Yield, DCF, Hardcore and Term & Reversion Flashcards
What is a yield?
- Measure of investment return expressed as a percentage of capital invested
- Yield is calculated by income divided by price * 100
- Yield found by comparable evidence
- Years Purchase is number of years required for income to repay purchase price
What is a Net Initial Yield?
Annualised current passing rent less empty rates for all non-recoverable property rates divided by property valuation plus purchasers costs
What is a reversionary yield?
Market rent divided by current price on an investment let at a rent below MR
What is an equated yield?
Internal rate of return from a growth explicit cash flow
What is an equivalent yield?
Average weighted yield where a reversionary property is valued using an initial and a reversionary yield
How would a yield reported from an auction differ from a Net Initial Yield?
Auction yield would be a Gross Yield not adjusted for purchaser cost, whereas Net Initial Yield adjusts for purchasers costs
How does a Term and Reversion differ to a DCF?
- DCF used where projected cash flows are explicitly stated over a period of time e.g. short leaseholds, over rented properties
- DCF is growth explicit
- Difference to T&R is Term element values existing cash flow then assumes a Reversion to the market rent and market yield
What is the difference between a growth explicit and a growth implicit yield?
- Growth explicit: does not consider rental growth e.g. initial yield
- Growth implicit: makes adjustments for growth rate as part of the valuation e.g. all risks yield
How would you value an under / over rented investment property?
- Over rented property = use layer hardcore method
- Under rented = use the term and reversion method
When would you use a dual rate investment calculation?
- In an under rented scenario you would use the term and reversion. Reversion to market rent is capitalised at reversionary rent
- In an over rented scenario you would use layer and top slice. Higher yield to top slice as more risk
Where can you find yield evidence from?
- Rent and sale price for properties, use market databases such as CoStar
What is a term and reversion?
- Used for under rented properties
- Used for reversionary investments where the market rent is more than the passing rent
- Term capitalised until next review / lease expiry at an initial yield
- Reversion to market rent valued in perpetuity at a reversionary yield
What is a hardcore and topslice?
- Used for over rented investments e.g. passing rent more than the market rent
- Income flow divided horizontally
- Bottom slice = market rent
- Top slice = rent passing less market rent until lease event
- Higher yield applied to top slice to reflect additonal risk
- Different yields used to reflect comparable investment evidence and relative risk
What is a Discounted Cash Flow?
- Growth explicit investment method of valuation
- DCF involves projecting estimated cash flows over an assumed investment period
- Plus an exit value arrived at using ARY basis
- Cash flow is discounted back to PV
What are the advantages of DCF?
- Sets out explicit growth assumption
- Sets out cash flow over a period; detailed interpretation e.g. void periods, other costs
