4. Investment Method of Valuation Flashcards
(7 cards)
1
Q
Why would the investment method be used?
A
- When there is an income stream to value
- Rental income is capitalised to produce a capital value
- Conventional method assumes growth implicit valuation approach
- An implied growh rate is derived from the market capitalisation rate (yield)
2
Q
What are the types of investment methods?
A
1) Conventional
2) Term and Reversion
3) Layer/Hardcore
3
Q
Talk me through the conventional method
A
Rent received or market rent, multiplied by YP to calculate market value
Importance of comparables for rent and yield
4
Q
Talk me through the Term and Reversion method
A
- Used for reversionary investments (Under rented)
- Term capitalised until next rent event (review or expiry) - initial yield
- Reversion to market rent valued in perpetuity - reversionary yield
5
Q
Talk me through the Lay/Hardcore method
A
- Used for over rented investments
- Horizontal flow
- Bottom Slice = MR
- Top slice = Passing rent less MR until next lease event
- Higher yield applied to top slice to reflect additional risk
- Different yields used depend on comparable evidence and risk
6
Q
What is the formula for calculating present value?
A
Future Value / (1+discount rate)^time.
7
Q
What is the formula for YP for a term?
A
1-Present value / discount rate or interest rate.
