Valuation 3

Question 1

why is the YP singe rate table also know as the Present Value of £1 per annum

Answer 1

the present value of the right to receive £1 each year per annum for a number of years

Question 2

What are the three principles sources of investment

Answer 2

guilts (bonds), equity (shares), property

Question 3

What is the major attraction of property over the other two major investment opportunity

Answer 3

You are able to increase the performance of a property through proactive, positive management

Question 4

what is a bond investment

Answer 4

A secured fixed capital and fixed return over a fixed period.

guilt is a government bond, but can have corporate

Question 5

what are the major disadvantages of property over the other two major investment opportunities

Answer 5

• Low liquidity
• Need to be managed
• High transfer costs
• Usually Non-divisible
• ongoing costs such as voids and repairs

Question 6

How did the all risks yield get its name?

Answer 6

Takes into account all the risks of the investment associated with the capitalisation:
- construction
- rent
- rental growth
- tenant covenant
- unexpired term
- lease terms

Question 7

What is another name for the all risks yield?

Answer 7

market capitalisation rate

Question 8

What is a gross yield?

Answer 8

income expressed as a % of the purchase price.
(excluding acquisition costs)

Question 9

What is a net yield?

Answer 9

income expressed as a % of the purchase price + acquisition costs.
(gross aquisition costs)

Question 10

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

Answer 10

• Stamp Duty Land Tax
• agent fees
• legal fees
• on recoverable VAT

Question 11

quantify the costs of the acquisition costs.

Answer 11

• Stamp Duty Land Tax (0% on first 150k, 2% on next 100k, 5% on everything else)
• agent fees (1%)
• legal fees (0.5%)
• on recoverable VAT (0.3%)

Question 12

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

Answer 12

Use the Guilt rate + risk premium - rental growth

Question 13

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

Answer 13

implicit (included) in the all risk yield.
high growth - lower ARY

Question 14

what is a reversionary investment?

Answer 14

An investment where the asset is let at a rent other than the Market Rent

Question 15

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

Answer 15

Term and Reversion or Hardcore/Layer Method

Question 16

Explain the process of the term and reversion technique

Answer 16

Income is divided up vertically

The passing rent for the the term is capitalised by the ARY until the next lease event.

The revision is valued at market rent in perpetuity. It is capitalised by the ARY with additional risk factored in and multiplied by the PV of £1 by the number of years till the next lease event.

Question 17

Explain the process of the hardcore / layer method?

Answer 17

Income is divided up horizontally

Capitalise the current market rent into perpetuity.

to work out the top slice you multiply the additional market rent by the years purchase at an appropriate yield to work out the value. capitalised this into perpetuity

Question 18

How would you value an over rented property.

Answer 18

The Hardcore Method / Term and Reversion

Question 19

what is an initial yield?

Answer 19

Net income at the date of purchase expressed as a % of purchasers price

Question 20

what is a reversionary yield?

Answer 20

Market Rent expressed as a % of Market Value

Question 21

What is a equivalent yield?

Answer 21

The initial rate of return from an investment that disregards any rental or capital growth

Question 22

What is an equated yield?

Answer 22

The internal rate of return of an investment with rental growth

Question 23

at is a true equivalent yield?

Answer 23

Rate of return that takes into account that rent is received quarterly in advance

Question 24

What do you understand ‘top slice’ income to be?

Answer 24

The additional rent expected at a lease event when a property is under-rented

Question 25

how is top slice income valued

Answer 25

Capitalised at higher rate than the bottom slice income as it is riskier

multiplied by the value of £1

Question 26

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

Answer 26

Capitalise the profit rent to the end of the term.

Question 27

what are the names of the two yields in the YP dual rate?

Answer 27

The remunerative rate
The Accumulative rate

Question 28

what effect does rent received quarter in advance have on the yield

Answer 28

it increases it

£10k passing/£100k purchase price = 10.6% return giving the true equivalent yield.

Question 29

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

Answer 29

• DCF’s are useful to value multi-let properties with frequently changing rental income
• Conventional methods of valuation growth is implicit (included) in the yield where DCF it is excluded and is discounted at the investor’s true rate of return

Question 30

how is growth calculated in a DCF?

Answer 30

It is compounded

Question 31

How would you arrive at a discounted rate when carrying out a DCF

Answer 31

UK Government Stock (bonds) form the basis of yields
Start with risk free rate and add on market risks and property risks

Risk free rate + risk premium

Question 32

what is a risk free rate?

Answer 32

The gross redemption yield on UK bonds

Question 33

what do you understand by the expression risk premium?

Answer 33

It comprises of market risks and specific risks

Question 34

Why do property investors require a risk premium?

Answer 34

Because there is more risk and more difficulty investing in property than there is investing in Guilts