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APC Revision > Investment Valuation Techniques (Growth Implicit and Explicit) - Module 3 > Flashcards

Investment Valuation Techniques (Growth Implicit and Explicit) - Module 3 Flashcards

1
Q

Why is the YP single rate table also known as the Present Value of £1 per annum?

A

The YP for any given year is a sumation of present values upto and including that year.

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2
Q

What are the three principle investment opportunities?

A
  1. Gilts (Government stock)
  2. Equities (Shares in Companies)
  3. Property
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3
Q

What is a bond investment?

A

Fixed capital and a fixed return and a fixed life at the end of which we get back the original capital invested.

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4
Q

What is the major attraction of property over the other two major investment opportunies?

A
  • Through proactive management you can improve performance.
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5
Q

What are the major disadvantages of property over the other two major investment opportunities?

A
  • Lack of liquidity
  • Need to be managed
  • Not Divisible
  • Relatively high transfer costs
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6
Q

How did the all risks yield get its name?

A

It includes all the risks of an investment.

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7
Q

What is another name for the all risks yield?

A

The market capitalistion rate.

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8
Q

What is a gross yield?

A

The rent expressed as a percentage of the purchase price

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9
Q

What is a net yield?

A

The rent expressed as a percentage of the gross cost of aquisition.

I.E. The purchase Prace Plus Purchasers Costs.

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10
Q

Name the costs that a purchaser must incur when acquiring a property investment?

A
  1. Stamp Duty Land Tax
  2. Agents Fees
  3. Legal Fees
  4. Non Recoverable VAT on Agents and Legal Fees
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11
Q

Quantify purchaser’s costs in percentage terms?

A
  • Agents Fees are 1%
  • Legal Fees 1/2%
  • VAT 20% on Agents and Legal Fees = 0.3%
  • Total = 1.8%
  • Stamp Duty
  • 0% on the first £150,000
  • 2% on the next £100,000
  • 5% on all above £250,000
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12
Q

What would you do if you had to value an investment property but could not find any evidence of yields?

A

You will have to construc a yield.

You do this by starting with a risk free rent which is yield from guilts.

Then add a risk premium for that property in that location.

Then deduct any growth.

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13
Q

How is rental and capital growth accounted for in a conventional investment valuation?

A

Rental and Capital Growth are not made explicit in the valuation. They are implicit in the capitalisation rate.

The greater the growth the lower the rate.

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14
Q

What is a reversionary investment?

A

A property that is let at a rent other than market rent.

  1. under-rented (traditional)
  2. Can be over-rented
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15
Q

What techniques can be used to value an under-rented reversionary investment?

A
  1. Term and Reversion (block income approach)
  2. The hardcore approach (layer approach)
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16
Q

Explain the process of the term and reversion technique?

A
  • Capitalise the term rent (net income) up to review/reversion with YP Single Rate @ x%
  • Capitalise the market rent into perpetuity YP Perp @ x%
  • Defer it by multiply by PV of £1 for x years @ x%
  • You would use a higher yield for the reversion than for the term to reflect the risks.
17
Q

Explain the process of the hardcore/layer technique?

A

Bottom Slice Income = Capitalise the rent passing into perpetuity.

Top slice = Capitalise the marginal income (increase in rent you expect to receive)

Defer it by PV of £1 in x years @ x%

You would capitalise the top slice income by a higher rate than the bottome slice income.

18
Q

How did you / would you value an over-rented investment?

A
  1. Can use the Block Income (same as term and reversion approach).
  • Rent Passing​ x YP for x years @ higher %
  • Review/Reversion = Market Rent (being lower) x YP Perp @ lower %
  • Defer that for the term by multiplying by PV of £1 in x years @ lower percentage (than term)
  1. Can use the Core income approach
  • Core Income = Market Rent multiplied to reversion by YP Perp @ ​x%
  • Top Slice = Overage/Froth (Over rented element) multiplied by YP for x years @ higher% (than the core income)
19
Q

What is an initial yield?

A

The net income expressed as a percentage of the purchase price.

20
Q

What is a reversionary yield?

A

The market rent expressed as a percentage of the purchase price.

21
Q

What is an equivalent yield?

A

The weighted average of the initial yield and the reversionary yield.

It can also be expressed as the Internal Rate of return disregarding any rental orr capital growth.

22
Q

What is an equated yield?

A

The yield including growth.

23
Q

What is a true equivalent yield?

A

The yield taking into account the rent received quarterly in advance.

24
Q

What do you understand top slice income to be?

A
  1. Additional rent we expect to receive at review/reversion where a property is under-rented
  2. The overrage / froth when a property in over-rented.
  3. A leasehold profit rent is top slice income.
25
Q

How is top slice income valued?

A

Valued at a higher yield than the bottom slice income as the top slice income is more risky.

26
Q

How would you value a leasehold interest / ascertain if a premium can bee charged for the assignment of a lease?

How would you capitalise the Profit Rent?

What one would you use?

A

I would capitalise the profit rent.

How would you capitalise the Profit Rent?

  1. I would use either the YP Dual Rate
  2. YP Dual Rate Tax Adjusted
  3. YP Single Rate

What one would you use?

  • I would cross that bridge when I come to it
27
Q

What are the names of the two yields in the YP Dual Rate?

A
  1. The remunerative rate (generally takes 1% - 2% above Market Rent)
  • ​This reflects the profit rent/top slice income
  • an inconvenience of having a landlord and a lease
  • possibility of substantial liability for dilapidations
  1. The accumulative rate
    * ​Interest rate paid on the sinking fund element used to repalce the capital outlay
28
Q

What effect does rent received quarterly in advance have on the yield?

A

It increases the nominal yield

29
Q

What is the fundamental diffence between conventional investment valuation techniques and discounted cash flow techniques?

A
  1. In conventional investment valuation techniques you do not make growth explicit in the capitalisation.
  2. It is implicit in the capilisation and discount rates.
  3. In the DCF technique we make the rental and capital growth explicit but we dicount at the investors target rate of return.
30
Q

How is growth calculated in a discounted cash flow?

A

Growth is calculated by compounding.

The formula is 1 + in

i = rate of interest

n = numberr of years

or use Parrys Valuation tables and use

The Amount of £1 table

31
Q

How would you arrive at a discount rate when carrying out a discounted cash flow?

A

I would start with a risk free rate and then add on a risk premium.

32
Q

What is a risk free rate?

A

Is the yield from UK Gilts (Government Stock)

33
Q

What do you understand by the expression risk premium?

A

Risk premium is the additional return over and above Gilts that a property investor would require to the additional risks.

  • Market risks
  • Specific risks (relating to that particular property)
34
Q

Why do property investors require a risk premium?

A

Investment in property has a higher risk than Investment in Gilts

APC Revision (32 decks)

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