Valuation 3

Question 1

*Why is the YP single rate table also known 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 principal sources of investment?

Answer 2

1. Gilts (UK Government Bonds)
2. Equities (Shares in companies)
3. Property

Question 3

What is a bond investment?

Answer 3

A bond investment has a fixed return (coupon) for a fixed period at the end of which the capital is repaid (redemption)

Question 4

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

Answer 4

You can improve the performance of a property through positive proactive management.

Question 5

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

Answer 5

1. Low liquidity
2. High management costs
3. High transfer costs
4. Low divisibility,
5. Voids (ongoing costs)

Question 6

How did the all risks yield get its name?

Answer 6

It takes into account all the aspects of the investment
1. the construction (age, design, specification)
2. the quality of the tenant’s covenant
3. the amount of rent (i.e. market-rented, under-rented, over-rented)
4. the unexpired lease term
5. the other lease terms
6. anticipated rental growth (location)

Question 7

What is another name for the all risks yield?

Answer 7

The market capitalisation rate

Question 8

What is a gross yield?

Answer 8

is the rent expressed as a percentage of the purchase price

Question 9

What is a net yield?

Answer 9

is the rent expressed as a percentage of the gross acquisition price i.e. purchase price plus purchaser’s costs

Question 10

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

Answer 10

• Stamp Duty Land Tax
• Agent’s Fees (1%)
• Legal Fees (0.5%)
• Non-recoverable VAT on Fees (20%)

Question 11

Quantify purchaser’s costs in percentage terms.

Answer 11

1. From 17th March 2016, Stamp Duty Land Tax on Commercial Property changed to
   - 0% on the first £150,000
   - 2% on the next £100,000
   - 5% on all above £250,000
2. Agent’s and Legal Fees amount to 1.80%
   - VAT at 20% on Agent’s and Legal Fees of 1.50% is 0.30% of the Purchase Price

Question 12

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

Answer 12

You would find the ARY by:
Gilt yield + risk premium - growth rate

Question 13

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

Answer 13

• It is discounted back to the present value
• Implicit in the all risks yield
• More growth = lower yield
• less growth = higher yield

Question 14

What is a reversionary investment?

Answer 14

• An investment that is let at a rent other than the market rent.
• Traditionally, under-rented
• Can be over-rented

Question 15

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

Answer 15

1. Term and reversion
2. Hardcore / layer

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 until the next leave event.

Reversion to market rent is capitalised into perpetuity at an all risks yield (ARY) and PV backed by the number of years until the next review/renewal

Question 17

Explain the process of the hardcore / layer technique?

Answer 17

Income is divided up horizontally

To calculate the bottom slice - capitalise the market rent into perpetuity at an appropriate yield.

to work out the top slice you capitalise the overage/froth at a higher yield up to the next lease event.

Question 18

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

Answer 18

Hardcore / layer

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 the running yield (Straight yield)

Answer 20

the present income from a property expressed as a percentage of the Market Value

Question 21

What is a reversionary yield?

Answer 21

Market Rent expressed as a % of the purchase price

Question 22

What is an equivalent yield?

Answer 22

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

Question 23

What is an equated yield?

Answer 23

The internal rate of return of an investment with rental growth

Question 24

What is a true equivalent yield?

Answer 24

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

Question 25

What do you understand top slice income to be?

Answer 25

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

Question 26

How is top slice income valued?

Answer 26

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

Question 27

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

Answer 27

Capitalise the profit rent to the end of the term.

Question 28

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

Answer 28

The Remunerative rate
The Accumulative rate

Question 29

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

Answer 29

it increases it

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

Question 30

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

Answer 30

• 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 31

How is growth calculated in a discounted cash flow?

Answer 31

It is compounded.
(1+i)^n
for “n” years
“i”% per annum interest, payable annually in arrears

Question 32

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

Answer 32

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

Question 33

What is a risk-free rate?

Answer 33

The gross redemption yield on UK bonds

Question 34

What do you understand by the expression risk premium?

Answer 34

It comprises of market risks and specific risks

Question 35

Why do property investors require a risk premium?

Answer 35

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