Investment Method Level 1 Flashcards
(27 cards)
Where is the Investment used?
Used when there is an income stream to value
The rental growth is capitalised to produce a capital value.
Conventional method assumes growth implicit valuation approach.
An implied growth rate is derived from the market capitalisation rate (yield).
What is the Conventional Investment method?
Conventional method assumes growth implicit valuation.
Growth-implicit valuation refers to a valuation approach where future rental growth is assumed within the capitalisation (yield) rate, rather than explicitly modelling rental growth separately.
How is the Conventional Investment method calculated?
Rent received, or market rent multiplied by the years purchase to calculate the Market Value.
Importance of comparables for rent and yield.
What is the term and reversion method?
Used for reversionary investments (Market Rent more than passing rent), i.e. when under-rented
Term capitalised until next review/lease expiry at an initial yield
Reversion to Market Rent valued in perpetuity at a reversionary yield
What is layer/hardcore method?
- Used for over rented investments (Passing Rent more than Market Rent)
- Income flow divided horizontally
- Bottom slice = Market Rent
- Top slice = Rent passing less Market Rent until next lease event
- Higher yield applied to top slice to reflect additional risk
- Different yields used to depend on comparable investment evidence and relative risk
What is a yield? How do you calculate it?
A measure of investment return, expressed as a percentage of capital invested.
A yield is calculated by Income / Price x 100
Why do different asset classes have different yields?
Different asset classes have different yields to reflect the different levels of risk.
Investors assess risk, growth potential and market conditions differently for each type of asset. The yield reflects the return investors require for taking on the risks associated with the property.
What is Years Purchase?
A Years Purchase is calculated by DIVIDING 100 / YIELD.
This is the number of years required for its income to repay its purchase price.
What factors impact a yield?
- Prospects for rental and capital growth
- Quality of location and covenant
- Use of the property
- Lease Terms
- Obsolescence - what is the likely future rate?
- Voids - what is the risk?
- Security and regularity of income
- Liquidity - ease of sale
What are prime and secondary yields in London for Offices?
Prime - West End - 4% & City of London - 5.5%
Secondary - 6.5% - 7%
What are prime and secondary yields in London for Industrial?
Prime South East Industrial Yields - 5%
Secondary Industrial Yields - 7%
What are the different investment method techniques?
- Conventional technique (rack rented)
- Term and reversion technique (under rented)
- Hardcore and layer technique (over rented)
- DCF
What does racked rented mean?
currently let at your opinion of MR
When would you use the conventional investment technique
When a property is deemed to be rack rented (Currently let at MR)
NI x YP = MV
How do you establish Years Purchase?
100 / Yield
YP is the number of years required for its income to repay its purchase price
What is VP value?
value of the property vacant with no income
If a property was under rented, what valuation technique would you use?
Term and Reversion (where MR is more than PR)
Capitalise the remainder of the term (up until the next break, rent review, expiry/lease event) at initial yield.
Then capitalise the reversion into perpetuity at the reversionary yield. Then add the two together.
What is an Initial Yield
Based on the current passing yield
What is Reversionary Yield
Based on the Market Rent that could be achieved when the lease is reviewed or re-let
What is equivalent yield
A blended rate used in vals.
Reflects both passing and future reversionary rent.
How would you calculate a VPV?
Two Methods:
- COMPARATIVE METHOD, on a £ per sq ft basis (search for relevant owner occupied evidence
- HYPOTHETHICAL INVESMENT VALUE
VPV - Hypothetical Investment Method - Explain
The Hypothetical Investment Method is another way you can calculate VPV - this is used to sense check and when there is not enough comparable evidence relatable to the subject property.
The Hypothetical Investment scenario will need assumptions to be made regarding:
- Void Periods/Marketing Periods
- Incentives / Rent Free Periods
- Opinion of Market Rent
- Length of Term
Then capitalise the ERV into perpetuity at a higher yield to reflect risk.
Deduct purchasers costs to get net value.
What asset class would you use the profits methods for?
Pubs, hotels, care homes, private schools, petrol stations
What is the profits method?
Used for valuations of trade related properties and is used where value of the property depends on the profits of the business and its trading potential.
Methodology:
- Annual turnover (income received) - LESS costs = Gross Profit of business
- LESS working expenses = unadjusted net profit
LESS operators remuneration
= Adjusted net profit known as Fair Maintainable Operating Profit (FMOP) or EDITDA (Earnings Before Income Tax Depreciated and Amortisation)
Capitalise EDITDA at appropriate yield to achieve market value
3 years of audited accounts
