Valuation 3 Flashcards
*Why is the YP single rate table also known 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 principal sources of investment?
- Gilts (UK Government Bonds)
- Equities (Shares in companies)
- Property
What is a bond investment?
A bond investment has a fixed return (coupon) for a fixed period at the end of which the capital is repaid (redemption)
What is the major attraction of property over the other two major investment opportunities?
You can improve the performance of a property through positive proactive management.
What are the major disadvantages of property over the other two major investment opportunities?
- Low liquidity
- High management costs
- High transfer costs
- Low divisibility,
- Voids (ongoing costs)
How did the all risks yield get its name?
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)
What is another name for the all risks yield?
The market capitalisation rate
What is a gross yield?
is the rent expressed as a percentage of the purchase price
What is a net yield?
is the rent expressed as a percentage of the gross acquisition price i.e. purchase price plus purchaser’s costs
Name the costs that a purchaser must incur when acquiring a property investment.
- Stamp Duty Land Tax
- Agent’s Fees (1%)
- Legal Fees (0.5%)
- Non-recoverable VAT on Fees (20%)
Quantify purchaser’s costs in percentage terms.
- 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 - 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
What would you do if you had to value an investment property but could not find any evidence of yields?
You would find the ARY by:
Gilt yield + risk premium - growth rate
How is rental and capital growth accounted for in a conventional investment valuation?
- It is discounted back to the present value
- Implicit in the all risks yield
- More growth = lower yield
- less growth = higher yield
What is a reversionary investment?
- An investment that is let at a rent other than the market rent.
- Traditionally, under-rented
- Can be over-rented
What techniques can be used to value an under-rented reversionary investment?
- Term and reversion
- Hardcore / layer
Explain the process of the term and reversion technique?
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
Explain the process of the hardcore / layer technique?
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.
How did you / would you value an over-rented investment?
Hardcore / layer
What is an initial yield?
Net income at the date of purchase expressed as a % of purchasers price
What is the running yield (Straight yield)
the present income from a property expressed as a percentage of the Market Value
What is a reversionary yield?
Market Rent expressed as a % of the purchase price
What is an equivalent yield?
The internal 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
What 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
*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 quarterly 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 discounted cash flow?
It is compounded.
(1+i)^n
for “n” years
“i”% per annum interest, payable annually in arrears
How would you arrive at a discount rate when carrying-out a discounted cash flow?
UK Government Stock (bonds) form the basis of yields
Start with risk free rate and add on market risks and property risks
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
