Download Australian Valuation Practices Survey 2015

CORPORATE FINANCE
Australian
Valuations
Valuation
Practices
Survey 2015
kpmg.com.au
Contents
Section 1: Foreword...................................................................................... 1
Section 2: Executive summary – equity valuations..................................... 2
Section 3: Commercial environment............................................................... 3
Section 4: Impairment issues............................................................................. 7
Section 5: Valuation methodologies.................................................................... 8
Section 6: Market approach.................................................................................... 9
Section 7: Income approach: discounted cash flow.............................................. 10
Section 8: Adjusting for country risk premium........................................................ 13
Section 9: Benchmarking the risk-free rate........................................................................ 14
Section 10: Understanding beta.................................................................................... 16
Section 11: The equity market risk premium................................................................. 19
Section 12: Discounts and premia...................................................................................... 23
Section 13: Analysing the small stock premium................................................................ 24
Section 14: Marketability discount......................................................................................... 27
Section 15: Control premium.................................................................................................... 28
Section 16: Minority discount..................................................................................................... 29
Section 17: Accounting, ESG and miscellaneous factors........................................................... 30
Section 18: All about imputation credits........................................................................................ 38
Real Estate
Section 19: Introduction to real estate................................................................................................ 42
Section 20: Valuation methodologies.................................................................................................... 43
Section 21: Valuation cycle........................................................................................................................ 45
Section 22: Sales and leasing activity........................................................................................................ 47
Section 23: Leasing incentives....................................................................................................................... 48
Section 24: Yields.............................................................................................................................................. 49
Section 25: Rent................................................................................................................................................... 51
Tangible assets
Section 26: Introduction to tangible assets........................................................................................................... 54
Section 27: Valuation methodologies...................................................................................................................... 56
Section 28: Cost approach........................................................................................................................................... 57
Section 29: Depreciation profiles................................................................................................................................... 58
Section 30: Replacement cost considerations................................................................................................................ 61
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
1
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Australian Valuation Practices Survey 2015
Section 1:
Foreword
“It became evident that
the survey was filling
a real gap in the
Australian market based
upon the feedback and
queries we received on
the 2013 survey.”
Welcome to KPMG’s Australian Valuation Practices Survey 2015. This is KPMG’s
second survey and it builds on the findings of our inaugural 2013 survey. We hope
it will offer a unique reference point for corporate financiers and financial analysts,
providing insight into the valuation parameters and approaches currently being used.
For the first time, the survey also covers real estate and tangible asset valuations.
It became evident that the survey was filling a real gap in the Australian market
based upon the feedback and queries we received on the 2013 survey. We trust
that this will continue to be the case, especially given the continued volatility
in the financial markets which makes assessments and assumptions around
valuations, and in particular expected shareholder returns, very challenging.
The last couple of years have also shown us that a standard textbook approach to
valuation analysis does not always reflect commercial reality and has resulted in
corporate financiers and analysts often deviating from these approaches.
Thank you to everyone who completed the survey. Your time, efforts and insights
are, as always, invaluable.
Thank you also to those members of KPMG’s Valuation Services team who
initiated the inaugural survey and lead this year’s analysis.
Please feel free to discuss the results of the survey with us. All feedback is
warmly welcomed.
Sean Collins
Partner in Charge, Valuation Services
KPMG Corporate Finance
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Australian Valuation Practices Survey 2015
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Section 2:
Executive summary
– equity valuations
This year we have captured the views of 29 participants across a wide range of
industries including Big 4 accounting firms, investment banks, infrastructure funds,
valuation boutiques and large corporates. Their responses provide considerable
insight into the valuation methodology adopted in the Australian market.
For the first time we also included questions around general market expectations
and asset valuations from a non-technical point of view.
Key non-technical findings
• The board has final say on doing deals. The biggest challenge to
successfully completing deals over the next 12 months is the willingness of
boards to do so, whilst the availability of assets and asset values will also be
important determinants.
“59 percent of the
participants believe
real estate was
overvalued, 37 percent
believed infrastructure
was overvalued and
45 percent believe
equities were
overvalued.”
• Deal activity on the rise. Most participants believe the number of deals will
increase in 2015 and that scrip will be used in two thirds of transactions.
• Independent expert reports to remain steady. The number of Independent
Expert Reports (IERs) is expected to remain steady over the next 3 years
compared to FY14.
• Expensive assets abound. In terms of asset classes, 59 percent of the
participants believe real estate was overvalued, 37 percent believe
infrastructure was overvalued and 45 percent believe equities were
overvalued at the end of 2014.
• ASX on the decline. Accordingly, 68 percent of the participants believe the
S&P/ASX200 index will decrease over the next 3 years when compared to FY14.
• No sign of a decrease in impairment charges. Impairment charges are
expected to remain steady during 2015 when compared to 2014.
• Financial reporting influence. There has been an increase in the consideration
of financial reporting implications when evaluating or advising on a deal.
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
2
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Australian Valuation Practices Survey 2015
Section 3:
Commercial
environment
The biggest challenge
“
to successfully completing
deals over the next 12
months is the willingness
to boards to do so, whilst
the level of M&A activity
and values will also be a
determinant.”
1. What do you see as the biggest challenge to successfully
completing deals in the next 12 months?
Figure 1: What do you see as the biggest challenge to successfully
completing deals in the next 12 months?
Willingness of
the company's
Board of Directors
33.33%
22.22%
Asset valuation
Access to financing
11.11%
22.22%
Active M&A market
Other
0%
11.11%
5%
10%
15%
20%
25%
30%
35%
% of participants
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Australian Valuation Practices Survey 2015
2. Are any of the following Australian asset classes,
Figure 2: Are any of the following Australian asset classes, in your
in your opinion, currently overvalued? (Select all that apply)
opinion, currently overvalued?
37.9%
Infrastructure
58.6%
Real Estate
44.8%
Equities
Other
In terms of asset clauses,
“
more than half the
participants believed real
estate is over-valued.”
20.7%
Bonds
6.9%
0%
10%
20%
30%
40%
50%
60%
% of participants
3. Do you expect the number of deals completed to increase,
decrease or remain steady in the next 12 months?
Figure 3: Do you expect the number of deals completed to increase,
decrease or remain steady in the next 12 months?
Increase
41%
56%
Decrease
Remain steady
4%
© 2015 KPMG, an Australian partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The
KPMG name, logo and “cutting through complexity” are registered trademarks or
trademarks of KPMG International. Liability limited by a scheme approved under
Professional Standards Legislation.
|
The majority of
“
participants expect
the number of deals
to increase over the
next 12 months.”
4
5
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Australian Valuation Practices Survey 2015
A cash and scrip offer
“
is expected to be the
most common form
of consideration to
complete deals.”
4. What do you expect the preferred deal structure to be in deals
Figure over
4: the
What
do you expect the preferred deal structure to be in deals over the
next 12 months?
next 12 months?
33%
Cash offer
Scrip offer
48%
Cash and Scrip offer
19%
The number of IER’s is
“
expected to remain steady
over the next 3 years
compared to FY14.”
5. During FY12, FY13 and FY14 the number of Independent Expert
Figure
5: completed
During FY12,
FY13
and
the number
Reports
were 204,
182
andFY14
200 respectively.
Do of
youIndependent Expert Reports
expect the
number of Independent
Experts
completed
completed
was 204, 182
andReports
200 respectively.
Do you expect the
to increase,
decrease
remain steady Expert
over the Reports
next 3 years
number
oforIndependent
completed to increase,
compared to FY14?
decrease or remain steady over the next 3 years compared to FY14?
32%
Increase
Decrease
60%
Remain steady
8%
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Australian Valuation Practices Survey 2015
6. During
FY13 FY12,
and FY14
the total
the total
S&P/ASX200
Figure
6:FY12,
During
FY13
andreturn
FY14ofthe
return of the S&P/ASX200
accumulation index were -6.4%, 21.6% and 19.7% respectively.
accumulation
index
was
-6.4
percent,
21.6
percent and 19.7 percent
Do you expect the total return of this index increase, decrease or
respectively.
Do
you
expect
the
total
return
of this index to increase,
remain steady over the next 3 years compared to FY14?
decrease or remain steady over the next 3 years compared to FY14?
0%
|
6
68 percent of the
“
participants believe the
S&P/ ASX200 accumulation
index will decrease when
compared to FY14.”
32%
Increase
Decrease
Remain steady
68%
Figure 7: As a general observation, do you believe that the prices paid for
Australian Infrastructure assets (e.g. ports; toll roads):
7. As a general observation, do you believe that the prices paid for
Australian Infrastructure assets (e.g. ports & toll roads):
0%
37 %
63%
Only 37 percent of the
“
participants believe
that the prices paid for
Australian Infrastructure
assets represent fair value.”
Represent fair value
Indicates there may be a bubble
and the market is overheating
Provides room for further
increases in value
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
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Australian Valuation Practices Survey 2015
Section 4:
Impairment
issues
8. Has the volume of impairment related work, conducted by your
Impairment related work
“
and impairment changes are
expected to remain at the
levels experienced in 2014.”
firm,8:
increased,
decreased
or of
remained
steady related
in the past
12 conducted by your firm,
Figure
Has the
volume
impairment
work
months?
increased, decreased or remained steady in the past 12 months?
25%
Increase
63%
Decrease
40.74%
Remain steady
12%
55.56%
Figure 9: Do you expect impairment charges to increase, decrease or remain
steady
in the next
12 to
months?
9. Do you expect
impairment
charges
increase, decrease or
remain steady in the next 12 months?
19%
0%
Increase
Decrease
Remain steady
81%
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
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Australian Valuation Practices Survey 2015
8
Section 5:
Valuation
methodologies
Income and market approaches are the most popular
In 2015, the income approach (or discounted cash flow (DCF) approach) and the
market approach (eg: price earnings ratio) proved to be equally popular as the
primary valuation methodologies used by the participants. The survey shows the
income and market approaches are used ‘always’ or ‘sometimes’ by 100 percent of
participants. In contrast, 20 percent never use the asset based methodology. While
this is similar to our 2013 Valuation Practices Survey findings, the bias then was
towards using the income approach.
Figure 10: Survey 2015 – How often do you use the following
valuation approaches assuming a going concern?
10. How often do you use the following valuation approaches
assuming a going concern?
Other
70%
30%
Other
Asset based 4%
methodology
Figure 11: Survey 2013 – How often do you use the following
valuation approaches assuming a going concern?
Market approach
(e.g. Price
Earnings ratio)
70%
30%
Income approach
(Discounted
Cash Flow)
70%
30%
50%
Asset-based
10%
methodology
20%
76%
50%
Market approach
(e.g. Price
Earnings ratio)
76%
14%
48%
Income approach
(Discounted
Cash Flow)
48%
65%
4%
35%
11.11%
0%
20%
40%
60%
80%
100%
120%
20%
0%
% of participants
Always
Sometimes
40%
60%
80%
100%
% of participants
Never
Always
Sometimes
Never
Other methodologies used by participants:
• Cross-check to a RAB multiple or similar
• Valuation benchmarks – ie. value per unit of resource/reserve
• Rule of thumb for smaller valuations
• Probability Weighted NPV; Real Options
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
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Australian Valuation Practices Survey 2015
Section 6:
Market approach
No change to multiples
In looking closer at the market approach, our 2015 findings show no material change for a number of the valuation multiples.
Revenue, price to book ratios, and price to pre-tax earnings all remain fairly steady. The most favoured multiple – Enterprise
Value/Earnings Before Interest Tax Depreciation & Amortisation (EBITDA) – has only increased its popularity. Every participant
always or sometimes uses it, with three quarters always.
11. When using the market approach, how often are the following
Figurevaluation
12: Survey
2015
– When using the market approach,
multiples
used?
how often are the following valuation multiples used?
29%
Other
Price / Book
value of equity
10%
Price / Pre-tax
earnings
Price / Earnings
71%
Other
Price/Book
value of equity
55%
35%
22.22%
32%
EV/EBIT
23%
45%
11.11%
55%
22%
35%
10%
21%
9%
57%
36%
Price/Pre-tax
5%
earnings
68%
32%
Figure 13: Survey 2013 – When using the market approach,
how often are the following valuation multiples used?
55%
27%
Price/Earnings
23%
EV/EBIT
23%
68%
18%
59%
73%
5%
22.22%
EV/Revenue 5%
0%
25%
75%
EV/EBITDA
11.11%
20%
55%
40%
40%
60%
80%
61%
EV/EBITDA
EV/Revenue 5%
100%
0%
Always
Sometimes
50%
20%
% of participants
39%
45%
40%
60%
80%
100%
% of participants
Never
Always
Sometimes
Never
Other multiples used by participants:
• EV/RAB
• EV/Production
• EV/Reserves
• EV/passenger
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Australian Valuation Practices Survey 2015
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10
Section 7:
Income approach:
discounted cash flow
Capital asset pricing model still the way to determine the cost
of equity
So far as the income approach is concerned, there is no obvious change in the
methods employed when calculating the cost of equity to value future cash flows
to equity. Not surprisingly, the capital asset pricing model is as popular as ever when
deriving a cost of equity estimate. A substantial 83 percent of participants prefer
it to any other method. In direct contrast the arbitrage pricing theory still has no
support at all.
14. Which
the following
employ
when
Figure
14:ofSurvey
2015method(s)
– Whichdo
ofyou
theusually
following
method(s)
do you usually employ
calculating
the cost
of equity the
to value
cash flows
to equity?
when
calculating
costfuture
of equity
to value
future cash flows to equity?
Other
13%
Premium to
the risk
free rate
4%
Arbitrage
Pricing
Theory (APT)
0%
Capital
Asset
Pricing Model
(CAPM)
0%
83%
20%
40%
60%
80%
100%
% of participants
Always
Never
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Australian Valuation Practices Survey 2015
Going for Gordon Growth
The Gordon Growth model (or perpetuity method) continues to be popular when calculating the Terminal Value in a DCF valuation.
The survey shows 58 percent always use it while 42 percent sometimes use it. In using this method, the Consumer Price Index (CPI)
is commonly used as a proxy for the perpetuity (or residual) growth rate.
16 When calculating the Terminal Value in a DCF valuation what
While amethod(s)
large proportion
of respondents use the Exit Multiple model (85 percent), most (60 percent) only sometimes use it.
are considered?
Figure 15: Survey 2015 – When calculating the Terminal Value
in a DCF valuation what method(s) are considered?
Figure
16:Gordon
Survey
2015 method
– If the is
Gordon
Growth
is employed, how
17 If the
Growth
employed,
howmethod
do you usually
determine
(residual) growth
rate?
do the
youperpetuity
usually determine
the perpetuity
(residual) growth rate?
43%
CPI/Inflation
100%
Other
Long term
bond yields
Exit multiple
model
60%
25%
13%
15%
17%
GDP growth
Gordon growth
model (perpetuity
method)
58%
House view
42%
9%
11.11%
0%
20%
40%
60%
80%
100%
Other
17%
% of participants
Always
Sometimes
Never
0%
10%
20%
30%
40%
% of participants
Other growth rates used by participants:
• Unless there is a reason to expect a decline we
allow for inflation and some real growth (subject to
reasonableness).
• Long term asset growth prospects
• Asset specific growth depending on various factors
such as growth capex, etc.
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
50%
Australian Valuation Practices Survey 2015
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12
Midyear discounting preferred
When conducting a DCF valuation, you can choose between the mid-point or
end-of-year convention for the purposes of discounting. According to the survey,
most respondents (88 percent) usually prefer mid-year discounting. That’s not
altogether surprising given it assumes that cash flows are generated evenly
throughout the period.
18. When conducting a DCF valuation what discounting convention
is usually
employed?
Figure
17: Survey
2015 – When conducting a DCF valuation what discounting
convention is usually employed?
12%
Mid-point discounting
End-of-year discounting
88%
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
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Australian Valuation Practices Survey 2015
Section 8:
Adjusting for country
risk premium
Discount rate adjusted for country risk
Consistent with KPMG’s 2013 survey, most participants (41 percent) tend to adjust
the discount rate for country risk by determining an appropriate risk-free rate using
country credit ratings or (32 percent) by adding a premium to the cost of equity and
the cost of debt.
19. How do you generally adjust for country risk when valuing an asset in a
Figuredeveloping
18: Survey
2015 – How do you generally adjust for country risk when valuing
country?
an asset in a developing country?
60%
55%
50%
45%
% of participants
40%
41%
35%
30%
32%
25%
20%
15%
10%
5%
14%
9%
5%
0%
Adjusting the cash flows
Determining an appropriate risk free rate with reference to default yield spreads on
USD denominated sovereign Eurodollar bonds
Determining an appropriate risk free rate with reference to implied premiums using
country credit ratings
9%
Add an appropriate premium to the cost of equity and cost of debt
Other
2013
Other methodologies used by participants:
• All of the above
• Host country 10 year bond yield vs USD 10 year bond yield
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Australian Valuation Practices Survey 2015
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14
Section 9:
Benchmarking
the risk-free rate
10-years still a preferred proxy
Most participants continue to use the yield on 10-year government bonds as a
benchmark for the risk-free rate in Australia with a substantial 88 percent choosing
to do so as a general rule.
Figure 19: Survey 2015 – Which of the following are generally
used as a benchmark for the risk free rate in Australia?
100%
88%
% of participants
80%
60%
40%
20%
8%
4%
0%
0%
10 year government bond
5 year government bond
Cash rate
Other
2013
Other benchmarks used by participants:
• House view of long-term rate
• 10 year or duration matched
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Australian Valuation Practices Survey 2015
On the spot
Similar to KPMG’s 2013 survey, there is some variation in how the risk-free rate
is derived. A little more than a third of the participants (39 percent) use the spot
government bond yield as a proxy for the risk-free rate. However, 35 percent choose
to favour a combination of the spot, historic average and forecast to benchmark the
risk-free rate.
Figure 20: Survey 2013 / 2015 – How do you derive the risk free rate when using
the yield on a government bond as a proxy?
60%
50%
% of participants
40%
39%
35%
30%
20%
13%
10%
9%
4%
0%
Spot
Historic average
Forecast
A combination of the above
Other - please specify
2013
Other approaches used by participants:
• Either spot or historic average depending on the nature
of the valuation
• Look at both spot and historical average
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
Liability limited by a scheme approved under Professional Standards Legislation.
Australian Valuation Practices Survey 2015
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16
Section 10:
Understanding beta
Bloomberg takes top honours for beta information
When it comes to sources of information for beta estimates, the preferred service
providers are clear: Bloomberg attracts almost 60 percent of participants’ votes,
while Capital IQ stands next in line with almost 45 percent.
Figure 21: Survey 2013 / 2015 – Which of the following service providers are used
as a source of information?
60%
58.6%
50%
44.8%
% of participants
40%
30%
27%
20%
20.7%
17.2%
10%
0%
3.4%
0%
Aspect Huntley
Australian Graduate School of Management
Bloomberg
Capital IQ
Reuters/Factiva
In-house calculation/research
Other
Other methodologies used by participants
• Fact set
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Australian Valuation Practices Survey 2015
All in the leverage
The vast majority of participants (79 percent) unlever and relever the observed
equity betas to apply them to their subject company. A mere 21 percent choose to
apply equity betas sourced directly from comparable companies. This is consistent
with our 2013 survey.
Figure
Survey
2015
– Do
you apply
equity
sourced directly from
20. Do 22:
you apply
equity
betas
sourced
directly
frombetas
comparable
comparable
companies,
or
first
unlever
and
relever the observed equity
companies, or first unlever and relever the observed equity
apply
to thecompany?
subject company?
betas tobetas
apply to the
subject
21%
Source equity
beta directly
Unlever then relever
observed equity beta
79%
© 2015 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
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Australian Valuation Practices Survey 2015
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18
Timeframes for adjusting beta
The majority of participants (38 percent) make reference to monthly observations
over a five year period when calculating beta. However, it is worth noting that one
quarter rely on a data provider’s default output.
28. When calculating the Beta, generally what period and frequency
Figure 23: Survey 2015 – When calculating the Beta, generally what period and
do you deem to be most appropriate?
frequency do you deem to be most appropriate?
40%
% of participants
35%
38%
30%
25%
25%
20%
15%
21%
17%
10%
5%
0%
2 year weekly
5 year monthly
Rely on data provider default output
Other - please specify
Other methodologies used by participants:
• Multiple time periods and frequencies and understand
reasons for differences
• 48 monthly observations
• Both 2 year weekly and 5 year monthly – depends on
the sector
• 5 year monthly or based on sensitivity analysis
(correlation to market of stocks)
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Australian Valuation Practices Survey 2015
Section 11:
The equity market
risk premium
Australian market risk premium steady at 6 percent
Survey participants continue to show a clear bias towards using an equity (market) risk premium (EMRP) for Australia of
6 percent. This stands in contrast to the United States and the United Kingdom where a relatively wide range appears to be
used. Participants use an equity risk premium for the US of between 5 and 6 percent. The UK, on the other hand, sits mainly
at 5 percent but with some using 6 percent.
Figure 24:Survey 2013/2015 – What equity market risk premium do you use when making use of the Capital Asset Pricing
Model in percentage terms when valuing assets in the following countries?
United States
80
70
70
60
60
% of participants
% of participants
Australia
80
50
40
30
50
40
30
20
20
10
10
0
0
%
0.
4.
5.
%
0.
%
0.
6.
.%
7.0
%
0.
%
0.
8.
4.
%
6.
MRP
2013
%
.%
0.
0.
5.
%
0.
7.0
8.
MRP
2015
2013
2015
United Kingdom
80
% of participants
70
60
50
40
30
20
10
0
%
0.
4.
%
0.
5.
%
0.
6.
.%
7.0
%
0.
8.
MRP
2013
2015
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Mixed rationale behind market risk premia
While a small portion (10 percent) indicate the use of the historic equity bond
spread and others (19 percent) rely on the expected premium, a large majority
of participants (71 percent) use a combination of the two when setting the market
risk premium.
Figure 25: Survey 2013/2015 – Which of the following would you consider to be the
rationale for selecting the market risk premium?
80%
70%
% of participants
60%
50%
40%
61%
30%
20%
26%
10%
0%
13%
0%
Historic equity
bond spread
Expected
premium
Combination
of above
2013
Other – please
specify
2015
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Australian Valuation Practices Survey 2015
The alpha effect
For the most part, participants tend to add a premium to reflect unique risks not
modeled in forecast cash flows. The survey indicates that no participant ‘never’
makes an adjustment for such risks.
24. How often do you adjust the CAPM rate of return by a
Figurepremium,
26: How
you adjust
theare
CAPM
rate of return
tooften
reflectdo
unique
risks that
not modelled
in the by a premium, to reflect
unique
risks that
are not modelled in the forecast cash flows (alpha)?
forecast
cash flows
(alpha)?
0%
40%
Always
Sometimes
60%
Never
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Australian Valuation Practices Survey 2015
Section 12:
Discounts
and premia
Preferred discounts and premia
Almost 80 percent of participants consider minority discounts and control premia
when conducting valuations. However, a marketability discount is also considered by
52 percent, as is a small stock premium to a lesser extent.
33. Which of the following discounts/premia are often
Figure 27:considered
Which of the
following
discounts/premia
often considered
when
conducting
valuation are
analysis?
Select all when
conducting
valuation
analysis?
that apply
50%
79.3%
40%
30%
51.7%
20%
34.5%
10%
0%
Minority discount/ Marketability
control premium
discount
Small Stock
Premium (SSP)
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Section 13:
Analysing the
small stock premium
Small stock returns
The 2015 survey results are consistent with those of 2013. Most participants adjust
the overall expected rate of return on equity capital to reflect the additional risks
associated with smaller companies.
Figure 28: In relation to the S
mall Stock Premium (SSP) which factor is adjusted?
100
% of participants
80
80%
60
40
20
10%
10%
Beta
Equity market
risk premium
0
2013
Overall expected
rate of return
on equity capital
2015
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Australian Valuation Practices Survey 2015
Small stock premium inverse relationship
It is clear that there is an inverse relationship between the size of the SSP and
the size of the entity. The 2015 results suggest an increase in the SSP applied to
companies with a market cap less than $250 million.
A large number (44 percent) of participants rely on in-house views regarding the
SSP. Together with subjective assessments of the premium, this accounts for two
thirds of the participants who responded to this question.
Figure 29: Survey 2015 – What is the benchmark SSP applied given the size of
the entity?
12%
11%
10%
Premium Range
9%
10.0%
8%
8.9%
7%
6%
5%
4%
3%
2%
2.9%
1%
0%
Estimated
(MVE)
($m)<=150
Estimate
MVE ($m)
150-250
Estimate
MVE ($m)
251-500
2.4%
Estimate
MVE ($m)
501-1000
1.9%
Estimate
MVE ($m)
1001-2000
0.9%
Estimate
MVE ($m)
2001+
Market Value of equity (MVE)
Figure 30: Survey 2013 – What is the benchmark SSP applied, given the size of the
company or entity?
6%
Premium range
5%
4%
Up to
5%
3%
Up to
3%
2%
Up to
2%
1%
0%
Estimated
MVE
($m)<=250
Estimated
MVE ($m)
251-500
Estimated
MVE ($m)
501-1000
0%
0%
0%
Estimated
MVE ($m)
1001-2000
Estimated
MVE ($m)
2001-4000
Estimated
MVE ($m)
4001+
Market value of equity (MVE)
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37. Which sources do you generally consult in estimating an
appropriate
SSP?
Figure
31: Which
sources do you generally consult in estimating an appropriate SSP?
50%
40%
44%
30%
20%
22%
22%
10%
11%
0%
Ibbotson
Associates
In-house
Subjective
Other – please
specify
Other methodologies used by participants:
• All of the above
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Section 14:
Marketability discount
Marketability discount inverse relationship
The 2015 results are consistent with those of 2013. It is clear that there is an inverse
relationship between the size of the marketability discount being applied and the
size of the stake being valued.
38. Discount for lack of marketability
Figure 32: Survey 2015 – What benchmark discount is applied given the size of the
stake being valued (unlisted companies)?
50
45
40
Discount range
35
40%
30
25
20
15
30%
+
Median
15%
10
+
Median
10%
+
Median
0%
5
0
20%
1% – 24% 25% – 49%
50%
10%
+
Median
0%
5%
+ Median
0%
51% – 74% 75% – 99%
0%
100%
Size of stake
Figure 33: Survey 2013 – What benchmark discount is applied given the size of the
stake being valued (unlisted companies)?
45%
Discount range
40%
30%
+
Median
20%
30%
+
Median
15%
15%
20%
+
Median
5%
10%
+
Median
2.5%
0%
1% – 24%
25% – 49%
50%
5%
+ Median
0%
51% – 74% 75% – 100%
Size of stake
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Section 15:
Control premium
The benchmark premium
The premium range being considered by participants is consistent with that
observed in the 2013 survey. However, it is worth noting that the median control
premium decreased in 2015, from 22.5 percent, for a 51 percent to 74 percent
stake, to 15 percent and 30 percent, for a 75 percent to 100 percent stake, to
25 percent.
Figure 34:Survey 2015 – Control Premium. Please indicate the benchmark premium
normally applied given the size of the stake being valued.
50%
45%
40%
Premium range
35%
40%
30%
25%
30%
Median 25%
20%
15%
10%
Median 15%
5%
0%
51%–74%
75%–100%
Size of stake
Figure 35: Survey 2013 – What benchmark control premium is applied given the size of
the stake being valued?
50%
45%
40%
Premium range
35%
40%
30%
25%
30%
Median 30%
20%
15%
10%
Median 22.50%
5%
0%
51%–74%
75%–100%
Size of stake
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Section 16:
Minority discount
Not so minor discounts
The 2015 results are consistent with those of 2013. It is clear that there is an
inverse relationship between the size of the minority discount being applied
and the size of the stake being valued.
32. Minority interest discount
Figure 36: Survey 2015 – Minority interest discount
50
45
40
Discount range
35
40%
30
25
Median 25%
30%
Median
25%
20
15
10
Median 5%
5
0
20%
Median 15%
1% - 24%
25% - 49%
50% joint venture
Size of stake
Figure 37:
2013
– What
benchmark discount is applied given the size of the
32. Survey
Minority
interest
discount
stake being valued (unlisted companies)?
50
45
50%
40
Discount range
35
30
25
Median 20%
30%
Median
25%
20
15
Median 10%
10
Median 0%
5
0
10%
1% - 24%
25% - 49%
50% joint venture
Size of stake
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Section 17:
Accounting, ESG and
miscellaneous factors
Environmental, social and governance factors
While all participants are clearly considering Environmental, Social and Governance
(ESG) factors when performing valuations, most (60 percent) appear to be doing so
qualitatively. This is similar to 2013, although our latest survey shows that a further
30 percent adopt a qualitative and quantitative approach.
Figure
38:
Survey
– How Social
do you
account (ESG)
for Environmental, Social
33.
How do
you account
for2015
Environmental,
& Governance
factors when performing
valuations?
Governance
(ESG) factors when performing valuations?
&
10%
30%
Quantitatively
Qualitatively
Both
60%
Figure 39: Survey 2013 – Do you consider Environmental, Social & Governance
(ESG) factors when performing valuations?
5%
32%
Yes – Quantitatively
Yes – Qualitatively
No
63%
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Getting serious about the impact of accounting standards
It would appear the 2015 survey participants give more consideration to the impact
of accounting standards on future financial statements when evaluating or advising
on a deal. More than half (53 percent) of participants critically evaluate this impact.
This differs significantly to the 2013 survey where only 21 percent of participants
undertook a critical evaluation.
Figure 40: Survey 2013/2015 – To what extent do you consider the impact of
accounting standards on future financial statements when evaluating
or advising on a deal?
80%
% of participants
70%
60%
50%
53%
40%
47%
30%
20%
10%
0%
Ignore
Consider
2013
Critically evaluate
2015
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More hedge books get marked to market
While almost half the 2013 participants (47 percent) preferred to include hedge
books in the cash flows at contracted commodity prices, about two thirds
(67 percent) of this year’s participants are choosing to treat them as mark-to-market.
35. Please indicate how you treat hedge books in business valuations:
Figure 41:Survey 2015 – Please indicate how you treat hedge books in
business valuations:
80%
70%
67%
% of participants
60%
50%
40%
33%
30%
20%
10%
0%
0%
Mark-to-market
Included in cash
flows at contracted
commodity prices
Other
2013
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The value of employee options
When it comes to employee options, half the survey’s participants choose to
adjust the market value of equity by the market value of the options. This remains
consistent with the 2013 findings. Nonetheless, there has been a notable rise in the
number of participants who treat it as an expense in the income statement or cash
36. How do you treat employee options in the valuation?
flow statement – 42 percent in 2015, compared to 26 percent in 2013.
Figure 42: Survey 2013/2015 – How do you treat employee options in the valuation?
60%
% of participants
50%
50%
40%
42%
30%
20%
10%
8%
0%
Estimate the value of the options and adjust the market value of equity
As an expense in the income statement/cash flow statement
Other
2013
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Pricing in commodities
Participants continue to be divided in terms of how they estimate expected
commodity prices for a valuation. While just over half (51.7 percent) look to a
consensus of forecast prices by brokers and economists, a substantial 34.5 percent
turn to a commodity pricing expert for assistance. Then again, the spot price or
forward prices also make for popular methodologies with nearly 58.6 percent of
participants (17.2 percent and 41.4 percent respectively) using either one.
Figure 43: Survey 2013/2015 – Please indicate how you determine expected
commodity prices for valuation purposes:
60%
% of participants
50%
51.7%
40%
41.4%
34.5%
30%
20%
17.2%
10%
3.4%
0%
Spot
price
Forward
prices
Consensus of
Commodity
forecast prices pricing expert
by brokers /
economists
Other
2013
Other methodologies used by participants:
• Combination of spot, forward and consensus
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Working out the exchange rate
Most of the participants (55.2 percent) choose to rely on a consensus of forecast
prices by brokers and economists to determine the expected foreign exchange
rate. 51.7 percent look to forward prices for guidance. This is consistent with the
approach followed to determine expected commodity prices.
38. 44:
Please
indicate
how
expected
foreign
exchange
Figure
Please
indicate
howyou
you determine
determine expected
foreign
exchange
rates
rates
valuation
purposes
forfor
valuation
purposes.
60%
55.2%
% of participants
50%
51.7%
40%
30%
20%
24.1%
24.1%
10%
3.4%
0%
Spot
price
Forward
prices
Consensus of
Commodity
forecast prices pricing expert
by brokers /
economists
Other
Other considerations by participants:
• Combination of spot, forward and consensus
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36
Third party bias
It’s not always easy to rely on third party valuations. For our participants, the main
concerns relate to the questionable use of subjective inputs and an apparent lack
of commerciality or commercial reasonableness. A little more than 55 percent
39. What are the most common issues encountered when
underlined subjectivity as an issue, while about 48 percent questioned the
reviewing
third
party valuations?
commercial
quality of the
valuations.
Figure 45: What are the most common issues encountered when reviewing third party valuations?
60%
55.2%
50%
% of participants
48.3%
40%
30%
34.5%
34.5%
34.5%
20%
17.2%
10%
10.3%
6.9%
0%
Overly
simplistic
analysis
Lack of
Questionable
commerciality/
use of
commercial
subjective
reasonableness
inputs
Questionable
methodologies
adopted
Insufficient
detail to
reconstruct
report analysis
Too
much
jargon
Report or
analysis
too heavily
disclaimed
(i.e. no opinion
given on inputs
or analysis)
Other
Other issues encountered by participants:
• Misunderstanding of basic concepts
• Errors with pre-tax and post-tax discount rates.
• Poor understanding of the nature of some risks.
• Incorrect use of most likely cash flows instead of
expected cash flows.
• Poor understanding of standards of value.
• Related party transactions are not adequately reviewed
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Relying on a company’s credit worthiness
When it comes to working out the cost of debt in a given valuation, there are a
number of methodologies that find favour. However, participants commonly
40. percent)
How do you
determine
thethe
cost
of debt forcredit
valuation
purposes?
(48
choose
to use
company’s
rating.
Figure 46: How do you determine the cost of debt for valuation purposes?
16%
16%
20%
48%
Incremental cost of debt of company being valued
Cost of debt of comparable companies
Implied cost of debt given credit rating of company being valued
Other
Other considerations by participants:
• All of the above
• Cost of debt for generic owner of set of assets
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Section 18:
All about
imputation credits
Regarding imputation credits
There is little sign of change in how participants choose to treat imputation credits
when valuing a business. While 35 percent ignore them altogether, just as many
separately determine the market value of the benefit and add this to the estimate of
the value.
In direct contrast, infrastructure-related investments are treated quite differently.
Very few (6 percent) ignore imputation credits, the sizeable majority (69 percent)
choosing to include imputation credits attaching to dividends at an assumed
utilisation rate.
Figure 47: Survey 2013/2015 – How do you treat imputation credits in business
enterprise valuations (other than infrastructure investments)?
50%
% of participants
40%
30%
35%
35%
20%
18%
10%
6%
0%
Ignore
Adjust the
equity market
risk premium
6%
Separately
Adjust cost
determine the
of equity
market value
for gamma
of the benefit
and add to
estimate of value
Other
2013
Other methodologies used by participants:
• Depends on the potential buyer
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Figure 48: Survey 2013/2015 – How do you treat imputation credits when valuing
80% an infrastructure investment?
70%
69%
% of participants
60%
50%
40%
30%
20%
19%
10%
0%
6%
6%
Ignore
Adjust the
equity market
risk premium
2013
0%
Separately
determine
the market
value of the
benefit and add
to estimate
of value
Adjust cost
of equity
for gamma
Other
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Making the most of franking credits
The survey shows some disparity regarding the utilisation rate of imputation
credits. Nonetheless, similar to the 2013 survey, there is a clear concentration
with 74 percent of participants using 70 – 80 percent of the benefit.
Figure 49: Survey 2015 – Where imputation credits are included in the cash flows,
what utilisation factor do you assume?
50%
47%
% of participants
40%
30%
27%
20%
10%
13%
13%
0%
0%
100%
90%
0%
80%
70%
60%
50%
0%
0%
40%
Less
than
40%
Utilisation factor
2013
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Australian Valuation Practices Survey 2015
Section 19:
Introduction
to real estate
|
42
Real Estate
Our inaugural real estate section provides some interesting insights. The survey
was provided to a range of real estate advisors including valuers, investors and
consultants. Fourteen real estate advisors completed the survey.
Key findings
It’s all about capital and cash. Capitalisation and discounted cash flow
approaches are the most utilised primary and secondary methods of valuation
across all asset classes respectively. When adopting these approaches, valuers
use excel-based models more than industry accept software. The cost of
licenses for the software may be a reason for this, particularly for the smaller
and independent practices. However, more likely is the need to factor in specific
issues relating to an individual property, which may not be possible in the
framework of a structured software program.
• Adopting a standard approach to valuation. Valuers generally adopt a similar
approach to valuations across all asset classes. This includes:
−− using 2 years of pending lease expiries to make capital adjustments
−− using 50 basis points difference between the capitalisation rate and
terminal yield when using the DCF approach, and
−− waiting either one or more years between the revaluation of assets either
for internal or external purposes, (although 2 or more years is considered
more acceptable for external valuations).
• A buoyant real estate market. The common view is that both sales and leasing
activity has increased across all asset classes over the past 12 months. Valuers
believe this trend will continue over the forthcoming 12-month period.
• Steady returns to continue. While an uplift in activity is welcomed by landlords/
investors, both leasing incentives and face rents have remained steady and valuers
expect them to continue to do so over the next 12 months.
• Yields on the decline. Valuers believe yields have decreased across all asset
classes in both the primary and secondary markets over the past 12 months and
will continue to do so over the next year, albeit with variations between the asset
classes. This means they have experienced growth in capital values and there is an
expectation this will continue.
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Australian Valuation Practices Survey 2015
Section 20:
Valuation
methodologies
Deriving market value
The capitalisation approach is clearly the predominant method applied in deriving
45. What
are
yourallmost
utilised
primary
methods of valuation?
market
value
across
real estate
asset
classes.
Figure 50: What are your most utilised primary methods of valuation?
Primary Method of Valuation
80%
77%
75%
72%
70%
60%
50%
40%
30%
25%
17%
15%
11%
Retail
Cost Approach
0%
Direct Comparison
Direct Comparison
Discounted Cash Flow
Capitalisation Approach
Cost Approach
Direct Comparison
Discounted Cash Flow
Capitalisation Approach
Office
0%
Capitalisation Approach
0%
0%
0%
Discounted Cash Flow
8%
10%
Cost Approach
20%
Industrial
Cash is important
The DCF approach is the second most preferred method applied in deriving
market
value
across
real estate
assets.
This is followed
byof
thevaluation?
direct
46. What
are
yourallmost
utilised
secondary
methods
comparison approach.
Figure 51: Secondary
What are
your most utilised secondary methods of valuation?
Method of Valuation
70%
60%
58%
50%
50%
50%
40%
31%
30%
30%
25%
20%
10%
13%
8%
8%
6%
10%
10%
Office
Retail
Cost Approach
Direct Comparison
Discounted Cash Flow
Capitalisation Approach
Cost Approach
Direct Comparison
Discounted Cash Flow
Capitalisation Approach
Cost Approach
Direct Comparison
Discounted Cash Flow
Capitalisation Approach
0%
Industrial
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Consideration to capital adjustments
Our survey indicates that the majority of participants use 2 years of pending lease
expiries to make capital adjustments for valuations across all sectors. Adjustments
that extend beyond this time frame appear more prevalent in the industrial sector
than in office or retail.
47. When using the capitalisation approach, within how many years
Figure 52: When using the capitalisation approach, within how many years
of pending lease expiries do you typically make capital adjustments
of pending lease expiries do you typically make capital adjustments
in the valuation?
in the valuation?
Typical Unexpired Terms For The Provision of Capital Adjustments
Using the Capitalisation Approach
90%
86%
82%
80%
75%
70%
60%
50%
40%
30%
20%
25%
14%
9%
10%
9%
0%
0%
0%
1 Year
2 years
>3 years
1 Year
Office
2 years
>3 years
1 Year
Retail
2 years
>3 years
Industrial
50 bp the norm for DCFs
In all sectors, the majority of valuers use a 50 basis points difference between the
capitalisation rate and terminal yield when adopting the DCF approach to valuation.
While a smaller portion are happy to employ a 25 basis points difference, there is
48.support
Whenfor
using
the discounted
cash flow approach, what is the
no
100 basis
points.
typical spread between your capitalisation rate and terminal yield?
Figure 53: When using the discounted cash flow approach, what is the typical
spread between your capitalisation rate and terminal yield?
Typical Spread Between Capitalisation Rate and Terminal Yield in a DCF
80%
71%
70%
57%
60%
50%
50%
50%
43%
40%
30%
29%
20%
10%
0%
0%
0%
0%
25 bp
50 bp
Office
100 bp +
25 bp
50 bp
Retail
100 bp +
25 bp
50 bp
100 bp +
Industrial
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Australian Valuation Practices Survey 2015
Section 21:
Valuation cycle
A good time to revalue
The typical period between the revaluation of assets for either internal or external
purposes is 1 or more years for office and retail assets and more than 2 years for
industrial assets. However, some participants consider it necessary to carry out
49. What iswithin
the typical
period
revaluations
revaluations
12 months
of abetween
previous valuation,
acrossofallassets,
asset classes.
whether it be internal or external?
Figure 54: What is the typical period between revaluations of assets, whether it be
internal or external?
Typical Period Between Revaluation of Either Internal or External Assets
60%
50%
50%
38%
40%
30%
38%
36%
36%
27%
25%
25%
25%
20%
10%
0%
0-1 yrs
1-2 yrs
2+ yrs
0-1 yrs
Office
1-2 yrs
2+ yrs
0-1 yrs
Retail
1-2 yrs
2+ yrs
Industrial
The need for regular external valuations
Our survey shows that external valuations are required relatively frequently
across the board. In all asset classes, they are overwhelmingly sought after 2 or
50. Inyears.
your experience, how often are external valuations sought?
more
Figure 55: In your experience, how often are external valuations sought?
Frequency of Exetrnal Valuations
80%
75%
70%
63%
60%
55%
50%
40%
20%
27%
25%
30%
25%
18%
13%
10%
0%
0%
0-1 yrs
1-2 yrs
Office
2+ yrs
0-1 yrs
1-2 yrs
Retail
2+ yrs
0-1 yrs
1-2 yrs
2+ yrs
Industrial
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46
Excel leads the way in office and retail valuations
The survey findings show that a higher proportion of participants use excel-based
proprietary models compared with industry accepted software when undertaking
a valuation of either office or retail assets. As regards industrial assets, both are
used
equally.applying the capitalisation approach and DCF approach,
51. When
do56:
you
or your
valuers
use industryapproach
accepted
or do you
Figure
When
applying
the capitalisation
andsoftware
DCF approach,
excel or
based
proprietary
models?
your valuers
use industry
accepted software or excel based
proprietary models?
Type of Software Used to Perform Valuations Using the Capitalisation and DCF Approaches
70%
64%
57%
60%
50%
50%
50%
43%
40%
36%
30%
20%
10%
0%
Industry Accepted
Excel based
Industry Accepted
Excel based
Industry Accepted
Excel based
Software
Proprietary Models
Software
Proprietary Models
Software
Proprietary Models
Office
Retail
Industrial
Real estate remains active
The 2015 survey shows that participants have experienced an overwhelming
increase in sales and leasing activity across all asset classes over the past 12
months. Only 14 percent experienced a decline in the Office sector, 13 percent in
the Industrial sector, with no reported decline in the Retail sector.
52. How would you describe sales and leasing activity in your
Figure
57: How
you describe
sales
activity in your sector/s of
sector/s
ofwould
expertise
over the
lastand
12leasing
months?
expertise over the last 12 months?
Sales and Leasing Activity Patterns for the Previous Twelve Months
80%
73%
70%
60%
50%
57%
50%
38%
40%
29%
30%
20%
27%
14%
13%
10%
0%
0%
Increasing
Remaining Decreasing Increasing
steady
Office
Remaining Decreasing Increasing
steady
Retail
Remaining Decreasing
steady
Industrial
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Australian Valuation Practices Survey 2015
Section 22:
Sales and
leasing activity
Valuers confident market will continue to strengthen
A high proportion of participants continue to be bullish about all sectors of the real
estate market, predicting a continued rise in sales and leasing activity over the next
12 months.
53. Where do you see sales and leasing activity moving in
Figure 58: Where do you see sales and leasing activity moving in the next
the next
12 months?
12 months?
Market Expectations for the Next Twelve Months
90%
82%
80%
70%
60%
50%
63%
57%
43%
38%
40%
30%
18%
20%
10%
0%
0%
0%
0%
Increasing Remaining Decreasing Increasing Remaining Decreasing Increasing Remaining Decreasing
steady
steady
steady
Office
Retail
Industrial
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48
Section 23:
Leasing incentives
No change to leasing incentives
The survey findings show that leasing incentives have mostly remained steady over
the past 12 months across all asset types.
54. How have leasing incentives changed in your specific sector
Figure 59: How have leasing incentives changed in your specific sector over the last
over the last 12 months?
12 months?
Leasing Incentive Patterns over the Last Twelve Months
80%
73%
71%
71%
70%
60%
50%
40%
30%
29%
18%
20%
0%
14%
14%
9%
10%
0%
Increased
Remained
steady
Decreased Increased
Office
Remained
steady
Decreased Increased
Retail
Remained
steady
Decreased
Industrial
More of the same
Similar to the previous period, participants expect incentives to remain steady
across all asset classes over the next 12 months.
55. What are your expectations in respect of leasing incentives in
the
next
12are
months?
Figure
60:
What
your expectations in respect of leasing incentives in the next
12 months?
Incentive Expectations for the Next Twelve Months
90%
86%
82%
80%
71%
70%
60%
50%
40%
30%
29%
20%
9%
10%
0%
9%
14%
0%
Increasing
Remaining Decreasing Increasing
steady
Office
0%
Remaining Decreasing Increasing
steady
Retail
Remaining Decreasing
steady
Industrial
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Australian Valuation Practices Survey 2015
Section 24:
Yields
Yields take a dip
In the main, participants have witnessed yields decrease across both primary and
secondary asset markets over the past 12 months.
56. Where have you seen investment yields moving across both
Figure
61: Where
you seen
investment
yields
across both primary and
primary
and have
secondary
markets
in the
lastmoving
12 months?
secondary markets in the last 12 months?
Movement of Investment Yields Across Primary Asset Markets Over the Last Twelve Months
100%
88%
90%
82%
80%
71%
70%
60%
50%
40%
29%
30%
18%
20%
10%
0%
13%
0%
0%
Increasing
Remaining
steady
0%
Decreasing Increasing
Primary Office
Remaining
steady
Decreasing Increasing
Primary Retail
Remaining
steady
Decreasing
Primary Industrial
Movement of Investment Yields Across Secondary Asset Markets Over the Last Twelve Months
100%
90%
83%
80%
70%
70%
60%
57%
50%
43%
40%
30%
30%
17%
20%
10%
0%
0%
0%
Increasing
Remaining
steady
0%
Decreasing Increasing
Secondary Office
Remaining
steady
Decreasing Increasing
Secondary Retail
Remaining
steady
Decreasing
Secondary Industrial
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50
Low expectations for yields
Similar to the previous 12 months, most participants expect yields to continue their
decline across both primary and secondary asset classes over the next 12 months.
However, a small proportion believe the retail and industrial markets will not perform
57.well
Where
youmarket.
see investment yields moving in both primary
as
as thedo
office
and secondary markets in the next 12 months?
Figure 62: Where do you see investment yields moving in both primary and
secondary markets in the next 12 months?
Expected Movement of Investment Yields Across Primary Asset Markets Over the Next Twelve Months
80%
70%
64%
57%
60%
50%
50%
43%
38%
40%
27%
30%
20%
13%
9%
10%
0%
0%
Increasing
Remaining Decreasing Increasing
steady
Primary Office
Remaining Decreasing Increasing
steady
Primary Retail
Remaining Decreasing
steady
Primary Industrial
Expected Movement of Investment Yields Across Secondary Asset Markets Over the Next Twelve Months
80%
70%
70%
67%
60%
57%
50%
40%
33%
29%
30%
20%
20%
14%
10%
10%
0%
0%
Increasing
Remaining Decreasing Increasing
steady
Secondary Office
Remaining Decreasing Increasing
steady
Secondary Retail
Remaining Decreasing
steady
Secondary Industrial
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Australian Valuation Practices Survey 2015
Section 25:
Rent
Stable face rents
According to the survey’s participants, face rents have largely remained steady
across both primary and secondary markets for all asset classes over the past
12 months.
58. Where have you seen face rents moving across both
Figure
63: Where
you seen
face rents
both primary and
primary
and have
secondary
markets
in moving
the lastacross
12 months?
secondary markets in the last 12 months?
Movement of Face Rents Across Primary Markets Over the Last Twelve Months
80%
73%
67%
70%
57%
60%
50%
40%
20%
33%
29%
30%
18%
14%
9%
10%
0%
0%
Increasing
Remaining
steady
Decreasing Increasing
Primary Office
Remaining
steady
Decreasing Increasing
Primary Retail
Remaining
steady
Decreasing
Primary Industrial
Movement of Face Rents Across Secondary Markets Over the Last Twelve Months
90%
82%
80%
71%
71%
70%
60%
50%
40%
30%
20%
14%
14%
14%
14%
9%
10%
9%
0%
Increasing
Remaining
steady
Decreasing
Secondary Office
Increasing
Remaining
steady
Decreasing
Secondary Retail
Increasing
Remaining
steady
Decreasing
Secondary Industrial
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52
No about face for rents
Face rents are expected to remain steady across both primary and secondary
markets in relation to all property classes over the next 12 months.
59. Where
do you
faceface
rents
moving
primaryand
and
Figure
64: Where
do see
you see
rents
movingin
in both
both primary
secondary
secondary
markets
in the
next 12 months?
markets
in the next
12 months?
Anticipated Movements of Face Rents in the Secondary Market Over the Next Twelve Months
100%
91%
90%
86%
80%
71%
70%
60%
50%
40%
30%
20%
14%
14%
14%
9%
10%
0%
0%
0%
Increasing
Remaining
steady
Decreasing Increasing
Primary Office
Remaining
steady
Decreasing Increasing
Primary Retail
Remaining
steady
Decreasing
Primary Industrial
Anticipated Movements of Face Rents in the Secondary Market Over the Next Twelve Months
90%
80%
80%
71%
70%
71%
60%
50%
40%
29%
30%
20%
20%
14%
14%
10%
0%
0%
0%
Increasing
Remaining
steady
Decreasing Increasing
Secondary Office
Remaining
steady
Decreasing Increasing
Secondary Retail
Remaining
steady
Decreasing
Secondary Industrial
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Australian Valuation Practices Survey 2015
Australian Valuation Practices Survey 2015
Section 26:
Introduction to
tangible assets
|
54
Tangible Assets
This second Valuation Practices Survey extends its reach to tangible assets.
Once again, the findings are revealing, offering unique insights for practitioners
and clients alike. Nine tangible asset valuers completed the survey.
Key insights
• The usual suspects. With a financial year characterised by no ‘extraordinary’
tax and accounting requirements or regulations, participants indicate that they
performed valuations in a variety of sectors and industries. All of them were
exposed to the lead sectors of our region such as energy and natural resources,
industrial markets and telecommunications.
• Hundred percent. We found that all participants use a combination of indirect and
direct approaches in performing their valuations.
• Digging for data. More than 80 percent of the participants are doing research to
determine the most appropriate useful/economical life of their assets. As such,
about 27 percent rely on client information, 23 percent engage external technical
people and about 31 percent use data from previous engagements. Only 15
percent rely solely on publications.
• Need for funding? Of the participants, 66 percent do not usually include finance
costs, in addition to all direct and indirect costs, when building a full replacement
cost new estimate.
• Try to optimise. About 86 percent of the participants often apply optimisation
adjustments during replacement cost analyses. For example, they optimise the
number of assembly lines or entire network of assets. The remaining 14 percent
apply them in every engagement.
• Cost to capacity. About 43 percent of the participants use the 0.6 exponent factor
in utility/cost to capacity calculations in lieu of supporting information/benchmarks.
The remaining 57 percent rarely or never use this kind of calculation.
• Never old enough. Of the participants, 67 percent indicate they prefer to extend
the Normal Useful Life (NUL) rather than the Remaining Useful Life (RUL) when
considering a long life asset that is already in excess of its NUL but still in good
condition.
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Business as usual
Last year, no particular sector dominated the market, according to the survey’s
findings. All the participants performed work for clients in different industries and
were exposed to multiple sectors over the past 12 months. This factor highlights
and is symptomatic of a financial year characterised by no external requirement or
regulation for tax or accounting compliance.
60. Which
of theoffollowing
sectors
workin?in?
Figure
65: Which
the following
sectorsdo
doyou
youfrequently
frequently work
Energy and natural resources
Industrial Markets (Transport &amp; Logistics,
Pharmaceuticals, Automotive, Chemicals,
Building Materials, Healthcare)
38%
44%
56%
63%
3.70%
Consumer Markets (Agribusiness,
Retail and Consumer Products)
11%
TMT (Technology, Media and Telecommunications)
22%
38%
63%
67%
3.70%
Other
20%
Always
Sometimes
Never
80%
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56
Section 27:
Valuation
methodologies
Market, cost and…
The survey shows that the market and cost approaches are the most commonly
adopted methodologies to value tangible assets. However, the majority of the
participants
they sometimes
also consider
and/or
utilise
income
61. Whichindicate
of the following
methodologies
does
your
firmthe
frequently
approach to perform their valuations.
employ when conducting valuation analysis?
Figure 66: Which of the following methodologies does your firm frequently employ
when conducting valuation analysis?
Income approach
Market approach
11%
22%
44%
56%
67%
3.70%
Cost approach
44%
Always
56%
Sometimes
Never
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Section 28:
Cost approach
Comfort in the accounting data
The Fixed Asset Register (FAR) is the first reference point for all the participants.
When they apply the cost approach, the indirect approach is always used as a
comparison to the direct approach. On the other hand, when participants review a
third party valuation, they complain about extensive use of the indirect method and
of relying on FARs that are deemed inaccurate.
62. When applying cost approach, which is more commonly used?
Figure 67: When applying cost approach, which is more commonly used?
Indirect
0%
Direct
0%
100%
Combination of
both indirect
and direct
0%
20%
40%
60%
80%
100%
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58
Section 29:
Depreciation profiles
Keen to use market based depreciation methods
The straight line and the diminishing value are the most commonly used
depreciation profiles. However, if possible, all the participants are keen to use
depreciation methods based on market based observations. These may include
units of production and condition adjusted depreciation, sums of the years’ digits,
among
63.others.
Which of the following depreciation profiles do you frequently use?
Figure 68: Which of the following depreciation profiles do you frequently use?
Reducing / Diminishing balance
100%
Straight line
13%
88%
Iowa
Other
100%
33%
67%
Never
Sometimes
Always
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Life experiences
There are different factors influencing an asset’s life, its ultimate length depending
on the mechanical efficiency, technological potential and commercial adequacy of
the product. The survey participants are most likely to draw on their own experience
to determine the useful life of data rather than turning to the taxation or accounting
rulings that may or may not appropriately reflect the technical/economic lives of
the assets.
64. Where do you often source your normal useful life data?
Figure 69: Where do you often source your normal useful life data?
Client management/
site personnel
27%
15%
Publications
Own experience/
prior engagements
31%
External/
consulting engineers
Other
23%
4%
0%
5%
10%
15%
20%
25%
30%
35%
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Australian Valuation Practices Survey 2015
Section 30:
Replacement cost
considerations
Not everything black on white
The findings show participants investigate and determine the life of assets from
a variety of sources including sector experts, client management/site personnel
and external/consulting engineers. They do not solely rely on data from publications
such as American Society of Appraisers, Marshall and Swift, and Australian
65. Where
dopublications.
you often source RCN data?
Taxation
Office
Figure 70: Where do you often source RCN data?
23%
20%
23%
23%
10%
0%
5%
10%
15%
20%
25%
Client management / site personnel
Publications
On line research – comparable projects
Own experience / prior engagements
Others
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62
Others
Figure 71: Publications being consulted
7%
50%
43%
Rawlinsons
Cost manuals
Other
Financing the project
The International Valuations Standards Council (IVSC) guidelines allow for finance
costs and interest during construction to be calculated using typical debt to equity
ratios, cost of debt, and draw down schedules over the construction period. The
participants indicate that they do not usually consider these costs in their valuations.
66. Do you typically include finance costs in addition to all direct
indirect
costs
when building
a fullfinance
replacement
Figureand
72:
Do you
typically
include
costscost
in addition to all direct and indirect
new estimate?
costs when building a full replacement cost new estimate?
33%
Yes
No
67%
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Figure 73: When considering application of finance costs, do you typically apply
time is?
67. When considering application of finance costs, do you typically
these when the project construction
apply these when the project construction time is:
33%
50%
17%
3.70%
No threshold (always applicable)
Only when greater than 12 months
Never applied
Figure 74: Do you consider interest during construction applicable to the portion of
would be funded by?
68. Do you consider interest during construction applicable to the
theconstruction
total construction
cost
that
portion of the total
cost that would be
funded
by:
40%
60%
Assumed debt portion only
Both debt and equity
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Optimising the cost
The survey findings highlight the fact that research and/or other sources are not
the most accurate starting points when trying to determine the cost of replacing
something new. Often – if not always – participants need to apply optimisation
adjustments during replacement cost analyses, for example, by optimising the number
of assembly lines or entire network of assets (that is, by reconfigurating them).
69. How often do you apply optimisation adjustments during replacement
Figure 75: How often do you apply optimisation adjustments during replacement
cost analyses e.g. optimise number of assembly lines or entire
analyses
optimise number of assembly lines or entire network
networkcost
of assets?
(i.e.e.g.
reconfiguration)
of assets?
14%
86%
0%
0%
20%
40%
60%
80%
100%
Always
Often
Never
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EPCM
The survey provides evidence that participants use Engineering Procurement
Construction Management (EPCM) in a consistent manner throughout different
70. Please
indicate typical EPCM estimates for P&E in the
sectors
and industries.
following sectors:
Figure 76: Please indicate typical EPCM estimates for P&E in the following sectors:
Oil and Gas
Mining
25%
40%
50%
60%
25%
Manufacturing
Heavy infrastructure (ports/roads)
20%
20%
40%
20%
60%
40%
<10%
10% - 30%
31% - 50%
>51%
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Figure 77: Cost to capacity estimates are often used in lieu of supporting
information/benchmarks,
how often do you use the 0.6 exponent factor
71. Cost to capacity
estimates are often used in lieu of supporting
information/benchmarks, how often do you use the 0.6 exponent
for inutility/cost to capacity calculations?
factor for inutility/cost to capacity
0%
14%
Always
43%
Often
Sometimes
Rarely
Never
43%
Salvaging value
When considering residual values applied to certain asset classes, the majority of
participants research market comparables of a similar age and/or consider a typical
scrap/salvage value at end of life, taking into account its removal from the location.
Figure 78: When considering residual values applied to certain asset classes do you:
29%
Consider a typical scrap/salvage
value at end of life, taking into
account removal from location
(i.e. no installation cost)
43%
Research market comparables
of a similar age (end of NUL)
0%
Always apply same %
Other
29%
0%
20%
40%
60%
80%
100%
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Australian Valuation Practices Survey 2015
Long life assets
When considering a long life asset that is already in excess of its NUL and has
all engineering records showing it is likely to continue in use for the foreseeable
future without any significant capital expenditures (capex), participants consider
two options. Most (67 percent) prefer to extend the NUL of the asset to its future
retirement date (i.e. age + RUL); the remainder choose to use the same NUL but
increase the RUL (the effective age). They do not use any other type of adjustment.
Figure 79: If you considered a long life asset that is already in excess of its NUL,
however, all engineering records show that the item is likely to continue
in use for the foreseeable future without any significant capex.
Would your preferred methodology be?
67%
33%
0%
0%
0%
20%
40%
60%
80%
100%
Extend the NUL of the asset to its future retirement
date (i.e. age + RUL)
Use the same NUL but increase the RUL (effective age)
Increase the residual value and keep the NUL constant to
represent the asset is at the end of its NUL but is still in
use for the foreseeable future
Other
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Functional obsolescence
The survey’s participants are consistent in the approach they take to assessing
functional/technological obsolescence as regards utility analysis, net present value
(NPV) of excess operating costs, and where the assumption is that the replacement
cost captures any adjustments. They did not highlight any particular situation that
gives rise to functional obsolescence.
Figure 80: Which of the following approaches do you frequently use to assess
functional/technological obsolescence?
Inutility analysis
Assume replacement cost
captures any adjustments
NPV of excess operating costs
100%
14%
14%
86%
86%
Always
Sometimes
Never
Figure 81: From your experience over the last 12 months, which of the following
situations have given rise to functional obsolescence?
17%
26%
Lack of utility
Excess capacity
17%
Change in design
Efficiency
Technological change
22%
17%
3.70%
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Assessing economic obsolescence
The survey participants equally favour inutility analysis, overall profitability of cost
generating units (CGU)/business (enterprise value), and market sample/evidence
vs. depreciated replacement cost (DRC) when determining any form of economic
obsolescence.
Figure 82: What approach or approaches do you most commonly use to assess
economic obsolescence?
6%
29%
29%
Inutility analysis
Overall profitability of CGU /
business (enterprise value)
Market sample/evidence vs. DRC
Other
35%
77. Over the last 12 months, which sectors have the assets that required
Figure 83: Over
the last
12 months,
which fallen
sectors
assets
required
economic
obsolescence
adjustments
into?have
(Select
all thatthat
apply)
economic obsolescence adjustments?
14%
Energy and natural resources
Industrial Markets (Transport & Logistics,
Pharmaceuticals, Automotive, Chemicals,
Building Materials, Healthcare)
32%
Consumer Markets (Agribusiness,
Retail and Consumer Products)
32%
TMT (Technology, Media
and Telecommunications)
Other (Please specify)
18%
5%
0%
5%
10%
15%
20%
25%
30%
35%
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Future economic expectations
Based on their recent experiences and discussions with the management
of different companies they have worked for, all plant and machinery (P&M)
participants expect economic obsolescence related issues (in general) to either
78. Do you expect economic obsolescence related
increase or remain constant over the next 3 years.
issues (in general) to increase, decrease or
over
the nextobsolescence
3 years?
Figure remain
84: Do constant
you expect
economic
related issues (in general) to
increase, decrease or remain constant over the next 3 years?
Increase
Decrease
43%
0%
Remain constant
0%
57%
10%
20%
30%
40%
50%
60%
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KPMG name, logo and “cutting through complexity” are registered trademarks or
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Believe it only if you see it
The majority of participants attribute great importance to the site visit. They consider
that the inspection of a single site should cover at least 50 percent of the value of
the assets, while in the case of multiple sites, they indicate that a participant should
visit more than 50 percent of them. Fourteen percent of participants underline
insufficient site visit sampling as an issue.
79. What % of value capture is considered reasonable for a site
Figure
85: What
percentage
inspection
(single
site)? of value capture is considered reasonable for a site
inspection (single site)?
90%
80%
83%
70%
60%
50%
40%
30%
20%
10%
0%
0%
Less than 10%
0%
10-30%
17%
30-50%
More than 50%
80. For multiple site/large portfolio engagements what size of site
Figure
86: For multiple
portfolio
engagements
what size of site inspection
inspection
sample site/large
is considered
reasonable
(as percentage
sample is considered reasonable (as percentage of Cost/NBV)?
of Cost/NBV)?
70%
67%
60%
50%
40%
30%
33%
20%
10%
0%
0%
0%
Less than 10%
10-30%
30-50%
More than 50%
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Making it immediately clear
The trend shows participants are concerned by the lack of the information
and disclosures in reports. On the issue of reviewing third party valuations,
one comment made was that while they find the participants have completed
an adequate process, the report fails to document the matters considered,
assumptions and judgments made.
Figure 87: What are the most common issues encountered during the review of
third party valuations?
20%
18%
18%
18%
Insufficient site visit sampling
Extensive use of indirect DRC (“trend and bend”)
Lack of benchmarking (RCNs and market/fair values)
and support
FARs deemed inaccurate but heavily relied upon
Mathematical errors
16%
14%
14%
12%
11%
11%
11%
Valuation approach(es) deemed unreasonable
Valuation inputs deemed unreasonable (useful lives,
residuals, depreciation profiles)
10%
8%
7%
7%
6%
4%
4%
Valuer lacking credentials/designation (ASA, API,
RICS etc.)
Other
2%
0%
82.
Have 88:
you seen
recent
scenarios
where P&E
fair value for
Figure
Have
you
seen recent
scenarios
where P&E fair value for accounting
accounting purposes differed significantly from market value
purposes
differed
significantly
from
market value for tax purposes
for tax purposes (stamp duty, tax consolidation etc.)
(stamp duty, tax consolidation etc.)
33%
Yes
No
67%
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Contact us
Sydney
Brisbane
Sean Collins
Partner in Charge
Valuation Services, Corporate Finance
+61 2 9335 7447
[email protected]
Bill Allen
Partner
Valuation Services, Corporate Finance
+61 7 3233 3174
[email protected]
Ian Jedlin
Partner
Valuation Services, Corporate Finance
+61 2 9335 8207
[email protected]
Perth
Melbourne
Jason Hughes
Partner
Valuation Services, Corporate Finance
+61 8 9263 7452
[email protected]
Adele Thomas
Partner
Valuation Services, Corporate Finance
+61 3 9288 6139
[email protected]
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