Investment Method Flashcards
When should you use the investment method?
When there is an income stream to value
Broadly how is a capital value calculated
Capitalising the rental income
What is the conventional investment method?
Assumes a growth implicit valuation approach
An implied growth rate is derived from the market capitalisation rate (yield)
What is the calculation used for the conventional investment method?
Rent received or market rent multiplied by the YP
Alternatively the rent divided by market capitalisation rate (yield)
Where do you find rents and yield to apply in conventional investment valuation?
Comparable evidence
When is term and reversion often utilised?
For reversionary investments where the market value is above passing rent
(When a property is under rented)
What is the term and reversion process?
Capitalise the rent for the remaining term (up to next rent review or lease expiry) at an initial yield and then capitalise the market rent into perpetuity using a reversionary yield
Layer/ hardcore method
Used for over rented investments (passing rent is more than the market rent)
Income flow divided horizontally
- the bottom slice is market rent
- top slice is the passing rent minus the market rent until next lease event
Higher yield applied to top slice due to higher risk
Different yields depending on market evidence etc.
What is a yield?
A measure of investment return, expressed as a percentage of capital invested
How to calculate a yield?
Income divided by the Capital value x 100
When determining a yield for valuation purposes, risk is a major factor in deciding a yield. Risk areas include what?
•Prospects for rental and capital growth
• Quality of location and covenant
• Use of the property
• Lease terms
• Obsolescence - what is the likely future rate?
•Voids - what is the risk?
•Security and regularity of income
• Liquidity - ease of sale
What is a return used for?
Describes the performance or the property as an investment
- measured retrospectively
- DCF is used to determine an IRR
In a market is there only one set of market/ asset yields?
No there is often primary and secondary yields
Define all risks yield
• The remunerative rate of interest used in the valuation of fully let property let at market rent reflecting all the prospects and risks attached to the particular investment
True yield
Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears)
