Thus, the adjustment for the risk of investing in real estate amounted to 4.5%. The low liquidity premium is used to take into account the potential ability of the investor to sell on the market property rights, get cash, as well as the time required for this. Premium for low liquidity, there is an adjustment for the duration of the exposure when selling real estate.
This premium is calculated according to the formula:
where: П - premium for low liquidity; b - risk-free rate;
L is the exposure period (in months); the total number of months in a year.
On the date of the assessment, the adjustment for low liquidity is assumed to be 3.62%, which corresponds to six months of exposure of the object. The period of exposure of the object of assessment on the market is calculated at a rate determined for a typical level of management in this market, i.e. market value is taken as the basis. But this is possible only if there is a significant information base for comparable items. To determine the exposure period, first of all, we analyze retrospective and current information on the object being evaluated, as well as interviews with the Customer and on the basis of interviews professional participants real estate market and on this basis we come to the conclusion that the period of exposure of the object of assessment on the market is maximum six months. The Investment Management Award is used to take into account the need for competent investment management by the investor. The more risky and complex the investments, the more competent management they require. In the Western theory of evaluation, a list of main factors is defined, including the risk factor - a key figure in leadership and the quality of leadership.
Su \u003d Cdu * d / (1-d), (18)
where: Sdu = Sdb + Sv + Sl - risk-free rate of return, taking into account adjustments for the risk of ownership and the risk of low liquidity; d - market discount to the price of the object due to the loss of income in the event of risks (ie, poor management quality).
The market discount for the sample ranges from 10% to 25% depending on market conditions.
Table 3.8 - Calculation of the management bonus.
The premium for investment management was accepted by the appraiser at a rate of 1.7%. The results of calculating the capitalization ratio using the cumulative construction method are presented in Table 3.9.
Table 3.9 - Calculation of the capitalization ratio.
Operational and production planning at the enterprise
Operational and production planning (OPP) is the final stage of in-house planning. Its peculiarity is that the development planned assignments production unit is combined with the organization of their implementation. The main task of the OPP is to organize the coordinated work of all departments of the enterprise to ensure a uniform, rhythmic release of products in the prescribed volume and nomenclature with the full use of production ...
The illiquidity adjustment is an adjustment for long exposure when the property is sold. According to analysts, the exposure time for office buildings is 2-3 months. Within the framework of this Report, maximum term exposure equal to 3 months.
The adjustment for low liquidity was calculated using the following formula:
Plikv. = , where:
Irisk - risk-free rate;
SR. EXP - exposure period for the object of assessment, months.
As a result of calculations, the adjustment for illiquidity amounted to 1.46%.
The adjustment for investment management is the management of the "investment portfolio" and, depending on the object of investment, is 1-3%. The appraised object is an office property, the management of which is characterized by high level management complexity. For the purposes of this Report, the appraisers consider it reasonable to take an average value of 2%.
The calculation of the discount rate determined by the summation method is given in the following table:
Table 28. Calculation of the discount rate by the summation method
Calculation of the rate of return on capital
The rate of return on capital is a value equal to one divided by the number of years required to return the invested capital, based on the time interval during which, according to the calculations of a typical investor, there will be a return on the capital invested in the property being valued.
There are three ways to get reimbursed invested capital:
straight-line return of capital (Ring's method);
return of capital on the compensation fund and the rate of return on investment (Inwood's method);
return of capital on the compensation fund and the risk-free rate of interest (Hoskald's method).
For the purposes of this Report, the return on capital was calculated using the Ring method. This method is appropriate when it is expected that the principal will be repaid in equal installments. The annual return on capital is calculated by dividing 100% of the asset's value by the remaining useful life, i.e. is the reciprocal of the life of the asset.
Since, on average, the service life of buildings comparable to the object being assessed is 120 years, taking into account the survey carried out in 1996. overhaul(complete refurbishment) with a remaining life of 109 years, the return on capital calculated using the Ring method would be:
/ 109 x 100 \u003d 0.9%
For calculations, we take a value equal to 0.9%.
According to the forecasts of real estate market analysts, in the next few years, rental rates for office facilities will grow at approximately the same pace. Considering the above, the appraisers took the value of the growth rate cash flow at a rate of 4%.
More articles on economics
Calculation of technical and economic indicators of an industrial enterprise for the year
Economics - is the study of human behavior in the process of production, distribution, exchange and consumption of material goods and services to the extent of limited resources. But if you consider...
Trends and the formation of the knowledge economy
Since the late 90s of the last century, the term "knowledge economy" or "knowledge-based economy" (in direct translation from English) has become widespread in Western and domestic science.
Increasing the competitiveness of enterprises
Currently, market relations dominate in any country in the world. There are now a huge number of firms producing homogeneous products. There is fierce competition between them. And you...
Principles of free enterprise, active and passive operations, claims and liabilities, liquidity of the bank, insured event and insurance premium.
Some costs of funds that are not opposed by income in the income statement and which are not reflected in it are called deferred expenses. Examples of such expenses include annual insurance premiums and prepaid rent. Prepaid expenses are probably not very liquid, but they provide a reduction in current out-of-pocket payments in the future.
The credit analyst should also establish why the loan was made and what the prospects for repayment are. For example, an employee may take loans from a company in return for a salary or bonus. Such a loan is actually an unrecorded expense that increases the profitability of the company. In addition, a company employee is not required to show the loan as income, thereby avoiding additional personal taxes, unless the loan has been on the books for too long. An executive can even buy shares in a company with a promissory note, a trick that results in an active account as opposed to an equity account. The lender must carefully review the existing loans to the company's employees to determine whether the employee has sufficient own liquidity to repay the amount owed.
Any premium is the difference between forward rates and expected future spot rates. This difference is commonly referred to as the liquidity premium.
According to two other theories, long-term bonds should provide some additional income as compensation for the additional risk associated with them. Liquidity preference theory suggests that risk arises solely from the uncertainty of underlying real rates. Perhaps this is a fairly accurate assumption for a period of price stability, as was the case in the 1960s. Inflation premium theory assumes that the risk arises solely from the uncertainty of inflation rates, which is quite consistent with the situation during periods of fluctuating inflation, as in the 1970s.
If the risk of investing in bonds arises mainly from real rate uncertainty, then a sound strategy for investors is to hold bonds that match their own obligations. For example, a firm's pension fund as a whole has long-term liabilities. Therefore, according to liquidity preference theory, a pension fund should prefer investing in long-term bonds. If the risk arises from the uncertainty of the inflation rate, then sound strategy will hold short-term bonds. For example, most pension funds have real liabilities that depend on the level of pay increases. According to the inflation premium theory, if a pension fund wants to minimize risk, it should prefer investing in short-term bonds.
The liquidity premium theory is due to Hicks, and our description of the effect of inflation on the term structure is taken from Brailey and Schaefer.
RATIO OF THE LEVEL OF PROFITABILITY AND LIQUIDITY OF INVESTMENTS is one of the main basic concepts of investment management, determined by the inverse relationship of these two indicators. In accordance with this concept, a decrease in the level of investment liquidity should be accompanied, other things being equal, by an increase in the required level of their profitability. LIQUIDITY PREMIUM - additional income paid to an investor in order to compensate for the risk of possible financial losses associated with low liquidity of investment objects (instruments).
The required level of liquidity premium is determined using the following formula
PL - the required level of premium for liquidity, in percent.
Example Determine the required level of liquidity premium and the required overall level of return on investments, taking into account the liquidity factor under the following conditions
Required level of liquidity premium =
III. The methodological toolkit for assessing the value of cash, taking into account the liquidity factor, makes it possible to form comparable investment flows providing the necessary level of premium for liquidity.
PL - the required level of liquidity premium, expressed as a decimal fraction
Pl - the level of the liquidity premium, taking into account the projected increase in the duration of the investment project.
Decreased liquidity premium for long - term debt financial instruments . With a significant decrease in the level of liquidity of such portfolio assets, the previously established amount of the liquidity premium no longer corresponds to the new market realities, which causes a decrease in their quotation and the amount of interest actually paid on them.
First, if the commonly held view of what is a safe level of interest rate remains unchanged, then every fall in r lowers the market rate relative to the "safe" rate and thus increases the risk of liquidity being squeezed out. Second, each drop in r lowers the current returns, which are derived from the forfeiting of liquidity and act as a kind of insurance premium, offsetting the risk of loss on the capital account, and this decrease is equal to the difference between the squares of the old and new interest rates. When, for example, the rate of interest on long-term debts is 4%, it is preferable to sacrifice liquidity, unless the whole calculation of probabilities gives reason to fear that this long-term rate of interest may increase at a rate greater than 4% per year, i.e. by an amount greater than 0.16% of the original amount for the year. If, however, the rate of interest is already only 2%, current income will compensate for its increase of only 0.04% per year. This seems to be the main obstacle to the fall of the rate of interest to a very low level. If there is no reason to believe that future experience will be very different from the past, then the rate of interest on long-term debts at the level of, say, 20% inspires more fear than hope, while at the same time the current income it brings is sufficient to compensate for only a very modest measure of fear.
It follows that the total return expected from ownership of an asset over a period is equal to the return on the asset minus the cost of maintaining it plus the liquidity premium. In other words, q- + 1 is the own rate of interest for any commodity, where q, c and 1 are measured in this commodity as in the standard.
Firstly, the fact that contracts are awarded in money and wages are usually quite stable in terms of money undoubtedly plays a role. important role in that money has such a high liquidity premium that it is convenient to keep assets at the same standard as perhaps
At the same time, the assumption that the future monetary value of output will be relatively stable cannot be sufficiently certain if the standard of value is a commodity with a high elasticity of production. In addition, the low cost of holding money as we know it plays as large a role as the high liquidity premium in explaining the prevailing. the value of the rate of interest on money. After all, the difference between the premium for liquidity and maintenance costs is important here. And for most commodities other than assets such as gold, silver, and banknotes, the maintenance costs of at least as high as the liquidity premium usually associated with the standard of value in which contracts and wages are assigned. Even if the liquidity premium due, for example, to pounds sterling, were transferred to wheat, the rate of interest on wheat would still hardly rise above zero. Thus it is that, although the fact that contracts and wages are fixed in monetary terms seriously raises the significance of the rate of interest on money, nevertheless this circumstance in itself is probably not sufficient to give rise to the noted properties of the rate of interest on money. .
The second point to consider is more subtle. The usual assumption that the value of output will be more stable if it is expressed in money rather than in some other commodity depends, of course, not on the fact that wages are paid in money, but on the fact that they are relatively inactive in terms of money. What would be the position if there were reason to suppose that wages would be less fluid (i.e., more stable) when they are expressed not in money itself, but in some one or more other commodities. For such an assumption it is necessary not only that the value of a given commodity be expected to be relatively constant in terms of wage units at larger or smaller outputs, both in the short run and in the long run, but also that any surplus in excess of current demand at the cost of production can be transferred to stocks without additional costs. That is, that the premium for the liquidity of this product exceeds the costs of its maintenance (because otherwise, since there is no hope of profit from a price increase, the maintenance of the stock will inevitably entail losses). If it were possible to find a commodity that satisfies these requirements, then, undoubtedly, it could be offered as a competitor to money. Thus, it is logically impossible to exclude the possibility of the existence of such a commodity in which the value of output would be assumed to be more stable than the value of output in money. However, it seems unlikely that such a commodity actually existed.
From this I conclude that the commodity, in terms of which the estimated wage is considered the most inactive, cannot be the commodity whose elasticity of production is not the smallest and whose excess of maintenance costs over the premium for is not the smallest. In other words, the assumption of relative immobility of wages expressed in money is a natural consequence of the fact that the excess of the liquidity premium over the maintenance costs of money is higher than that of any other asset.
Thus we see that the various features which together reinforce the significance of the rate of interest on money interact cumulatively with each other. The fact that money has low production and substitution elasticities, as well as low maintenance costs, makes it more likely that wages are deteriorating. In addition, the coverage of existing debts does not reflect potential debts (payments of insurance premiums, guaranteed repairs, etc.) that may arise in the future. Therefore, if the accountant takes them into account, then liquidity worsens, if not, it improves. On the other hand, the more reserves are created, the
This is the most common option in practice. In the first case (veiling), the administration may not be aware of the inadequacy of the data presented, in the second - we are talking about the falsification of reporting by the administration of the enterprise, the goal is to mislead shareholders regarding the amount of profit received in order to create the possibility of paying additional bonuses (overstating profits) or paying increased dividends, or, conversely, minimizing them, leading to an increase in the amounts remaining at their own (administration) disposal ( understatement of profit) to deceive workers and employees by reducing the base of payment of the corresponding bonuses to misinform creditors about the solvency (liquidity) of the company, tax authorities, in order to conceal taxable amounts, etc. At the same time, as can be seen from the above goals, in a given situation, the interests of the administration and the owners of the enterprise can either completely coincide (due to objective or subjective reasons), or be radically opposite.
K3 - in relation to money. This is connected with the concept of expenses, it is one thing when they are accrued and / or paid in money, and quite another when they are reflected, but not mediated by money. This difference, in particular, is caused by the peculiarity of money as a certain type of asset. The fundamental difference, Keynes wrote, between money and all other, or at least most other types of property, is that the premium for the liquidity of money far exceeds the cost of holding it, while the cost of holding other possessions far exceeds the premium for holding it. liquidity [Keynes,
See pages where the term is mentioned Liquidity premium
: Microeconomics Global Approach (1996) -- [Determining the premium for low liquidity
Premium for low liquidity, there is an adjustment for the duration of the exposure when selling real estate.
This premium is calculated according to the formula:
where: П – premium for low liquidity;
Rb - risk-free rate;
L - exposure period (in months);
Q is the total number of months in a year.
where: 8 months is the exposure period of the object. Adopted according to city real estate agencies (LLC Arkhangelsk Real Estate, Voskresenskaya St., 17, tel. 65-73-91), offers to sell such a property appear on average within 8 months.
This exposure period refers to the EON, i.e. to land and building. When an object (building) is sold, the land plot is transferred (sold or leased) together with it. Therefore, the exposure period for the building and land plot accepted as the same.
Determining the rate of return on capital
In this assessment, the Inwood method is used, which, according to experts, is most suitable for investment conditions in Russia
The calculation is made according to the formula:
Rreturn - the rate of return of capital;
R is the reinvestment rate (rate of return on capital);
k is the term of economic life, taken equal to 10 years.
Calculation of the reinvestment rate
Calculation of the rate of return on capital
Capitalization Rate Calculation for Improvements
This chapter will discuss the concept of liquidity, its impact on price and profitability. financial asset and, accordingly, the reasons for the existence of such a phenomenon as a premium for liquidity.
It is customary to single out market liquidity and funding liquidity. The first means the possibility of its sale without additional costs, the second - the ability to attract Money for funding (Brunnermeier and Pedersen, 2009). At the same time, speaking of assets, the authors in most cases mean market liquidity. For example, Holmström and Tirole (1998) also interpret the liquidity of an asset as the rate at which it can be sold without significant loss in value. And Sarr and Lybek (2002) noted that for a liquid asset, it must be possible to sell large volumes without affecting the price.
We see that the authors use slightly different definitions of liquidity. This is often due to the approach taken by the author, the choice of the market under study, the available tools for measuring its parameters, etc. In general, we can say that there is no definite single concept of liquidity.
Market liquidity research and individual assets is an important task because it influences the choice of investors and, accordingly, the price and return of assets. The need to take into account liquidity is due to the fact that the market is imperfect, and investors want to assess their risks as adequately as possible, including liquidity risk.
There are several reasons why the liquidity of all assets in the market is not absolute. The first of these is that agents in the market incur various transaction costs associated with the purchase and sale of assets (taxes, fees for brokers, etc.). In addition, all future transaction costs should be taken into account here. The second reason is the so-called storage risk and the characteristics of demand for the asset that determine it. Thus, if favorable conditions are expected for the sale of an asset from the portfolio in the absence of buyers, it is necessary to compensate for the risk of a possible price change while holding the asset (Amihud et al., 2005).
The costs of finding a buyer in the over-the-counter market are also close to this phenomenon. Here there is the possibility of a quick sale to the dealer, which, however, is associated with a discount as compensation for the risks of the latter.
In addition, market failure such as asymmetric or incomplete information should be taken into account. Under such conditions, an informed agent will always win on the market, who, based on the available data, can most adequately assess all the risks of a transaction with an asset. An example of such information can be data on any fundamental indicators that affect the price, as well as knowledge about the flow of orders to buy or sell.
Also, since liquidity in the market is not a constant value, it is necessary to take into account the very fact of its volatility when assessing risk and, accordingly, the required return (Amihud et al., 2005).
Based on the above facts that determine the degree of liquidity, researchers identify several parameters of a liquid market. The first of these characteristics is the contraction of the market, which implies low transaction costs, such as the difference between buying and selling prices. The speed of execution and processing of orders is instantaneous. They also highlight the depth of the market, which is determined by the presence of a large number of orders, the price of which can be either lower or higher than the prevailing market. In addition to these indicators, researchers also measure the width of the market, which means that a large number of orders with a significant volume does not have a serious impact on the price. A liquid market must be flexible and capable of such a price correction that brings them to fundamental values (Sarr, Lybek, 2002).
The allocation of indicators of the liquid market is the so-called microstructural approach, on the basis of which many authors choose in their studies methods for measuring liquidity. So in the study by Sarr and Lybek (2002) 4 groups of methods are distinguished, each of which corresponds to different measures of liquidity. Since within the framework this study liquidity proxy analysis is important and the results will be used later and discussed in more detail below.
- 1. Measurement by means of transaction costs:
- 1.1. The spread between the buying and selling price of an asset. It is one of the most popular measures of liquidity. This indicator has been used for a long time. So, for example, to measure liquidity and its impact on the price, Amihud et al. (1986). This indicator, according to many researchers, includes information costs, transaction processing costs, inventory storage costs, etc. This spread can also be calculated as a relative measure based on the highest buy price and the lowest ask price. Also, sometimes the so-called realized spread is calculated using the weighted prices of the trades that have taken place.
For example, in a study by Dick-Nielsen et al. (2012) two measures were used to account for costs. The first is based on the assumptions made in the original paper by Roll (1984) that the price of a bond is always somewhere between the bid and ask price. Accordingly, larger spreads lead to higher negative covariance between returns. This allows you to calculate the measure of liquidity by the method presented in formula (1).
where: - the maximum price in the transaction;
The minimum price in a transaction.
By transactions, the authors mean the following: trading session the same bond may have several transactions of approximately the same volume, which occurs as a result of the search for a seller and a buyer carried out by one or more brokers. The authors consider such transactions as one transaction, for which the opportunity costs are calculated.
- 2. Measures based on trading volumes:
- 2.1. turnover ratio. This indicator is calculated as the ratio of the total trading volume in value terms to the total value of the asset in circulation.
- 2.2. Absolute value of trading volume
- 2.2.1. Indicators such as days with zero trading volume on a bond and days with zero trading volume on all bonds of the firm as a whole can also be used. They are usually presented as a percentage of the number of days when the bond was not traded to the total number of trading days in the period (see, for example, Dick-Nielsen et al., 2012)
- 2.3. Amount of deals
These indicators are convenient to use to measure liquidity in over-the-counter markets, where information about quotes and prices for specific transactions may not be available.
- 2.4. Hui-Heubel liquidity ratio. It is calculated as the ratio of the difference between the maximum and minimum price of an asset for 5 days to the liquidity ratio calculated on the basis of five days of data. However, the researchers note that the five-day period is too long to catch noticeable price changes due to changes in trading volume. For this reason, the coefficient is relatively rarely used by Gabrielsen et al. (2012).
- 2.5. The ratio of profitability to trading volume (illiquidity index). This indicator was used in the study by Amihud (2002). It looks like this:
where: - profitability for the period;
Trading volume for the period;
The number of profitability (transactions) for the period.
Its main advantage, according to the author, is that it is a fairly accurate instrument for measuring liquidity, while all the necessary data for many instruments are available (compared to the spread between the buy and sell price).
The above measures show the degree of depth and breadth of the market, thereby allowing you to assess how liquid it is. However, in general, each of them is not without drawbacks, since the price and trading volume are not proportional. This reduces the possibility of obtaining a reliable estimate of liquidity.
In this regard, some authors use several liquidity indicators at once when assessing the premium or modify the existing ones. Thus, in the aforementioned study by Dick-Nielsen et al. (2012) used a measure that includes liquidity measures such as the Amihud (2002) measure, IRC and their standard deviations. Because they have different measurements, before weighing, the authors modify them as follows:
where: - the value of the liquidity measure of the i-th bond for the period t (j - measure index; j=);
The average value of the measure of liquidity;
The standard deviation of a measure of liquidity.
- 3. Measures based on the equilibrium price
- 3.1. Market efficiency ratio. It allows you to assess whether price fluctuations under the influence of new information are permanent or temporary. Experts believe that in a liquid market, any price changes are longer, and there are practically no short-term fluctuations. It is calculated as the ratio of the logarithm of the variance of the long period return to the product of the number of short periods and the logarithm of the variance of the short period return.
Thus, in a market with a high level of liquidity, this indicator should be close to one. disadvantage this indicator is the premise of a continuous change in prices in the market. For this reason, in the presence of discrete jumps, the values of this indicator (even those close to one) will not reflect the degree of liquidity.
- 3.2. Construction of vector autoregression. Researchers believe that in markets with a high level of liquidity, the lag in price adjustment is relatively small (Sarr, Lybek, 2002).
- 4. Evaluation of the market impact on the price. Here, the influence on the change in the price and profitability of an asset is taken into account not only by liquidity, but also, for example, by market profitability.
For a more detailed description of liquidity measures, see Gabrielsen et al. (2012). All of the above proxies are used to some extent when testing the presence of a significant effect of liquidity on the price and profitability of an asset.
The impact is due to the fact that investors, when evaluating assets, take into account the so-called liquidity risk, which accordingly has its own price. This is essentially a premium for liquidity. It should be noted that there is no clear and unique definition in the literature, as well as for direct liquidity. In general, all definitions used by researchers are relative. For example, Pereira and Zhang (2004) define a liquidity premium as the additional return that an illiquid asset must bring in order for an investor to receive a level of utility equivalent to that which he would receive if he bought a liquid asset.
We also note that difficulties may arise here, since the literature also uses concepts such as a discount or a premium for illiquidity. However, upon closer examination, these concepts consider the same phenomenon from different points of view. Amihud (2002), for example, calls the extra return on an illiquid asset an illiquidity premium.
Within the framework of this study, we define that the liquidity premium will be called the additional yield that the investor is willing to neglect when acquiring a liquid asset without transaction costs (as in the study by Gerhold et al (2011)). Thus, ceteris paribus, the required return on a liquid asset must be lower and the price correspondingly higher than that of an illiquid asset.
Such assumptions about liquidity, price, and yield ratios help solve financial problems such as the "equity premium puzzle", "risk-free rate puzzle", and also explain the reasons for the illiquidity of small firms' assets (Amihud et al., 2005).
Based on the foregoing, we can conclude that the liquidity of an asset is a complex concept. That is why for its measurement, as a rule, several approaches are used, on which the conclusions obtained often depend. In such a situation, to assess the liquidity price, it is necessary to apply methods that correspond to the chosen measurement methodology.
In general, taking into account the liquidity of an asset when investing is one of the important factors, the impact of which on the price and profitability of the asset is confirmed by various studies. Some of them will be discussed in more detail below.
