This methodology defines the fundamental principles, approaches, and methods applied by Q Home Ltd. in performing valuations of real estate, limited real rights, enterprises, company shares, financial instruments, machinery and equipment, intangible assets, and other assets for which the company possesses the necessary professional competence and legal capacity.
The methodology has been developed in compliance with the effective Bulgarian Valuation Standards (BVS), applicable Bulgarian and European legislation, as well as established professional principles in asset valuation.
The purpose of this methodology is to ensure consistency, objectivity, transparency, and traceability in determining the value of valuated assets through the application of appropriate valuation approaches and methods.
When performing a valuation, the choice of approach and method shall be determined by the appraiser depending on the following factors:
There is no requirement for all approaches or all valuation methods to be applied in every valuation. The appraiser shall use one or more approaches that can provide a reliable and reasoned indicative value. When a specific approach or method is not applicable due to a lack of sufficient information or due to the specifics of the valuated asset, the reasons for its non-application shall be reasoned in the valuation report.
The applied approaches and methods shall be based on verifiable market data, consistent assumptions, and professional judgment, and the used input data must be comparable with the selected basis of value and the purpose of the valuation.
The final value of the valuated asset represents the result of the appraiser's professional judgment based on the analysis of all relevant facts and circumstances as of the date of the valuation.
In accordance with the Bulgarian Valuation Standards, three main approaches may be applied in determining the value of assets:
Each approach includes one or more valuation methods, which are selected depending on the nature of the valuated asset, the purpose of the valuation, and the available information. The use of more than one approach increases the reliability of the valuation when sufficient market or financial data exist for this purpose.
Under the market approach, the value of the valuated asset is determined through comparison with identical or similar assets for which reliable information regarding realized transactions or active market offers is available. The approach is based on the principle of substitution, according to which a rational market participant would not pay more for a given asset than the cost of acquiring another asset with similar characteristics, utility, and potential for generating economic benefits.
The market approach should be preferred when:
In practice, completely identical assets are encountered relatively rarely. Therefore, the application of the market approach usually requires the analysis of similar assets and the performance of adjustments for the differences between them and the valuated asset. Adjustments shall be logically reasoned, quantitatively measurable when possible, and consistent with the manner in which typical market participants form prices.
The market approach finds the widest application in the valuation of real estate, machinery and equipment with an active secondary market, financial instruments, enterprises, company shares, and other assets for which reliable market analogues can be identified.
Within the framework of the market approach, the company applies to a primary extent the Comparable Transactions Method (Market Analogues).
Under the comparable transactions method, the value of the valuated asset is determined on the basis of an analysis of realized transactions or, when justified, reliably analyzed market offers for identical or similar assets.
In applying the method, the appraiser:
Depending on the type of the valuated asset, different units of comparison may be used. In real estate, these most frequently are price per square meter, market rent, or capitalization rate. In the valuation of enterprises and equity interests, market multiples such as EV/EBITDA, EV/Sales, P/E, P/BV, and other indicators adopted by participants in the respective market are commonly used.
When analyzing comparable transactions, the appraiser shall account for all factors that exert a significant influence on value, including location, physical characteristics, functionality, technical condition, legal status, encumbrances on ownership rights, profitability, liquidity, the size of the acquired rights, and all other characteristics that would be taken into account by a typical market participant.
Under the income approach, the value of the valuated asset is determined on the basis of the expected future economic benefits that can be realized from its ownership, use, or operation. The approach is based on the principle that the value of an asset is a function of its ability to generate future cash flows, while simultaneously accounting for the time value of money and the risk associated with the realization of these benefits.
The income approach should be preferred when:
In applying the income approach, the appraiser shall determine the projected cash flows, the period for which the forecast is prepared, as well as the appropriate discount rate or capitalization rate. The assumptions used shall be mutually consistent and reflect the expectations of typical market participants as of the date of the valuation.
The income approach finds application in the valuation of investment real estate, enterprises, company shares, financial instruments, intangible assets, and other assets whose value derives primarily from their ability to generate future economic benefits.
Within the framework of the income approach, the company applies the following main methods:
Under the discounted cash flow method, the value of the valuated asset is determined by discounting the expected future cash flows to the date of the valuation using an appropriate discount rate.
In applying the method, the appraiser:
Projected cash flows shall be based on reasoned and verifiable assumptions, consistent with historical results, current market conditions, the expected development of the respective sector, and the specific characteristics of the valuated asset. When necessary, different scenarios, probability-weighted forecasts, or sensitivity analysis may be used.
When the valuated asset has a finite useful life, the terminal value may be determined as a salvage value at the end of the projection period. For assets with an infinite or long-term useful life, the terminal value is usually determined via a constant growth model or another appropriate method consistent with the nature of the valuated asset.
The discount rate shall be consistent with the type of cash flows used and reflect all significant risks inherent to the valuated asset. In determining it, generally accepted models and techniques may be used, including the Capital Asset Pricing Model (CAPM), Weighted Average Cost of Capital (WACC), the Buildup Method, or other appropriate market-based models.
Under the income capitalization method, the value of the valuated asset is determined by converting a representative income for a single reporting period into a capital value via an appropriate capitalization rate. The method is based on the assumption that the valuated asset generates stable economic benefits whose amount and risk can be accepted as relatively constant over time.
In applying the method, the appraiser determines a representative income, which, depending on the subject matter of the valuation, may be net operating income, net rental income, operating profit, or another appropriate indicator. The obtained income is capitalized via a capitalization rate reflecting the required return of typical market participants and all significant risks inherent to the valuated asset.
The capitalization rate may be determined on the basis of observed market transactions, by converting a discount rate, or by using generally accepted models for determining the required return. In the valuation of investment real estate, the Buildup Method is frequently used, where the starting base is the market yield of prime investment properties (Prime Yield) adjusted by appropriate risk premiums. In the valuation of enterprises and intangible assets, CAPM and WACC are commonly used.
The method finds application in assets generating stable and predictable incomes when no significant changes in future cash flows or their risk profile are expected.
Under the residual value method, the value of the valuated asset is determined as the difference between the expected value of the completed project and all costs necessary for its realization, including entrepreneurial profit and remuneration for the assumed risk.
In applying the method, the appraiser determines the expected value of the project after its completion, calculates all direct and indirect costs for its realization, and, when necessary, discounts future revenues and expenses to the date of the valuation.
When determining costs, all significant elements shall be accounted for, including costs for design, construction, financing, administrative procedures, marketing, sale, taxes, fees, entrepreneurial profit, and a risk reserve.
The method finds application primarily in the valuation of land plots with potential for development or redevelopment, investment projects under development, and other assets whose value depends mainly on the possibility for future development in accordance with their highest and best use.
Under the cost approach, the value of the valuated asset is determined on the basis of the costs necessary as of the date of the valuation for its reproduction or replacement with a new asset of the same utility, accounting for the effect of all forms of depreciation. The approach is based on the principle of substitution, according to which a rational market participant would not pay more for a given asset than the cost of acquiring or creating another asset with the same functional characteristics.
The cost approach should be preferred when:
The cost approach finds wide application in the valuation of specialized real estate, machinery and equipment, engineering infrastructure, special-purpose assets, and other assets for which an active market is lacking.
In applying the cost approach, the appraiser determines the reproduction or replacement costs of the valuated asset as of the date of the valuation, analyzes all forms of depreciation, and determines the value indication after deducting them.
Within the framework of the cost approach, the company applies the following main methods:
Under the replacement cost method, the value of the valuated asset is determined on the basis of current costs for constructing or acquiring a new asset of the same utility, using modern materials, technologies, and technical solutions.
After determining the replacement cost, the appraiser analyzes accrued physical, functional, and external depreciation, accounting for their effect on the utility and value of the valuated asset as of the date of the valuation.
The method finds application in the valuation of specialized buildings, engineering facilities, machinery, production equipment, and other assets for which replacement costs can be reliably determined.
Under the reproduction cost method, the value of the valuated asset is determined on the basis of the costs of creating an identical copy thereof as of the date of the valuation, using the same design solutions, materials, technologies, and technical characteristics, to the extent practically possible.
After determining the reproduction cost, the appraiser analyzes physical, functional, and external depreciation and determines the value indication after deducting it.
The method finds application in the valuation of historical and architectural monuments, cultural values, unique production facilities, and other assets where the identity of construction or execution represents an essential element of their value.
Under the summation method, the value of the valuated asset is determined as the sum of the values of its individually valuated constituent elements.
In applying the method, the appraiser identifies all significant assets included in the subject matter of the valuation, determines the value of each asset via the most appropriate approach and method, and then reconciles and sums the obtained value indications, eliminating any potential overlaps.
The method finds application in the valuation of companies, holding structures, investment companies, and other objects where value derives primarily from the value of individually identifiable assets.
When more than one approach or method has been applied in the valuation, the appraiser shall perform a reconciliation of the obtained value indications in order to form a final conclusion regarding the value of the valuated asset.
Reconciliation does not represent a mechanical determination of an average value. In forming the final conclusion, the appraiser analyzes the reliability, applicability, and evidentiary value of each obtained indicative value under the respective method, accounting for:
When significant differences exist among individual value indications, the appraiser shall analyze the reasons therefor, perform the necessary checks, and, when necessary, review the input data and assumptions used.
The final conclusion regarding value represents the result of the appraiser's professional judgment based on the analysis of all relevant facts and circumstances as of the date of the valuation.
When determining specific bases of value, the appraiser shall apply the principles of this methodology, accounting for the particularities of the respective basis of value and the regulatory requirements applicable to the specific valuation.
In determining liquidation value, the appraiser analyzes the conditions under which the sale is expected to be realized, including available exposure time, method of realization, range of potential buyers, and all costs necessary for executing the transaction.
Depending on specific assumptions, liquidation value may be determined under conditions of voluntary liquidation or forced sale. In determining it, all direct realization costs, as well as the effect of the limited selling period on the achievable price, shall be accounted for.
In determining mortgage lending value, the appraiser analyzes the sustainable characteristics of the real estate and its long-term ability to secure a credit claim.
In determining this basis of value, the long-term sustainability of market conditions is accounted for, without taking into account temporary price fluctuations, speculative expectations, or individual circumstances characteristic of a specific seller or buyer.
Mortgage lending value shall be determined in compliance with applicable regulatory requirements and the principles of the Bulgarian Valuation Standards.
When performing a valuation, the appraiser applies the generally accepted principles of valuation practice, insofar as they are relevant to the subject matter, purpose, and basis of value of the specific valuation.
When applicable, the valuation is based on the assumption of the highest and best use of the valuated asset. Highest and best use is understood as that use which is:
In valuing real estate, the appraiser analyzes whether the current use corresponds to the highest and best use or whether an alternative use exists that would result in a higher value. When the present use corresponds to the highest and best use, this is accepted as the basis for the valuation.
The value of the valuated asset is determined under the assumption that a rational market participant would not pay more than the cost of acquiring another identical or similar asset of the same utility. This principle is foundational in applying the market and cost approaches.
The value of the valuated asset is determined by the expected future economic benefits it can generate. The income approach is based precisely on this principle, accounting for the amount, timing of receipt, and risk of future cash flows.
The value of an individual component of an asset is determined by its contribution to the total value of the entire asset, rather than by the independent costs of its acquisition or creation. The principle finds application in the valuation of improvements, machinery and equipment, investments, and other assets constituting part of a larger object.
The value of the valuated asset is influenced by the ratio between supply and demand in the respective market. The appraiser analyzes the current state and trends of the market when they exert a significant influence on value determination.
Maximum value is achieved when the characteristics of the valuated asset correspond to the requirements and expectations of typical market participants and to the prevailing characteristics of the market environment.
The value of assets changes over time under the influence of economic, legal, technological, social, and market factors. The appraiser analyzes these factors as of the date of the valuation when their influence is significant for determining value.