investment property vals lect 1 pt 2 valuation and surveying 2015-16

7/21/2019 Investment Property Vals Lect 1 Pt 2 Valuation and Surveying 2015-16

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Lecture 1 Pt 2

Investment Valuations



Why Investment Property?

• To gain a return on funds invested

• Potential investor considers alternative

investments – therefore investmentproperty may fall in or out of favourdependant on the current economicclimate

• ecision to !uy investment property is!ased on the yield compared toalternative investments



What can !e considered aninvestment property?

• "an !e residential !ut for the purposesof this lecture #e are consideringindustrial or commercial activities

• The o#ner leases the property in return

for rental income



$imple v compound interest• Investment 1 is an e%ample of simple interest e&g& received on a

term deposit or preference shares& The interest is calculatedon principal invested and paid out at defined intervals& Thematuring investment ' same amount originally invested&

(&g&

• )ear 1 Invest *2++,+++ - ./ interest ' *1+,+++

• )ear 2 *2++,+++ - ./ ' *1+,+++

• )ear 0 *2++,+++ - ./ ' *1+,+++

• )ear *2++,+++ - ./ ' *1+,+++

• )ear . *2++,+++ - ./ ' *1+,+++• t the end of the term the investor receives !ac3 their original

investment of *2++,+++&

• Total return #as *2++,+++ -./ ' *1+,+++ - . years ' *.+,+++



• The effects of "ompound interest hasprovided many property o#ners #ith

significant gains over returns theycould have received from alternativeinvestments i&e& provided the gains in

property value have outstripped theinterest costs of loan servicing&

• 4no#n as the positive effects of gearing



Effects of Compound interest

• The cost of the property in Year 1 was £200,000,however, the value of the property has increased everyyear by 1!"#

• Year $rincipal increase %alue end of year

• 1 200,000 &000 20&,000• 2 20&,000 &0'! 20(,0'!• & 20(,0'! &0)1 20),1&(• ' 20),1&( &1&* 212,2*&• ! 212,2*& &1+' 21!,'!*

• The property has compounded in value each year toreach £21!,'!* by the end of year !



hy learn the difference between simple

and compound interest-

.ecause it is the compoundin/ interest in

property that maes property investment

particularly profitable when the rate of

/rowth in value of the property outstrips the

rate of interest paid on borrowin/#



• hy learn the difference between simple

and compound interest-

• .ecause it is the compoundin/ interest in

property that maes property investmentparticularly profitable when the rate of

/rowth in value of the property outstrips

the rate of interest paid on borrowin/#



inancial athematics usin/ the

compound interest formula• Compound interest assumes that the investor will tae the

interest earned at the end of the year and add it to the

principal

• Compound 3nterest formula called The 4mount of £1

• 516i78n

• here i 9 the rate of interest

• n 9 the number of years

ie The amount to which £1 invested at the be/innin/ of the

year will accumulate after :n; years at :i; compound interest



• "ompound formula ' 1 5 i6n

• With the formulas !oth 7i8 and 7n8 must !e

in the same time scale&

• (&g& If you are calculating one years

compound interest #ith interest paya!le9uarterly at 2&./ per 9uarter, then i#ill !e 2&./ and n #ill !e &



<ow to determine capital value of

investment property-

• 3nvestor is looin/ for yield 5or rate of

return on investment7

• 3f the ban is payin/ &" yield 5interest rate

return on invested funds7 the potential

property investor considers this in relation

to the return obtainable from investin/ in

property



Yield from investment property-

• =ental return > property value 9 Yield

• ?=

• 3f you now the maret yield 5ie the returnre@uired by property investors for this type

of property, then you can rou/hly (NB very

roughly) estimate the Capital %alue if you

have the rental details

• E/ maret yield (" rental £(,000

• (000>00( 9 £100,000 Capital %alue



hat determines Yield

Yield is determined by the =eturn to the investor

• Ao B consider the different types of lease

• 1 where the tenant pays rates, insurance and

maintenance

• 2 where the owner pays rates, insurance and

maintenance

• Ceteris paribus one may consider scenario 1

would /ive a hi/her yield



• .ut thin/s are not always as strai/ht

forward as they appear to be



Total Accomodation Cost

• The tenant will determine what they are

prepared to pay in rent by B

• The total cost of accomodation

• Building Surveyor’s USP (Unique

Selling Point)?• 9 understandin/ of the @uality and

operatin/ costs of buildin/ services and

buildin/ itself



• E/ air conditionin/ system, lifts, water

reticulation, sustainability measures in systems

and buildin/ structure• Can all reduce tenants oerating costs

• ?bvious :/reen buildin/; factors can sometimes

operate as a maretin/ point for particulartenants

• =ent payable 9 function of total cost to tenant

• =ent 6 ?p e 9 Total 4ccomodation cost

• Dower op e allows for hi/her rental 9 hi/her

yield 9 hi/her Capital %alue



Controversy re sustainability

value

• %aluation is based on historical :proven data; B

so little evidence in maret of affect of lowered

op e due to /reen buildin/s

• .FT• Do/ically B what do you thin-

•=eadin/ B doin/ ell by Goin/ Hood B Hreen ?ffice .uildin/s byIohn Jui/ley

• Geliverin/ sustainability throu/h the adaptive reuse of commercial

buildin/sK the elbourne C.G challen/e B by Aara ilinson

5Geain Fniversity elbourne7 Aara is a FL .uildin/ Aurveyor



3nvestment %aluations maths

• %aluation of a future income stream

• 4 basic freehold investment valuation values the

ri/ht to receive a current maret rental intoperpetuity 5forever7

• .ut B if leased, the rent may not be set at currentmaret rates

• £1 due to be received in the future versus £1 dueto be received today-



To value a freehold property investment

where the rental is at full maret rental 5=7

The income stream 5=7 is capitalised 5to /ive the

capital value of the property7 by multiplyin/ the

annual income flow by a multiplier nown as theYears $urchase 5Y$7

The !P is a num"er 5not " or £7

The Y$ in perpetuity 5ie the present value of £1

per annum to be received forever7 is used



Y$ in $erpetuity

• To value the present worth today of an incomereceivable :into perpetuity;

• eans $resent %alue of £1 forever

• 4lso nown as $% of an annuity

• Y$ perp 9 1>i

• hereK

• i 9 interest rate, or yield, epressed as a decimal

5rate>1007



#$amle !P in Peretuity

reehold interest in a commercial property Must sold for £10

mill =ental of £!!0,000pa was set 2 months a/o and is a

maret rent 4nalyse the saleK

!!0,000 N 100>10,000,000 9 !! per cent

4nother view of this B if purchasers re@uired a !!" return on

investment, their purchase price would be Y$ perp O !!" N

maret rental income

Y$ perp at !!" 9 1>00! 5or 100>!!7 9 1+1+1+

1+1+1+ N £!!0,000 pa 9 £),))),))))) say £10 mill



• To value the worth today, of a lump sum

due to be received in the future

• Fse the $resent %alue of £1 formula



$resent %alue of £1• Calculates what a lump sum due in the

future is worth today

• 1>516i78n

• E/ what is £10,000 due in ! years worth

today if the investor wants a !" yield-

• 1>51600!78! 9 1>1&' 9 0*'(&

• 10,000 N 0*'(& 9 £*,'(&• ay be used to estimate how much to put aside today that will compound at i interest rate to

reach the lump sum in n years



$resent %alue of £1 $er 4nnum

• The present value of the ri/ht to receive£1 at the end of each year for :n; years at

:i; compound interest

• This concept is important when valuin/ a

leased property with a remainin/ leaseterm where rental is either above or belowcurrent maret rental rates



$resent %alue of £1 $er 4nnum

Can sum total of $% of £1 for each yeardiscounted at 10" paK

Year 1>51 6 i78n $%

1 10,000 N 0)0)1 9 £ )0)1

2 10,000 N 0+2(! 9 £ +2(!

& 10,000 N 0*!1& 9 £ *!1&

2'+() £2',+()

The value of the income stream of 10,000 pa for & years is£2',+(*

i%e% &'''' *%+,-. / 0*+,-.



• Juicer and easier way to arrive at the same

fi/ure is to use the Y$A= formulaK

• 551601078& B 17 > 551601078& N0107

• 9 51&&1 B 17 > 51&&1 N 0107

• 9 0&&1>01&&1• 9 2'+()

• £10,000 rental income N 2'+() 9 £2',(+)



• $resent %alue of £1 per annum for a

defined time period is also nown as

Ain/le =ate Years $urchase Y$ for anumber of years :is used to capitalise an

income that is fixed for a period of years

commencing from now’.p)2 .lacled/e

• 4lso called $% of an 4nnuity

• 3n valuation is used to value a defined rental income

stream from a 1reehold property $arrys tables provide

factors to avoid lon/ manual arithmetic calculations



4ll =iss Yield

hat does this really mean-



4ll =iss Yields 54=Y7

• 4=Y or maret yield is standard measure of therate of return from property investments

• Definition - ‘The remunerative rate of interest usedin the valuation of freehold and leasehold

interests, reflecting all the prospects and risksattached to the particular investment, such as thelikelihood of future rental and capital growth’

• Aee $ *1 .lacled/e

• ie is the rate of return re@uired by the investor that reflects all ris accordin/to the type class of property, location, @uality of tenant, opportunity cost ofinvestment, state of the economy

• =is can be bothKP• 47 property specific

• .7 maret based ris



• hen valuin/ a property, the yield

adopted must be obtained from

comparable properties hy-

• ill a Central .usiness Gistrict office

buildin/ yield the same percenta/e returnas a low rise office buildin/ in a provincial

city-

• 5compare apples with apples7



Eamples

• Calculate the yields for the followin/ investmentsK• 3ncome 5£7 Capital %alue 5£7

1 &0,000 (00,000

2 1!0,000 1,!00,000& 2*,!00 &&0,000

' ++,000 ''0,000

! 2!0,000 2!,000,000

Alide prepared by Acott L in/, Course Girector, %aluations



The 3nvestment ethod of

%aluation

• =ests on the idea that capital value is

directly related to the annual rent

/enerated by the property B will this be

static-

• :Turns income flows into capital;

• Goes that mean a vacant shop is worth

nothin/-



• Fse the same investment valuationmethodolo/y for vacant and let properties

• .ut B how to account for the void periodespecially in recessionary times-

• 3n 1))0;s City of Dondon had 20"vacancy rate#

• Empty buildin/ insurance is moreepensive, and rates must be paid



Eamples

• %alue the followin/ freehold interestsK

3ncome 5£7 Yield

1 (0,000 '"2 &00,000 10"

& !!,000 12!"

' 1(0,000 &"! !00,000 20"



Nhich is the better investment-• .oth $roperty 4 and $roperty . sold at

auction• 4 .

• aret rent £100,000 £100,000

• Aale $rice £1,000,000 £2,000,000

• Yield



• .ut yields reveal ris#

• 4s the auction bid the price on . up and

up, the yield went down

• hy mi/ht more people want to buy .

than 4-



• The 4ll =iss Yield has toreflect every ris involved in

the investment, ie lease,tenant, buildin/, land,

location, economy



• =eferencesK

• .lacled/e, 5200)7 3ntroducin/ property

%aluation, =outled/eK Dondon

investment property vals lect 1 pt 2 valuation and surveying 2015-16

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