Key investment terms

Question 1

All Risks Yield

Answer 1

A growth implicit yield used in investment valuation that reflects all of the risks and rewards of the subject property.

Question 2

Beta

Answer 2

this is a measure of volatility or systematic risk used in the capital asset pricing model (CAPM).

Question 3

Capital stack

Answer 3

this defines the priority of rights to income and profits generated by an investment. It can include common equity, preferred equity, mezzanine debt and senior debt.

Question 4

Full Repairing

Answer 4

this is a type of lease where the tenant is responsible for repairing the whole of the property, meaning that this cost does not fall to the landlord.

Question 5

Gap Analysis

Answer 5

this is used in investment management to compare current performance to expected or desired performance.

Question 6

Internal Rate of Return

Answer 6

this is a measure of an investment’s profitability over it’s lifetime. A higher IRR indicates a more profitable investment.

Question 7

Junior Debt

Answer 7

This is debt that ranks lower priority than senior debt. In the event of default, it will be paid after senior debt is paid back. For this reason it is typically riskier, but also offers higher returns.

Question 8

KPIS

Answer 8

KPIs can be used to measure and analyse investment performance and to benchmark investments against each other.

Question 9

Mezzanine Debt

Answer 9

This is a combination of debt and equity financing, ranking behind senior debt. It is typically higher risk, but also offers higher returns.

Question 10

Net Initial Yield

Answer 10

this is the initial yield (at the start of the investment) including purchaser’s costs.

Question 11

Purchaser’s Costs

Answer 11

these are typically deducted at the end of an investment valuation to calculate Market Value and to allow comparisons with other asset types. They typically include agent’s fees, legal fees, Stamp Duty Land Tax and VAT.

Question 12

Quarterly in Advance

Answer 12

Valuations typically assume that rental income is received annually in arrears, despite in practice being paid quarterly in advance. Software such as Argus will analyse the Nominal Equivalent Yield (arrears basis) and True Equivalent Yield (advance basis).

Question 13

Senior Debt

Answer 13

this is debt that takes priority over unsecured or junior debt and must be repaid first if a company becomes insolvent.

Question 14

Time Value of Money

Answer 14

this is an important concept as £1 in 1 years’ time is worth less than £1 today. This produces the PV and YP formulae that you may be familiar with in investment valuations.

Question 15

Unsecured Debt

Answer 15

this is debt that is not backed (or secured) by collateral. This is typically riskier and will offer higher returns. Examples include personal loans or some business bonds. This is different from, say, a mortgage, which is secured on the property by a first charge.

Question 16

Weighted Average Unexpired Lease Term (WAULT)

Answer 16

this is a metric used in valuation to assess the weighted average number of years remaining on leases across all properties in a portfolio.

Question 17

Zoning

Answer 17

this is a method of valuation analysis whereby the front of a retail shop is worth more than the rear.

Question 18

What is a Sale & Leaseback transaction?

Answer 18

The vendor sells the property to an investor and then leases it back from the investor under a lease agreement.

Question 19

Commercial Mortgage-Backed securities

Answer 19

CMBS are securities backed by pools of commercial mortgage loans. They allow lenders to securitize and sell off portions of their loan portfolios to investors, providing liquidity and capital for additional lending.

Question 20

REITS

Answer 20

REITs are investment vehicles that allow individuals to invest in a portfolio of income-producing real estate assets. They can be publicly traded or privately held and offer investors exposure to real estate without the need for direct property ownership.

Question 21

Benefits of REITs

Answer 21

Liquid
High Dividend yield
Diversification
Tax advantages - do not pay corporation tax.

Question 22

What is a futures agreement?

Answer 22

Futures are financial contracts that obligate the buyer to purchase an asset (or the seller to sell an asset) at a predetermined future date and price. These contracts are standardized agreements traded on organized exchanges.
Futures contracts are commonly used for commodities such as agricultural products (e.g., wheat, corn, soybeans), energy products (e.g., crude oil, natural gas), metals (e.g., gold, silver), and financial instruments (e.g., stock market indices, currencies, interest rates).

Question 23

What are swaps?

Answer 23

Swaps are financial agreements between two parties to exchange cash flows or other financial instruments over a specified period. Swaps are commonly used to manage risks, hedge against exposure to interest rates or currency fluctuations, and customize investment strategies.

Question 24

What is a CDS?

Answer 24

Credit Default Swaps (CDS): Credit default swaps are derivatives contracts that provide protection against the default of a borrower or issuer of debt securities. In a credit default swap, the protection buyer pays periodic premiums to the protection seller in exchange for compensation in the event of a credit event, such as default, bankruptcy, or restructuring. Credit default swaps are used by investors to hedge credit risk exposure or speculate on changes in creditworthiness.

Question 25

What are interest rate swaps?

Answer 25

Interest Rate Swaps (IRS): Interest rate swaps involve the exchange of fixed-rate and floating-rate cash flows based on a notional principal amount. In an interest rate swap, one party agrees to pay a fixed interest rate to the other party in exchange for receiving a floating interest rate (typically based on a reference rate such as LIBOR or EURIBOR), or vice versa. Interest rate swaps are used to manage interest rate risk, hedge against fluctuations in interest rates, or modify the interest rate profile of debt obligations.

Question 26

What are the differences between a Sovereign Wealth Fund and a Pension Fund?

Answer 26

Pension Fund target is to provide retirement benefits to individuals whereas SWF are state owned funds that aim to manage and invest a country’s surplus wealth in order to grow the nations wealth over the long terms.