Valuation - Investment Method

Question 1

When would you use the Investment Method of Valuation ?

Answer 1

When there is an income stream (the property is let)

Question 2

Explain the Investment method of valuation ?

Answer 2

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).

Question 3

What does the conventional investment method involve?

Answer 3

It involves the rent received or market rent being multiplied by the years purchase, which equals market value.

Question 4

What comparable evidence is needed ?

Answer 4

Evidence of market rent and yields.

Question 5

Explain Term & Reversion ?

Answer 5

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.

Question 6

When would you use the Layer/Hardcore method ?

Answer 6

When a property is over rented.

Question 7

What is a yield ?

Answer 7

A measure of investment return expressed as a percentage of capital investment.

Question 8

How do you calculate a yield ?

Answer 8

Income (rent) divided by price, multiplied by 100.

Question 9

How does one determine an appropriate yield ?

Answer 9

Using comparable evidence.

Question 10

How does one calculate ‘years purchase’ ?

Answer 10

Dividing 100 by the yield.

Question 11

What is ‘years purchase’ ?

Answer 11

The number of years required for a properties income to repay its purchase price.

Question 12

Risk plays a vital role when determining a yield. What factors does this include:

Answer 12

Prospects of rental/capital growth
Quality of Covenant
Use of the property
Lease Terms
Void periods

Question 13

What does ‘return’ refer to ?

Answer 13

A return refers to the performance of a property.

Question 14

Name the different types of yields ?

Answer 14

All Risk Yield
Equivalent Yield
Gross Yield
Initial Yield
Nominal Yield
Net Yield
True Yield
Reversionary Yield
Running Yield

Question 15

What is an All Risks Yield ? (ARY)

Answer 15

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.

Question 16

What is a True Yield ?

Answer 16

A true yield assumes rent is paid in advance.

Question 17

What is a Initial Yield ?

Answer 17

A simple income yield for current income and current price.

Question 18

What is a Gross Yield ?

Answer 18

The yield not adjusted for purchasers costs

Question 19

What is an Equivalent Yield ?

Answer 19

Average weighted yield when a reversionary property is valued.

Question 20

What is a Reversionary Yield ?

Answer 20

Market rent divided by current price on an investment let below the market value.

Question 21

What is the DCF ?

Answer 21

Discounted Cash Flow - It is a growth explicit method of valuation.

Question 22

What does the DCF involve ?

Answer 22

It involves projecting estimated cash flows over an assumed holding period.

Question 23

When are DCF’s commonly used ?

Answer 23

DCF’s are commonly used for valuations where the projected cash flows are explicitly estimated over a time period.

Question 24

Give examples of when DCF’s are useful?

Answer 24

• Phased development projects.
• Over rented properties
• Social Housing

Question 25

Explain the DCF methodology ? (5 Steps)

Answer 25

1. Estimate the cash flow (Income less expenditure)
2. Estimate the exit value at the end of the holding period.
3. Select the discount rate.
4. Discount cash flow at a discount rate.
5. Value in the sum of completed discounted cash flow.

Question 26

What is NPV ?

Answer 26

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.

Question 27

What does IRR stand for ?

Answer 27

Internal Rate of Return.

Question 28

What is the IRR used for ?

Answer 28

The IRR is used to assess the total return from an investment, making some assumptions regarding rental growth, re letting and exit assumptions.