. RISK ASSESSMENT
Among the many solutions available for risk assessment in real estate investments, the
following are worth mentioning:
-the “Property and Market Rating (MoriX)” system, designed by the HVB -
HypoVereinsBank Expertise banking group (part of the Unicredit group of companies) and
tested by the Laboratory of the University of Cagliari using the GMMA software.
-the RER (Real Estate Risk) model, which is the result of the research promoted by Deutsche
Bank Fondimmobiliari and Larry Smith Italia and carried out by the Economics department of
the University of Parma (Prof. Claudio Cacciamani).
They (above all the first), evaluate the key variables that need to be considered when
assessing real estate:
-Dependency on market;
-Individuality;
-Tied to a location;
-Benefit / yield.
These systems are aimed at identifying a set of standard criteria to measure real estate risk, to
support investors’ decision making and to protect credit exposures.
5. EMBEDDED VALUE
5.1. Geographic localisation
The area we focus on is called Costa
Smeralda [the Emerald Coast] and is
a stretch of the North Eastern coast
of Sardinia – the second largest
Italian island of the Mediterranean -
within the municipality of
Arzachena.
The area has an overall surface of
3'500 hectares along nearly 55 km of
coastline, even though presently the
term Costa Smeralda is often used to
identify an even larger area.
The most well-known resorts of the
area are Porto Cervo, Cala di Volpe,
Capo Ferro, Grande Pevero, Liscia di Vacca, Liscia di Ruja, Munti Tundi, Pantogia, Piccolo
Pevero, Piccolo Romazzino, Pitrizza, Razza di Juncu and Romazzino.
5.2. A brief history
The consortium of Costa Smeralda, which comprises the area we focus on, was established in
1962 by Prince Aga Khan Karim IV (Imam of the Muslim Ishmaelites).
Geographic localisation - Costa Smeralda -
Arzachena (OT) - Sardinia - Italy
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
6/8
The first phase of the development took place in a virgin coastal territory made up of granite
boulders and Mediterranean maquis of great environmental beauty. This phase featured
residential and tourist buildings characterised by an original Costa Smeralda architectural
style, known as “spontaneous”
or “neoMediterranean”, which
eventually spread out to other
tourist areas.
This original architectural style,
questionable as it may be, was
especially mindful of the way
buildings blended with the
surrounding natural
environment, whereas the later
building stage did not maintain
those original standards.
5.3. The Local market
From the beginning, the area of
the Costa Smeralda and
surroundings has become the
favourite destination of a
national and international high
level clientele, following its
unique, well integrated tourist
development in an environment
blessed with outstandingly
beautiful coastline overlooking
a superb body of water.
The real estate market has some
of the highest values in Italy and
features unique sea front
properties (even by international
standards) endowed with
panoramic views, large parks,
sporting facilities and private marinas. Also, whether or not the property was owned by
famous people may influence the sales price.
In markets like this, with great environmental value, the usual methods of valuation of the real
estate risk previously highlighted may be difficult to apply and may yield unreliable results.
5.4. Estimating the embedded value
Considering that:
- in the real estate market under study exhibits unit values higher than those of the top
capital cities in the world;
Figure 3 - NeoMediterranean style
Source: www.sardegnadigitallibrary.it
Photographer: Pietro Paolo Pinna
Figure 4 - Liscia di Vacca
Source: www.sardegnadigitallibrary.it
Photographer: Paolo Magnanelli
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
7/8
- the buyers may come from any part of the world, as they are attracted by the uniqueness of
the landscape and environment;
it becomes apparent that the analysis of real estate risk has to address the preservation of the
environmental quality which in fact determined the real estate success of the Costa Smeralda
and of other comparable locations.
The traditional methods of real estate risk analysis are unlikely to return reliable valuations in
this kind of locations, with few actual sales transactions to analyse.
In particular, the assessment of the real estate risk must evaluate which qualitative
environmental features are currently observable, which factors may compromise them and to
what extent.
The research carried out at the University of Cagliari allows to separate the share represented
by the intrinsic features of the property from its overall Market value (Mv).
For new buildings, the property’s features are represented by the Technical cost of
construction (Tccv), which has little influence over market variations. The value obtained
separating the Technical cost of construction (Tccv) from the Market value (Mv) is the so-
called Embedded Value (Ev) = (Mv – Tccv), which includes, quoting the University research,
the “most stable and permanent value elements, if they are supported by a high
probability that those quality levels are maintained which give ‘uniqueness’ to the
environmental context ”.
The ratio Ev/Mv produces the coefficient K; and the results of the study reported above and
of the field work conducted, show us that:
-if Tccv > Mv then K < 0, as is the case in depressed markets;
-if Tccv = Mv then K = 0; as is the case when market and construction value coincide;
-if Tccv < Mv then 0 < K < 1; and the closer to one, the greater the value of environmental
opportunities/enhancements.
For established rather than new properties, the equivalent of Technical construction cost
(Tccv) can be attained through the reproduction cost of the same property, less the accrued
depreciation of the property at the time of the valuation.
In the following, we will apply the scientific method developed by the University of Cagliari,
to real property values surveyed in the local market, regarding a Villa (not recently built)
located in one of the best sites in Costa Smeralda (Cala di Volpe).
Figure 5 - Cala di Volpe
Photographer: Walter Rosa
TS05C - Finance and Investment, 6111
Antonio Cabras
Evaluating Risk in Real Estate Investments in Areas of Special Value and Environmental Beauty
FIG Working Week 2012
Knowing to manage the territory, protect the environment, evaluate the cultural heritage
Rome, Italy, 6-10 May 2012
8/8
The ascertained market value (Mv) of this property is 40'000.00 €/m
2
, the depreciated
technical construction cost (Tccv) is 5'000.00 €/m
2
, which yields an embedded value (Ev) of
35'000.00 €/m
2
(40'000.00 - 5'000.00).
The K coefficient is 0.875 (35'000.00/40'000.00).
In our case study of a property located in a site of outstanding natural beauty, the high
construction cost turns out to be an almost negligible share (12.5%) of the total property
value.
BIBLIOGRAPHY
[1] Marchi G. - Argiolas M. - Valore d’uso, produttività e qualità ambientale: fattori del
capitale fondiario e valutazione del rischio di investimento immobiliare (2007); in Estimo e
Valutazione. Metodologie e Casi di Studio - DEI - Tipografia del Genio Civile - Roma;
[2] Raymond Trotz (Editor). Property and Market Rating [M] - HVB Expertise GmbH (2004);
[3] La valutazione dei rischi immobiliari: il modello RER, in Claudio Cacciamani (a cura di),
Il rischio immobiliare. Una soluzione di rating dell’investimento immobiliare, Egea (2003);
[4] www.ivsc.org;
[5] www.tegova.org;
[6] AA.VV. Tecnoborsa (2000) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - I edizione - Roma - Tecnoborsa S.c.p.a.;
[7] AA.VV., Tecnoborsa (2002) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - II edizione - Roma - Tecnoborsa S.c.p.a.;
[8] AA.VV., Tecnoborsa (2005) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - III edizione - Roma - Tecnoborsa S.c.p.a.;
[9] AA.VV., Tecnoborsa (2011) Codice delle Valutazioni Immobiliari - Italian property
Valuation standard - IV edizione - Roma - Tecnoborsa S.c.p.a.;
[10] ABI (Associazione Bancaria Italiana) delle “Linee guida per la valutazione degli
immobili in garanzia delle esposizioni creditizie“ - Roma (2010-2011);
[11] circolare della Banca d’Italia n. 263/2006 (2006);
[12] www.crifcertification.com;
[13] www.geoval.it;
[14] Guida d’Italia - SARDEGNA - Quinta edizione - Milano 1984 - Touring Club Italiano;
[15] www.consorziocostasmeralda.com;
[16] Simonotti M. (2005) - Manuale delle stime immobiliari - Roma - Geo.Val.Esperti;
CONTACTS
Geom. Antonio Cabras MRICS
Geo.Val. Esperti
Collegio dei Geometri e Geometri Laureati della Provincia di Cagliari
Cagliari - Italy
Telephone / Fax: 0039070403112
e-mail: [email protected]
doc_475562216.pdf