How do you value a stabilised office asset versus a value-add deal?
One of the toughest valuation questions asked in a real estate interview, and how to answer it.
By the CRE Modelling team
“Walk me through how you’d value a stabilised office asset versus a value-add deal, and where the assumptions differ.”
The interview question
It’s no secret: real estate interviews can be notoriously difficult. Some interviewers will push you to the limit, testing your technical knowledge and resilience. A candidate who has just walked the interviewer through a DCF often gets this as the follow-up. Here is the answer to give.
1. Cap rate assumptions
Stabilised assets price off in-place cap rates with modest reversion. In both cases the exit cap is set off the stabilised, finished asset, with a premium for the age it will have gained and for uncertainty; the execution risk of a value-add deal sits mainly in the discount rate, not in the exit cap.
2. Cash flow timing
Stabilised deals model steady-state NOI from day one, while value-add underwriting has to phase in capex, lease-up and a J-curve before NOI normalises.
3. Discount rate
Value-add deals carry a higher discount rate to compensate for execution and leasing risk versus a core, stabilised hold.
The takeaway? Technical knowledge is the key to standing out in real estate interviews. Whether you’re applying for a role in investments, acquisitions or finance, you’ve got to be prepared to dive deep into the details.