Valuation 3 Flashcards
why is the YP singe rate table also know as the Present Value of £1 per annum
the present value of the right to receive £1 each year per annum for a number of years
What are the three principles sources of investment
guilts (bonds), equity (shares), property
What is the major attraction of property over the other two major investment opportunity
You are able to increase the performance of a property through proactive, positive management
what is a bond investment
A secured fixed capital and fixed return over a fixed period.
guilt is a government bond, but can have corporate
what are the major disadvantages of property over the other two major investment opportunities
- Low liquidity
- Need to be managed
- High transfer costs
- Usually Non-divisible
- ongoing costs such as voids and repairs
How did the all risks yield get its name?
Takes into account all the risks of the investment associated with the capitalisation:
- construction
- rent
- rental growth
- tenant covenant
- unexpired term
- lease terms
What is another name for the all risks yield?
market capitalisation rate
What is a gross yield?
income expressed as a % of the purchase price.
(excluding acquisition costs)
What is a net yield?
income expressed as a % of the purchase price + acquisition costs.
(gross aquisition costs)
Name the costs that a purchaser must incur when acquiring a property investment
- Stamp Duty Land Tax
- agent fees
- legal fees
- on recoverable VAT
quantify the costs of the acquisition costs.
- 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%)
what would you do if you had to value an investment property but could not find any evidence of yields?
Use the Guilt rate + risk premium - rental growth
How is rental and capital growth accounted for in a conventional investment valuation
implicit (included) in the all risk yield.
high growth - lower ARY
what is a reversionary investment?
An investment where the asset is let at a rent other than the Market Rent
What techniques can be used to value an under-rented reversionary investment?
Term and Reversion or Hardcore/Layer Method
Explain the process of the term and reversion technique
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.
Explain the process of the hardcore / layer method?
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
How would you value an over rented property.
The Hardcore Method / Term and Reversion
what is an initial yield?
Net income at the date of purchase expressed as a % of purchasers price
what is a reversionary yield?
Market Rent expressed as a % of Market Value
What is a equivalent yield?
The initial rate of return from an investment that disregards any rental or capital growth
What is an equated yield?
The internal rate of return of an investment with rental growth
at is a true equivalent yield?
Rate of return that takes into account that rent is received quarterly in advance
What do you understand ‘top slice’ income to be?
The additional rent expected at a lease event when a property is under-rented
how is top slice income valued
Capitalised at higher rate than the bottom slice income as it is riskier
multiplied by the value of £1
How would you value a leasehold interest / ascertain if a premium can be charged for the assignment of a lease?
Capitalise the profit rent to the end of the term.
what are the names of the two yields in the YP dual rate?
The remunerative rate
The Accumulative rate
what effect does rent received quarter in advance have on the yield
it increases it
£10k passing/£100k purchase price = 10.6% return giving the true equivalent yield.
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques
- 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
how is growth calculated in a DCF?
It is compounded
How would you arrive at a discounted rate when carrying out a DCF
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
what is a risk free rate?
The gross redemption yield on UK bonds
what do you understand by the expression risk premium?
It comprises of market risks and specific risks
Why do property investors require a risk premium?
Because there is more risk and more difficulty investing in property than there is investing in Guilts
