Valuation - Yields Flashcards
What is a yield
A measure of investment return, expressed as percentage of capital invested
How to work out a yield
Income/ price * 100
YP - years purchase
The number of years required for its income to repay its purchase price
How to work out YP
100/yield
What happens to the YP if the yield sharpens
YP increases
At 5% YP is 20
At 4% YP is 25
All risk yield
The remunerative rate of inertest used in the valuation of a fully let property let at market rent reflecting all the prospects and risks attached to the investment
True yield
Assumes rent is payed in advance not in arrears
- traditional valuation practice assumes rent is paid in arrears
Nominal yield
Initial yield assuming rent paid in arrears
Gross yield
Yield not adjusted for purchasers costs
Net initial yield
Yield adjusted for purchasers costs 6.8%
How to calculate the net initial yield
Current rent / capital value inclusive of purchasers cost
Equivalent yield
The weighted average of the net yield from current rental income and all future recessionary income
I.e over/ under rented reverts back to market rate
Reversionary yield
Market rent divided by current price on an investment let at a rent below the market rent
Inclusive of purchases costs
Running yield
The yield at a moment in time
Yield is also a measure of
Risk
Return meaning
Term used to describe performance of property- measured retrospectively
How to calculate the internal rate of return
Use a DCF calculation
What influences a yield
- Prospects for rental/ capital growth
- Location quality
- Covenant
- Use of property
- Lease terms
- Obsolescence
- Voids
- Security and regularity of income
- Liquidity
Yields are
All growth implicit
A discounted cash flow technique is a growth xxx investment method
Explicit
How does a DCF work
Estimates the future value of a property by forecasting its future cash flow and then discounting the cash flow back to its present value. This accounts for the time value of money. Discount rate informed by comparables
When to use a DCF
Where there a no/ limited comparables. Provides a rational framework for the estimation of market value
What does the discount rate in a DCF reflect
The risk
DCF method
- Estimate cash flow for agreed time period (usually 5 or 10 years)
- Estimate exit value at end of period (use comparables and factor in yield compression)
- Select a discount rate
- Discount the cash flow my the discount rate
- Value = sum of completed discounted chase flow to provide the net present value
What is the DCF also used for
To determine if an investment gives a positive return against a target rate of return
RICS practice information regarding DCF
RICS Practice Information: Discounted Cash Flow Valuations (2023)
RICS Practice Information: Discounted Cash Flow Valuations (2023) - what does it provide
Practice global guidance on explicit DCF vs implicit methods of valuation, the context for applying DCF methods and the differences between inputs for MV and IV
