Valuation - Investment Method Flashcards
When would you use the Investment Method of Valuation ?
When there is an income stream (the property is let)
Explain the Investment method of valuation ?
The investment method of valuation involves the rental income of a property being capitalised to produce a capital value. An implied growth rate is derived from the market capitalisation rate (Yield).
What does the conventional investment method involve?
It involves the rent received or market rent being multiplied by the years purchase, which equals market value.
What comparable evidence is needed ?
Evidence of market rent and yields.
Explain Term & Reversion ?
Term and Reversion is used for reversionary investments. For example when the market rent is more that the passing rent. It’s mainly used for valuing under rented properties.
The term is capitalised until the next rent review/lease expiry at an initial yield.
The Reversion is then done to MR in perpetuity at a reversionary yield.
When would you use the Layer/Hardcore method ?
When a property is over rented.
What is a yield ?
A measure of investment return expressed as a percentage of capital investment.
How do you calculate a yield ?
Income (rent) divided by price, multiplied by 100.
How does one determine an appropriate yield ?
Using comparable evidence.
How does one calculate ‘years purchase’ ?
Dividing 100 by the yield.
What is ‘years purchase’ ?
The number of years required for a properties income to repay its purchase price.
Risk plays a vital role when determining a yield. What factors does this include:
Prospects of rental/capital growth
Quality of Covenant
Use of the property
Lease Terms
Void periods
What does ‘return’ refer to ?
A return refers to the performance of a property.
Name the different types of yields ?
All Risk Yield
Equivalent Yield
Gross Yield
Initial Yield
Nominal Yield
Net Yield
True Yield
Reversionary Yield
Running Yield
What is an All Risks Yield ? (ARY)
An all risk yield is the rate of interest used in the valuation of a fully let property at market rent, reflecting all the prospects and risk attached to the particular investment.
What is a True Yield ?
A true yield assumes rent is paid in advance.
What is a Initial Yield ?
A simple income yield for current income and current price.
What is a Gross Yield ?
The yield not adjusted for purchasers costs
What is an Equivalent Yield ?
Average weighted yield when a reversionary property is valued.
What is a Reversionary Yield ?
Market rent divided by current price on an investment let below the market value.
What is the DCF ?
Discounted Cash Flow - It is a growth explicit method of valuation.
What does the DCF involve ?
It involves projecting estimated cash flows over an assumed holding period.
When are DCF’s commonly used ?
DCF’s are commonly used for valuations where the projected cash flows are explicitly estimated over a time period.
Give examples of when DCF’s are useful?
- Phased development projects.
- Over rented properties
- Social Housing
Explain the DCF methodology ? (5 Steps)
- Estimate the cash flow (Income less expenditure)
- Estimate the exit value at the end of the holding period.
- Select the discount rate.
- Discount cash flow at a discount rate.
- Value in the sum of completed discounted cash flow.
What is NPV ?
The sum of the discounted cash flow of the project. It can be used to determine if an investment gives a positive return against a target rate of return.
What does IRR stand for ?
Internal Rate of Return.
What is the IRR used for ?
The IRR is used to assess the total return from an investment, making some assumptions regarding rental growth, re letting and exit assumptions.
