Investment Method Level 1 Flashcards
Where is the Investment used?
Used when there is an income stream to value
The rental growth is capitalised to produce a capital value.
Conventional method assumes growth implicit valuation approach.
An implied growth rate is derived from the market capitalisation rate (yield).
What is the Conventional Investment method?
Conventional method assumes growth implicit valuation.
Growth-implicit valuation refers to a valuation approach where future rental growth is assumed within the capitalisation (yield) rate, rather than explicitly modelling rental growth separately.
How is the Conventional Investment method calculated?
Rent received, or market rent multiplied by the years purchase to calculate the Market Value.
Importance of comparables for rent and yield.
What is the term and reversion method?
Used for reversionary investments (Market Rent more than passing rent), i.e. when under-rented
Term capitalised until next review/lease expiry at an initial yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
What is layer/hardcore method?
- Used for over rented investments (Passing Rent more than Market Rent)
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = Rent passing less Market Rent until next lease event
- Higher yield applied to top slice to reflect additional risk
- Different yields used to depend on comparable investment evidence and relative risk
What is a yield? How do you calculate it?
A measure of investment return, expressed as a percentage of capital invested.
A yield is calculated by Income / Price x 100
Why do different asset classes have different yields?
Different asset classes have different yields to reflect the different levels of risk.
Investors assess risk, growth potential and market conditions differently for each type of asset. The yield reflects the return investors require for taking on the risks associated with the property.
What is Years Purchase?
A Years Purchase is calculated by DIVIDING 100 / YIELD.
This is the number of years required for its income to repay its purchase price.
What factors impact a yield?
- 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 are prime and secondary yields in London for Offices?
Prime - West End - 4% & City of London - 5.5%
Secondary - 6.5% - 7%
What are prime and secondary yields in London for Industrial?
Prime South East Industrial Yields - 5%
Secondary Industrial Yields - 7%
