CBRE Consulting and

Valuation

Know Your Basics

Financial
Terminology
 Agenda

Key Terms Used

Various Asset
Classes
 Terminology
specific to asset
class
 Typical Costs
• Capital
Expenditure
Heads
• Operating
Costs
 Typical Revenue
Streams
• Sale revenues
• Lease revenues
•Other revenue ‘boosting’ streams
 Terminology

Major Real Estate Asset Classes

 Residential (Apartments / Row Houses / Villas / Independent Floors /

Plots )

 C ommercial O ffice / IT O ffice space

 Retail Space

 Hospitality (Hotels / Serviced Apartments / Condo Hotels etc.)

Unit Measurements

 Most asset classes quote costs and incomes on a per sq. ft basis

 Hospitality quotes on a per room or per key basis

Residential
 Residential Developments

Types of residences
 Apartments ~ typically considered as high rise
developments
 Row Houses ~ have common walls to neighboring units
with front and rear spaces remaining open
 Villas ~ no common walls (completely independent
units)

Evaluating a residential opportunity into financial

analysis
 All residential development across the country operate on
a sale model
 Residential Terminology

Soft launch / Pre launch ~Typically before sanctions/ approvals

 The sale of a project before the official launch of the project ~ sale to select customers at lower
rates

 Witness before official marketing activity begins ~ in some cases happens before the approvals

have been received

Launch ~ Typically after all formal approvals

 The formal sale of the project in the open market

 Rates are higher than the pre-launch rates and the project is available for sale to all.

Absorption ~ Not to be confused with occupancy

 Sale of a unit
 Costs ~ Capital Expenditure

Infrastructure / Site development costs

 Typically range from Rs. 40-60 lacs /acre (Approx. Rs. 100-140/sq. ft)

 Includes the following improvements

• Site leveling, Landscaping etc.
• Internal Driveways & Roads / Pathways
• All service lines: Water, Drainage & Sewerage, Electrical
• Sewage treatment for waste water management & re-cycling
• C able N etworking for IT, Telephones & C able TV etc.

Cost of Construction
 Costs Range from Rs. 1,400 – 2,800 / sq. ft depending upon the
specifications

 Basement Costs (Rs. 600 – 900 / sq. ft) depending upon the no. of
basements

Architects and Professional fees (3-5% of construction costs)

Any contingencies for cost over-runs (3-5% of total construction costs)
 Costs ~ Operating Expenditure

Administrative Costs ~ General overseeing of day to day operations for the site
 Includes cost of setting up site offices, salaries for project administrators etc.

 Costs for maintenance of site after completion can be charged as maintenance

costs from occupants / Upfront charge from end-users for creation of a sinking
fund

Marketing Costs
 Printing of brochures

 Advertising in various forms of media (print / TV etc.)

 Typically the sum of admin and marketing costs ranges from 4-6% of
construction costs

Sales Costs
 Typically ranges from 3-5% of total sales revenues

 Brokerage / Commissions paid on sale of units

 Revenue
s
Base sale price

 Q uoted in Rs. / sq. ft on “Super Built-up Area”

 May also be quoted separately in case of Villas for land area and built-up area

 Construction linked payment vs. down payment price (Discounted rate)

Car park sales

 Significant revenue stream ~ Most developers mandate a minimum purchase of 1-2

car parks per unit

 Open vs Covered car parks

Other revenue streams (One time charge)

 EDC ~ External Development Charges

 Club Membership charges

 PLC ~ Preferred Location Charges (Park facing, Pool facing, Lower floors, Penthouses
etc.)

 Floor Rise ~ Prevalent in most cities (NCR prefers lower floors!)

Commercial /
Retail
 Terminology

Types of Commercial Office / IT Office space

 Bare Shell

 Warm Shell (Bare shell + Power back-up + High-side A/C)

• High side AC includes all actual AC equipment such as compressors, condenser coil
etc.
• Low side AC includes the evaporator coils and internal ducting within premises

 Fully fitted space / Plug-and-play (Warm shell + Interior fit-outs)

‘Building efficiencies’ vary according to type of space

 IT Offices typically offer highest efficiency (useable space to super built-up area) ~ 80% +

 Commercial offices lose some efficiency ~ depends on unit sizes offered to end-users

since space is lost in additional corridors etc.

 Retail space is lowest in terms of efficiency ~ large atriums, extensive corridor spaces etc.
 Commercial / Retail
Launch of a project
 When the official marketing of a project begins and the commercial / retail space is open to the
market for leasing / purchase

Hard Options
 A client commits to the developer that he would take up extra space (other than that
already committed)

 The developer reserves that space for the said client for a pre-decided tenure (usually a
period varying between 6-8 months) on a ‘Right of first refusal’

 During this period the client may or may not pay the relevant property taxes and maintenance for
that extra space

Pre committed space / Soft O ptions

 A client commits to taking up space in the project before its completion

 Security Deposit ~ the client pays a percentage of the security deposit on signing of the
MOU (memorandum of understanding) the remaining security deposit is paid on possession

 The rent is paid only on possession of the property

 Costs ~ Capital Expenditure

Infrastructure / Site development costs

Cost of Architects and Professional fees

Any contingencies for cost over-runs

Cost of Construction (Quoted in Rs. /

sq. ft)

 Bare shell costs are typically in the

range of Rs. 1,600 – 1,800 / sq. ft

 Higher for Warm shell buildings (add

approx. Rs. 500 – 700 / sq. ft over
bare shell buildings)

 Retail Malls are typically more

expensive (Ranges from Rs. 2,500 –
2,800 / sq. ft)

• Includes interior finishing,

atriums, facades in addition to
cost of warm shell building

 In addition to the above, costs are

heavily influenced by amount of
basement parking provided
 Costs ~ Operating Expenditure

Administrative Costs
 General day to day management, lease administration etc.

 May be taken at approx. 2-3% of the lease revenue

Marketing Costs
 Printing of brochures, advertising in various forms of media (print / TV) etc.

 May be taken at approx. 3% of the construction costs

Sales Costs
 Brokerage / Commissions paid on leasing or sale of space (app. 1-2 months lease rent)

CAM (Common Area Maintenance)

 Generally passed through to tenants

 General upkeep of facilities, provision of amenities such as security, cost of power back-up
etc.
 Common area lighting, air-conditioning etc.
 Revenue
s
Lease rent
 Quoted as Rs. / sq. ft / month on Super Built-up area
 May be separately quoted for warm shell and fit-outs (if any)
 Leases are generally quoted as 3+3+3 years where the tenant pays the transacted lease
rent for 3 years which is due for a revision (pre-decided) every three years
 Gross Lease vs. Net Lease rent ~ Gross rent includes property taxes
Security deposit
 Interest free refundable deposit paid to landlord / developer ~ may range from 3 –
15 months depending on location (prevailing market practices)
Parking revenues
 Generally office leases provide for 1 free space per 1,000 -1,500 sft leased with
balance chargeable
 Mall parking revenues may either be a guaranteed revenue through outsourcing to
a contractor or on a per-entry basis
 Revenue
s
CAM Charge

 Paid by end-users on either cost or cost + mark-up (profit for developer) basis

 Revenues dependent on the level of facilities provided ~ Rs. 3-18 / sq. ft / month

Key Adjustments for Net Lease Revenues

 Rent free periods ~ granted to tenants for furnishing fit-outs after signing of leases (45-

90 days generally granted to tenants)

 Vacancy losses ~ net operating revenues need to be adjusted for vacancy and collection

losses – No space is 100% leased for 100% time ~ may adjust lease revenues for a

vacancy of 5-10%

Sale revenue

 Space may be sold to speculative buyers / investors / end users

 Assured return basis – Space sold to investors which is pre-leased by the developer
 Exit Price Determination

Estimate the income generated for tenanted space and ‘capitalize’ to arrive at an exit
value
Capitalization refers to the sale of property at an adopted return or ‘yield’ on the
space
Capitalization to also account for exit costs / brokerage paid ~ app. 1-2% of
exit price

Suppose a property earns Rs. 100 / sq. ft / month and is offered at a 10%
yield Capitalized value would be calculated as:

Rs. 100 x 12 / 10% x (1-2%) ~ Rs. 11,840 / sq.

ft Yield calculation may be classified as Gross Yield or Net Yield

 Gross Yield ~ (Annual lease rent - Property taxes) / (Sale
price)
 Net Yield ~ (Lease rent – Property taxes + parking revenue + margin on
maintenance + imputed interest on security deposit) / (Sale price – Exit costs)
Hospitalit
y
 Terminology ~ Types of Products

Hotels

Serviced Apartments

 Catering to long stay guests

 Generally offer studios, 2 BHK and 3 BHK formats

 Quote rates on a weekly / monthly basis

Condo-hotels

 Hotels / Serviced apartments which are sold to end-users as unit investments with or

without assured yields

 End-users generally get to use unit for a pre-determined time frame with balance utilized

for generating returns

 End-user and hotel operator share returns generated from letting out units
 Hotel Development Contours

4 Star 5 Star
Typical Bay Size 30 sqm 45 sqm Typical Hotel Upper
Floor
+ Corridor space 33 sqm 52 sqm
(10-15% loading) C orridor Space

+ Common Area 52 sqm 104 sqm

Bay
(60-100%)

Approx 600 sft 1,100 sft

Common areas comprise of ~ Lobby, reception, restaurants, kitchens, conference &

exhibition facilities, business centre, concierge desk, club floor lounge, spa, gym, shopping
arcade, marketing office etc.

Services typically sent to the basement ~ Staff kitchen, changing rooms, cold storage,
EPABX, security room, IBMS, flower arrangement room, laundry, equipment storage etc.
 Terminology

ARR ~ Average Room Rent

 The average net rate at which a room is let out (Quoted as Rs. / day)

 eg. For a 100 room hotel, daily room realization is Rs. 500,000 and 80 rooms have
been occupied, ARR for the day would be calculated as Rs. 500,000 / 80 ~ Rs. 6,250

Occupancy ~ Ratio of occupied rooms to total rooms available

RevPAR ~ Revenue per Available Room
 Average net realization across all rooms available for letting out

 Essentially RevPAR = O ccupancy x ARR

 In above example, RevPAR is calculated as Rs. 500,000 / 100 ~ Rs. 5,000 or alternately
Rs. 6,250 x 80% = Rs. 5,000

RevPAR is a better parameter for judging a hotel’s performance

 Operating Revenues
Room Revenues
 ARR x N o. of occupied rooms
 Typically walk-ins offer highest rates ~ ‘Rack rates’ (Published rates)
 Corporates generally negotiate better rates ~ offer multiple room nights / year
 Lowest rates offered by Airline crews ~ Bulk occupiers of space
F&B Revenues (Food and Beverage)
 Forms the second largest revenue source for hotels
 Includes revenues from room service, restaurants, pubs, night clubs, banqueting
and conferences, mini-bar etc.
 May range between 40-60% for 4* hotels
 Range for 5* hotels is more diverse ~ 50-120% depending on the hotel operator and
the positioning of the hotel
Spa / Health Club revenues ~ 5-10% of room revenues
MoDs (Minor Operating Departments) ~ 5-10% of room revenues
 Includes all other revenue streams such as Laundry, Business Centers (secretarial
services, internet usage, printing etc.), Telephone and Fax charges, Travel desks etc.
 Capital Costs

Cost of construction ~ calculated as cost per room

 Includes all costs – Construction, Site development, Basements as well as fully furnishing
the rooms, lobbies, restaurants etc.

 Essentially it is cost of entire development (excl. land costs) / No. of rooms

 Typical costs for hotel construction are

• 3* hotels ~ app. 30-45 lacs / room

• 4* hotels ~ app. 40-70 lacs / room

• 5* hotels ~ app. 75-100 lacs / room

• 5* deluxe ~ app. 1 - 1.25 Cr / key

High end brands (Mandarin Oriental, Four Seasons etc.) may go as high as 1.3-1.5
Cr / room
 Operating Costs

Other than the usual departmental costs, other key overhead costs include

 Payroll costs ~ Other than those included in each department

 F F & E reserves ~ Furniture, Fixture and Equipments – typically low

at commencement and escalates with aging of hotel property

 Operating expenses ~ Includes utilities expenses, property taxes and

insurance etc.

 Marketing fees ~ commissions paid to travel operators, advertising

expenses etc.

 Management fees ~ paid to operator for branding, managing the

property

• Base management fee ~ 2-3.5 % of top line revenues

• Management incentive fees ~ 6-10 % of achieved Gross Operating

Profits

 The Gross Operating profits after adjusting for the above range between 35-45% of

the total revenues

Thank You for your
time!