Valuation Module 3 Flashcards
What would you do if you could not find any evidence when creating an ARY?
Construct it by:
Take risk-free rate (gilt)
Add risk premium
Deduct growth
How is rental and capital growth accounted for in a conventional investment valuation?
Implicitly in the ARY.
What is reversionary investment?
Let at a rent other than market rent, normally under rented.
What techniques can be used to value an under-rented reversionary investment?
Term & reversion (block income)
Hard-core (layer)
Explain the process of the term and reversion technique for under rented properties?
Capitalise the term to reversion.
At reversion capitalise the market rent into perpetuity.
Defer it for the term period at a higher yield to reflect risk
Explain the process of hard-core technique for under rented property?
Capitalise the passing rent into perpetuity.
Then capitalise the top slice into perpetuity.
Then, defer it for period up to reversion, at a higher rate for the top slice.
How do you value an over rented property?
Use block income
or core income.
How does block income work for an over rented property?
Capitalise the passing rent to review.
Capitalise market rent into perpetuity.
Defer for period until review at a higher rate for the term.
How does core investment method work for over rated properties?
Capitalise market rent into perpetuity.
Capitalise overage (froth) to reversion at a higher rate to reflect risk.
What is an initial yield?
Market rent is expressed as a percentage of the purchase price.
What is the equivalent yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR (discounting growth).
What is an equated yield?
The weighted average of the initial yield and reversionary yield. Also known as the IRR including growth.
What is true equivalent yield?
The yield accounting for rent is received quarterly in advance?
What is top slice?
- Additional rent expected at review in an under rented property.
- It is the overage/froth if the property is over rented.
- Leasehold profit rent.
How is the top slice valued?
At a higher yield reflecting the increased rent.
How would you value a leasehold interest/ascertain if a premium can be charged for an assignment of a lease?
Capitalise the profit rent.
1. YP dual rate
2. YP dual rate tax adjusted
3. YP single rate
What are the names of the two yields in the YP Dual Rate?
Renumeration rate (return on capital).
Accumulated rate (risk-free interest on sinking fund 2.25% Sportelli.
Earl Cadogan v Sportelli [2007]
What effect does rent received quarterly in advance have on the yield?
It increases the nominal yield.
What is the fundamental difference between conventional investment valuation techniques and discounted cash flow techniques?
In conventional methods, growth is implicit.
In DCF, it’s explicit.
How would you arrive at a discount rate when carrying out a discounted cash flow?
DCF finds the present value of money to see if returns will be higher than the investment.
Rate = Start with risk-free rate and on a risk premium.
What is a risk free rate?
The yield from UK government stock (gilt).
What is risk premium?
It’s the additional return over and above gilts accounting for market and property specific risks.
Why do property investors require a risk premium?
Because investing in property has a higher risk than investing in bonds.
What is RICS Professional Statement?
Mandatory requirements for RICS members and RICS regulated firms.
