Investment Method Flashcards
1
Q
When would you use the investment method of valuation?
A
Used when there is an income stream to value.
2
Q
How does the conventional investment method work?
A
- Rent received (or Market Rent) x Years Purchase = Market Value
- Assumes growth implicit valuation approach
3
Q
What is a year’s purchase?
A
- Calculated by dividing 100 by the yield
- This is the number of years required for its income to repay its purchase price
4
Q
When would you use a Term and Reversion method? How does it work?
A
- Used for reversionary investments i.e. where Market Rent is more than passing rent
- Term capitalised until next rent review / lease expiry at an initial yield
- Reversion to Market Rent valued into perpetuity at reversionary yield
5
Q
When would you use the Layer / Hardcore method? How does it work?
A
- Used for over-rented investment i.e. where passing rent is more than Market Rent
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = passing rent - Market rent until the next lease event
- Higher yield applied to the top slice to reflect additional risk
- Different yields used depending on comparable investment evidence and relative risk
6
Q
What is a yield?
A
- Measure of investment return, expressed as a percentage of capital invested
- Calculated as income divided by price x 100
7
Q
How would you calculate Years Purchase? What does this show?
A
- Divide 100 by the yield
- Number of years required for the income to repay the purchase price
8
Q
What are the issues associated with the layer / hardcore method of valuation?
A
- Subjective yield selection - based on received tenant covenant strength and length of the over rent. Has to be done intuitively
- Double-counting - as the ARY applied to the bottom layer will be growth implicit, the size of the over rent will reduce over time
- Unrealistic split of income - risk of non-receipt is attached tot he whole income
9
Q
Are you qualified to comment on covenant strength?
A
No, I am able to comment on how the market would likely perceive the tenant covenant.
