investment property vals lect 1 pt 2 valuation and surveying 2015-16
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Slides on Investment Valuations.TRANSCRIPT
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
7/21/2019 Investment Property Vals Lect 1 Pt 2 Valuation and Surveying 2015-16
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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
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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
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$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 ' *.+,+++
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• 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
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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 !
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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/#
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• 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/#
7/21/2019 Investment Property Vals Lect 1 Pt 2 Valuation and Surveying 2015-16
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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
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• "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 &
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<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
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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
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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
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• .ut thin/s are not always as strai/ht
forward as they appear to be
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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
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• 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
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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
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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-
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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
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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
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#$amle !P in Peretuity
reehold interest in a commercial property Must sold for £10
mill =ental of £!!0,000pa was set 2 months a/o and is a
maret rent 4nalyse the saleK
!!0,000 N 100>10,000,000 9 !! per cent
4nother view of this B if purchasers re@uired a !!" return on
investment, their purchase price would be Y$ 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
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• To value the worth today, of a lump sum
due to be received in the future
• Fse the $resent %alue of £1 formula
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$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
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$resent %alue of £1 $er 4nnum
• The present value of the ri/ht to receive£1 at the end of each year for :n; years at
:i; compound interest
• This concept is important when valuin/ a
leased property with a remainin/ leaseterm where rental is either above or belowcurrent maret rental rates
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$resent %alue of £1 $er 4nnum
Can sum total of $% of £1 for each yeardiscounted at 10" paK
Year 1>51 6 i78n $%
1 10,000 N 0)0)1 9 £ )0)1
2 10,000 N 0+2(! 9 £ +2(!
& 10,000 N 0*!1& 9 £ *!1&
2'+() £2',+()
The value of the income stream of 10,000 pa for & years is£2',+(*
i%e% &'''' *%+,-. / 0*+,-.
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• Juicer and easier way to arrive at the same
fi/ure is to use the Y$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',(+)
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• $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
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4ll =iss Yield
hat does this really mean-
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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
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• 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
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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
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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/-
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• 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
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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"
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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
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• .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-
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• The 4ll =iss Yield has toreflect every ris involved in
the investment, ie lease,tenant, buildin/, land,
location, economy
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• =eferencesK
• .lacled/e, 5200)7 3ntroducin/ property
%aluation, =outled/eK Dondon