The Income Approach to Property Valuation

by Baum; Andrew

• ISBN13: 9780080966908
• ISBN10: 008096690X
• Edition: 6th
• Format: Nonspecific Binding
• Copyright: 2011-05-11
• Publisher: Estates Gazette

Summary

This classic text has been updated to meet the needs of today's valuation students. It covers the latest valuation techniques including the important area of investment appraisals. It will help readers understand the complex world of property valuation, in particular:. How to analyse market rents and sales prices to derive market evidence to support an opinion of market value . The investment method of valuation and how it's applied in practice . How specific legal factors can impact on market value when they interfere with market forces . What the market and the profession may consider to be the 'right' methodology in today's market place.This new edition has a particular emphasis on investment valuations, strong information on the impact of landlord and tenant relationships on valuations, clear explanations of the maths behind valuations and real-life examples of the valuation techniques used by today's practitioners.. Over 25,000 copies sold across all five editions . Strong focus on investment valuation, techniques and practice . New support materials make it easy for lecturers to teach with this text

Author Biography

Andrew Baum Professor of Land Management, Henley Business School, University of Reading and Honorary Professor of Real Estate Investment, University of Cambridge. David Mackmin Emeritus Professor of Real Estate, Sheffield Hallam University and joint author of Modern Methods of Valuation. Nick Nunnington Sorouh Dean of Real Estate Management at the Higher Colleges of Technology (HCT) based in Abu Dhabi. Previously, Nick was Principal Lecturer and Associate Director of two Centres for Excellence in Teaching and Learning at Sheffield Hallam University.

Table of Contents

Preface to the Sixth edition	p. xi
Acknowledgements	p. xiii
Introduction and Quick start to the Income Approach	p. 1
Introduction	p. 1
The income approach - a quick start	p. 5
Financial Mathematics for Valuers	p. 11
Introduction	p. 11
The six functions of £1	p. 11
The amount of £1 (A)	p. 12
The amount of £1 per annum (A £1 pa)	p. 13
Annual sinking fund	p. 15
The present value of £1 (PV £1)	p. 16
The PV of £l pa(PV£l pa or Years' Purchase)	p. 17
Present Value of£1 pa in perpetuity deferred n years (PV £1 pa in perp defd or YP of a reversion to perpetuity)	p. 20
PV of £1 pa dual rate (YP dual rate)	p. 22
Annuity £1 will purchase (A £1 wp)	p. 24
Mortgages	p. 29
The Interrelationship of the functions	p. 31
Properties of exponents	p. 32
Nominal and effective rates of interest	p. 33
Continuous compounding	p. 35
Incomes in advance and non-annual incomes	p. 36
Incomes receivable quarterly or monthly in advance	p. 37
Health warning	p. 38
Summary	p. 38
Spreadsheet user	p. 40
Project 1	p. 40
Project 2	p. 41
Discounted Cash Flow (DCF)	p. 43
Introduction	p. 43
Net Present Value (NPV)	p. 43
Internal Rate of Return (IRR)	p. 46
Comparative use of NPV and IRR	p. 49
Incremental analysis	p. 51
Summary	p. 52
Spreadsheet user	p. 52
Calculating the NPV	p. 52
Calculate the NPV of the scheme and the IRR	p. 53
Calculating the IRR	p. 54
Goal Seek	p. 55
Basic Principies	p. 57
Introduction	p. 57
Definitions	p. 57
Market value	p. 58
Value in exchange	p. 58
Investment value or worth	p. 58
Price	p. 59
Valuation	p. 59
Valuation report	p. 59
The Income approach	p. 60
Valuation process	p. 65
Income or rent	p. 71
The concept of zoning	p. 74
Landlords' expenses	p. 79
Purchase expenses	p. 83
Income capitalisation or DCF	p. 84
DCF	p. 86
Summary	p. 87
The Income Approach: Freeholds	p. 89
Introduction	p. 89
The income approach	p. 92
Capitalisation approaches	p. 94
DCF approaches	p. 108
DCF and the over-rented property	p. 116
Advance or arrears	p. 118
Analysing sale prices to find the equivalent yield	p. 120
A final adjustment	p. 121
Sub-markets	p. 121
Summary	p. 123
Spreadsheet user	p. 123
Project 1	p. 123
Project 2	p. 125
The Income Approach: Leaseholds	p. 127
Introduction	p. 127
Occupation leases	p. 129
Investment leases	p. 130
Medium to long-term leaseholds at a fixed head rent	p. 131
Fixed profit rent	p. 131
Single rate valuation of leaseholds	p. 132
DCF valuation of leaseholds	p. 135
DCF solution	p. 136
Summary	p. 138
The Income Approach: Taxation and Valuation	p. 141
Introduction	p. 141
Incomes in perpetuity	p. 142
Finite or terminable incomes	p. 142
Tax and deferred incomes	p. 144
Rising freehold incomes	p. 145
Gross funds	p. 146
Net or gross?	p. 146
Capital Gains Tax (CGT)	p. 146
Value Added Tax (VAT)	p. 147
Summary	p. 148
Landlord and Tenant	p. 149
Valuations and negotiations	p. 149
Premiums	p. 149
Future costs and receipts	p. 153
Extensions and renewals of leases	p. 155
Marriage or synergistic value	p. 160
Market rent, non standard reviews, constant rent theory	p. 166
Quarterly to monthly	p. 168
Summary	p. 169
The Effects of Legislation	p. 171
Introduction	p. 171
Business premises	p. 171
Compensation for improvements	p. 172
Security of tenure	p. 174
Compensation for loss of security	p. 176
Terms of the new lease	p. 176
Landlord and tenant negotiations	p. 180
Residential property	p. 182
Private sector tenancies	p. 183
Assured tenancies	p. 185
Assured Shorthold Tenancies (ASTs)	p. 185
Tenancies subject to the provisions of the Rent Act 1977	p. 186
Tenancies with high Rateable Values (RVs)	p. 188
Resident landlords	p. 188
Tenancies on long leases	p. 189
Development Opportunities	p. 191
Introduction	p. 191
Incorporating a 'big picture' approach	p. 192
Garbage in - garbage out	p. 194
Professional frameworks and methodologies	p. 195
The highest and best use methodology	p. 196
RICS Valuation Information Paper No 12: 'The Valuation of Development Land'	p. 197
The residual method	p. 199
Exploring the main inputs to a residual appraisal	p. 200
Sensitivity analysis	p. 204
The need for adoption of the cash flow approach	p. 206
The cash flow approach explained	p. 207
Viability studies	p. 210
Summary	p. 212
Spreadsheet user	p. 213
Using Excel to build an appraisal	p. 213
The Profits Method of Valuation	p. 229
Rationale behind the use of the profits method of valuation	p. 219
Fair Maintainable Turnover (FMT)	p. 220
Gross profitability	p. 221
Costs	p. 221
Fair Maintainable Operating Profit (FMOP)	p. 221
Commentary on use of actual accounts	p. 222
Freehold valuation and sales	p. 222
Licensed property	p. 223
Pubs	p. 224
Valuation: public houses and bars	p. 226
Comparables and market information	p. 229
Valuation: late bars/clubs	p. 230
Restaurants	p. 231
Hotels	p. 233
Other types of property	p. 234
Cinemas and theatres	p. 235
Care homes	p. 235
Petrol filling stations	p. 235
Golf courses	p. 236
Racecourses, racetracks and stadia	p. 236
Tenant's improvements under the profits method	p. 236
Summary	p. 238
Investment Analysis	p. 241
Introduction and re-cap	p. 241
Expected returns - the cash flow	p. 243
The discount rate	p. 244
Some simple analytical measures	p. 246
Initial yield	p. 247
Yield on reversion	p. 248
Equivalent yield	p. 248
Reversionary potential	p. 249
Income return	p. 249
Capital return	p. 249
Total return	p. 249
Required return	p. 249
IRR or expected return	p. 250
Dealing with risk	p. 250
The Risk-Adjusted Discount Rate (RADR)	p. 251
The sub-sector and property risk premium	p. 252
The sector premium	p. 252
The town premium	p. 252
The property premium	p. 253
Risk-adjusted cash flows: using sensitivity and simulation	p. 254
Risk-adjusted valuations	p. 259
Risk-adjusted IRRs	p. 261
Regression analysis	p. 262
Spreadsheet user	p. 265
Leaseholds: Dual Rate	p. 267
Illustrative Investment Property Purchase Report	p. 293
Illustrative Development Site Appraisal Report	p. 307
Solutions to Questions Set in the Text	p. 315
Further Reading and Bibliography	p. 331
Index	p. 333
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