PE Investment Val Flashcards
When is the investment method used?
For income producing property, i.e. an investment
What is a yield?
Annual return on investment expessed as % of capital value
What is an All Risks Yield (ARY)?
Remunerative rate of interest used in the conventional valuation of freehold and leasehold interests, reflecting all the prospects and risks attached to a particular investment
What is an equivalent yield?
Weighted average of initial and reversionary yields
What is a Net Initial Yield (NIY)?
Yield based on initial income and adjusted for purchaser’s costs
What is a true yield?
Calculated quarterly in advance
What is an equated yield?
Discount rate which needs to be applied to the flow of income expected during the life of the investment so that the total amount of income so discounted at this rate equals the capital outlay
Name 2 traditional valuation methods that use implicit yields?
Term and reversion
Hardcore and topslice
Both use implicit yields
Term and reversion for what investment?
Under-rented
Hardcore and topslice investment?
Over-rented
What is a reversionary freehold?
An investment where the rent passing is below open market rental value
What are key issues when using a hardcore and topslice valuation for an over-rented investment?
> Arbitrary division of income
Double counting
Topslice is highly agreed
Arbitrary division of income
Subjective adjustments
Hard to build in complex circumstances or voids
How could you value a leasehold property?
> Dual rate (with a sinking fund)
DCF
Single rate
When might you chose to use a DCF?
> Complex investment
Financial modelling
Lack of comparable evidence
Assess investment value to assist in buy/sell decision/selection between alternative investments
Adapt to individual investment requirements
What is Net Present Value (a type of DCF analysis)?
Present value of all future expected income and capital flows, discounted at the investor’s target or required rate of return
What is Internal Rate of Return (IRR) (a type of DCF analysis)
Discount rate which, when applied to all future expected income and capital flows, equates the price with the present value of these discounted income flows (i.e. NPV = 0)
Is DCF growth explicit or implicit?
Explicit
What does a positive NPV indicate?
Rate of return higher than the discount rate is being yielded
What are the problems with a DCF?
> Subjective
A lot of assumptions are made
Potential for double counting (e.g. building break option into cash flow and discount rate)
Not necessarily based on comparable evidence
How do you calculate exit value in a DCF?
Apply a YP in perp (NIY) rather than an equated yield
How could you chose a discount rate for a DCF?
> Risk-free rate + risk premium (market and specific property risk)
> Investor’s target discount rate
Which of these are correct in relation to a risk premium?
> Market risk (systematic) - illiquidity upon sale, failure to meet forecast rental growth and yield shift, risk of obsolescence through structural change, legislative risk
> Specific property risk (unsystematic) - covenant risk, void risk, cost of ownership and management, I ensure structures
What is the risk free rate generally based on?
Gross redemption yield on a medium-dated govenment gilt
How can you produce a DCF?
> By hand
Spreadsheet
Software e.g. Argus
