Certificate in Real Estate Development & Value-Add Investments Financial Modelling

1. This course will equip you with the knowledge to make investment decisions, identify and mitigate risks & deal with the intricacies of property acquisition, management, and disposal.
2. You will discover how to construct a robust financial model to assess the risk and return profile of development, re-development, refurbishment, and value-add investments.

Module 1: Real Estate Development and Investment  

Foundations of Real Estate Development and Investment

• Why invest in real estate
• Four quadrants of real estate investment
• Real estate market cycles and their impact on investment decision

Overview of Private Equity in Real Estate

• Definition and key concepts
• Importance and role in the real estate market
• Current trends and market dynamics

Investment Strategies and Processes

• Core, core-plus, value-add, and opportunistic strategies
• Risk-return profiles of different strategies

The Investment Lifecycle

• Sourcing and acquiring properties
• Due diligence and underwriting
• Asset management and value creation
• Exit strategies and dispositions

Evaluating Real Estate Developments

• Gross Development Value (GDV) and Net Development Value (NDV)
• Residual Land Value (RLV)

Evaluating Real Estate Private Equity Deals

Performance Metrics and KPIs

• Internal Rate of Return (IRR)
• Equity Multiple
• Net Operating Income (NOI)
• Yields
• Worth or Investment Value

Case Study Analysis

• Real-world example of a private equity real estate development deal

Module 2: REITs 

Foundations of REITs

• Introduction to REITs: History and purpose
• Overview of REIT structures in different countries
• Emerging Markets and REITs: Opportunities and risks
• Market size and structure
• Types of REITs: development, operating, internal vs external
• The economic rationale for investing in REITs

REIT Investment Strategies

• Portfolio Diversification with REITs
• Public vs. Private REITs: Pros and cons

Legal and Regulatory Framework

• REIT Legislation: A global overview
• Tax considerations and requirements for REITs
• Governance and compliance in REIT operations

REIT Financials and Performance Metrics

• Understanding REIT Financial Statements
• Key Performance Indicators for REITs (FFO, AFFO, NAV)
• Analysing REIT dividend payout and sustainability

Valuation Techniques for REITs

• Intrinsic vs Relative Value
• Comparative analysis and benchmarking
• Identifying value and stock selection
• Market Trends Affecting REIT Sectors (Retail, Residential, Office, etc.)
• The impact of economic cycles on REIT performance

Risks and Opportunities in REIT Investment

• Macro-economic, sector and stock-specific risks
• ESG Risks
• Identifying and managing risks in REIT investment portfolios
• Legal and Regulatory Changes: Impacts on REITs

The Future of REITs

• Innovations in Real Estate: REITs and technology
• The outlook for REITs: Trends and predictions

Case Study Analysis

• Real-world example of a publicly-traded REIT

Module 3: Real Estate Debt Finance  

Fundamentals of Real Estate Debt Finance

• The Real estate transactions’ capital stack
• The importance of debt in real estate transactions

Real Estate Market Analysis

• Understanding market trends
• Asset class demand pre- and post-COVID-19
• ESG, lenders’ and borrowers’ approaches
• Evaluating market conditions for financing decisions
• Geographic and sector-specific considerations

Types of Real Estate Debt Instruments

• Commercial Real Estate Loans: Characteristics of commercial loans
• Risk-Return: Loan structures
• Interest-only
• Constant amortisation and remaining balloon payment
• Annuity
• Cash Sweep

Development Financing

• Financing new development projects
  • Strategy: Residential/ Commercial; domestic/ international
• Risks and considerations
  • Developing entity, credit worthiness, project experience
  • Land development risks
  • Design Risks
  • Entitlement risks
  • Financing Risks
  • Cost overrun/ delay risk
  • Lease risk
  • Sale Risk
• Phases of development financing
  • Total Development Costs and Sources of Funds
  • S-Curve and Debt Drawdowns

Key terms and covenants

• Maturities: Development facility vs Investment properties
• Financial covenants/ Default covenants
• Reporting covenants/ Information covenants

Analysing real estate debt

• Financial Analysis Techniques from an investment and lending perspective
  • Property Investment
  • Net present value (NPV) and internal rate of return (IRR)
  • Lending
  • Debt service coverage ratio (DSCR)/ Interest Cover Ratio (ICR)
  • Debt Yield
  • Loan-to-value ratio (LTV)

Risk Assessment

• Identifying and mitigating risks
• Sensitivity analysis
• Stress testing financial models

Commenting on Legal and Regulatory Framework

• Legal Aspects of Real Estate Debt
  • Key legal documents (Loan agreement/ Security documents including Fixed charge/ mortgages deed, floating charge, pledges over rental income accounts)
  • Foreclosure process and implications
  • Lender liability and borrower protections
• Regulatory Environment
  • Overview of relevant regulations
  • Basel III
  • Output Floors
  • Sustainable Finance Disclosure Regulation
  •  Shariah Finance
  • Impact of regulations on real estate finance

Case Studies and Practical Applications

• Real-world example of a real estate debt financing transaction

Module 4: Real Estate Financial Models

Best practice in financial models

• Simple tips to help you become an efficient financial modeller
• How to avoid errors and present your models in a persuasive way

Implicit investment valuation methods

• Term & Reversion
• Layer / Hardcore
• Property yields
• Defining term and reversionary yields
• Calculating the equivalent yield

Build your cash flow from scratch

• Inputs: passing rent, estimated rental value, initial and exit yields, market growth, review cycles and most importantly, target returns
• Outputs: internal rate of return, net present value and worth
• Annual and quarterly discounted cash flows: modelling purchase price, passing rent, rent reviews, exit rent and exit price

Gearing / Leverage

• Adding senior debt “bullet” loan

Analyse the results

• IRR, NPV and Worth
• Data tables & sensitivity analysis
• Risk visualisation (charts)

Case study:

• Single-tenant office building in Egypt

Module 5: Multiple tenant properties

Multiple tenant properties

• Modelling tenancy schedules and rents forecast
• Rent reviews, upward-only, break options, lease expiry
• Modelling hypothetical second leases
• Void period, rent free and estimated rental values

Time-varying rental growth

Net Operating Income Forecast

• Modelling capital expenditure for refurbishment and operating costs (letting fees, void costs, empty rates)

Investment decision

• When to accept the project and make investment recommendation

Case study

• Multi-tenant office building in Egypt

Module 6: Residual Valuation Appraisal

Residual Valuation Appraisal

• Property Yields
• Land Value
• Profit Appraisal
• Gross and Net Development Values
• Return on GDV, Cost and Equity

Pro-forma development cash flow

Inputs:

Timings: purchase date, works start date, planning, lead in, construction and refurbishment, void period, lease start, sale date

• Revenue: sales proceeds, estimated rental value per sqf, net internal areas, rental growth and target returns
• Development Costs: construction and refurbishment, site purchase and vacant possession value, contingency, professional fees, statutory costs, allowances and rights
• S-Curve vs. Straight Line

Outputs:

• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Maximum Bidding Price
• Total profit, profit on cost and equity multiple

Financial viability testing & risk analysis

• Data tables & sensitivity analysis
• Risk visualisation techniques

Case study: 

• un-geared office redevelopment in Egypt

Module 7: Development finance

Development finance

• Debt & Equity Structures
• Senior Debt
• Mezzanine Loan

Geared cash flow

Debt Types

• Rolled-up interest senior debt
• Equity first capital deployment waterfall
• Debt repayment structures for development finance

Joint-venture structures

• Equity waterfall structure
• Preferred returns
• Promote Cash Flow

Capitalised interest & circularities

Case study:

• Geared office redevelopment in Egypt

Module 8: Lead-in period

Lead-in period

• Current in-place leases, operating expenses – vacancy costs, including rates and empty costs
• Site acquisition including options, pre-development and planning costs
• Equity and debt drawdowns, including mezzanine finance

Construction period

• Development hard and soft costs using S-curve, Straight line and Known curves
• Construction finance drawdowns following an equity-first model

Lease-up and stabilisation period

• New leases with gross and net lease clauses
• Tenant incentives such as rent-free and capital expenditure contributions
• Operating expenses – delayed rates, letting fees, service charges and void costs

Investment options modelling

• Lease re-gearing, hold or sell
• Re-develop, refinance and hold
• Re-develop, stabilise and sell

Sources of funds

• Calculating debt and equity peaks
• Modelling the debt repayment waterfall
• Calculating total cost of debt (interest and fees)

Carried Interest / Promote Structures

• Profit shares and preferred equity returns
• Equity returns based on different IRR tiers

Risk modelling and presentation

• Sensitivity analysis (2-way data tables)
• Scenario analysis
• Financial ratios: IRR, NPV, Residual Land Value, Profit on Cost, Profit on GDV, Equity Multiple