THE ART AND SCIENCE OF VALUATION

I am frequently asked how Alliance approaches valuation. We recently published a longer explanation of real estate valuation methods.

‍

But here’s the shorter version. We use our years of expertise to determine which of the many property valuation methods best fits in any given situation. By far the most important method is the income approach, but the story doesn’t end there.

‍

The income approach relies on a somewhat mechanistic summation of a property’s rents and other income, minus its operating expenses. Of course, the quality of this income data matters too, and precise numbers are not always available. But the idea is that a property’s value depends most directly on its future net operating income.

‍

If valuation were this easy, anybody could do it and everybody would agree. In reality, valuation requires a lot more insight and judgment than this tabulation of income numbers. Why?

‍

Because we’re interested in future income. Past income is informative but not definitive, and this points to Alliance’s great strength.

‍

As experts in our niche, we have demonstrated an unusual ability to predict how properties will perform in future markets. Will rents and property values rise, or fall?

‍

This is the big question for real estate valuation. The answer depends on the market fundamentals that we focus on every day. What are the demographic trends around a given property? What is economic growth like? What kind of zoning restrictions are in place, and how might they change in the foreseeable future? What kind of infrastructure access does the property have, and how is that changing over time?

‍

These questions all feed into the one big thing: supply and demand.

‍

Alliance has delivered market beating returns for our investors because of our unique insights into how attractive properties will be in the future. In part, this is a function of our skill in picking great properties. But our success also depends on our ability to add value so that we don’t just pick winners, we also make winners.

‍

Sometimes we make capital improvements to our properties, although that is often done by tenants. Tenant management and lease renewals are the primary way that we boost properties’ values. We know how to attract and retain top quality tenants and we have been very successful with negotiating the kinds of long term lease agreements that make those properties more attractive on the open market.

‍

It’s not easy to model the kinds of insights that we apply to our investments. That’s why valuation is an art as well as a science. In this business, experience matters, and nobody has a better track record than Alliance does of identifying great deals.

‍