Real Estate Appraisal From Value to Worth

by Sayce, Sarah; Smith, Judy; Cooper, Richard; Venmore-Rowland, Piers

• ISBN13: 9781405100014
• ISBN10: 140510001X
• Edition: 1st
• Format: Paperback
• Copyright: 2006-07-17
• Publisher: Wiley-Blackwell

Summary

The education of the real estate professional is changing and aligning itself more closely with the world of business. This book takes a new approach to property appraisal by exploring the pricing mechanism in this changing context. It: * develops the notion of the pricing mechanism in relation to property * covers practical issues of comparison and the real problems in applying valuation theory * explores calculations - including social and environmental worth - ignored in other texts As real estate professionals now advise both on strategic and operational aspects of built assets, they must take into account practices of other investment markets and see investors as competitors to owner-occupiers. Both owner-occupiers and investors have to assess accurately how their buildings perform but also be aware of wider sustainability issues, and social and environmental responsibilities. Real Estate Appraisal: from value to worth meets these new demands by examining the latest techniques of the marketplace; developing an understanding of both market appraisal and worth; and highlighting the emerging role of sustainability as a driver for decision-making in real estate. Written by a group of highly experienced lecturers and professionals at the cutting edge of investment practice, the book has an accessible style and authoritative coverage, for both students and practitioners facing changes in established ways of working. For supporting material please go to www.blackwellpublishing.com/sayce

Author Biography

Professor Sarah Sayce is Head of the School of Surveying at Kingston University in which capacity she is responsible for a suite of undergraduate and postgraduate programmes and for the research programmes. She is a Chartered Surveyor and after some years in practice she moved into teaching and research. She has published widely on many aspects of commercial property from portfolio management to leisure property and sustainability.
Judy Smith is a Senior Lecturer in the School of Surveying at Kingston University where she is Field Leader fro the MSc in Real Estate. She lectures on both undergraduate and postgraduate courses specialising in property investment, valuations and IT applications. She is a Chartered Surveyor, joint author of Property Construction and Economics and is currently involved in researching a sustainable model of worth.
Richard Cooper Richard Cooper is a Chartered Surveyor with experience in investment property analysis and appraisal for UK and Continental European property fund managers. He currently works for a UK based manager of pooled property funds.
Piers Venmore-Rowland is a property appraisal and IT consultant and trainer. Having worked both as a stockbroker and as a Chartered Surveyor, he developed extensive property and financial knowledge. After some years in practice Piers become an academic and was Head of Department at City University before deciding to set up his own business. He is Visiting Professor at Kingston University.

Table of Contents

Preface	ix
Acknowledgements	xi
About the authors	xii
Introducing concepts of value and worth	1	(23)
Real estate: an introduction to the economic concepts	1	(3)
Aims of the book	4	(1)
New influences on the real estate market	5	(4)
Structure of the book	9	(1)
Worth v. price v. value: definitions	10	(2)
Conventional approaches to establishing value	12	(4)
Additional approaches to appraisal	16	(3)
An introduction to the drivers for DCF	19	(2)
Summary	21	(3)
Introduction to the purchase decision	24	(15)
Introduction	24	(1)
Criteria for purchase: the investment purchaser	25	(3)
Criteria for purchase: occupational property	28	(1)
The purchase transaction process	29	(2)
The regulatory framework	31	(5)
Due diligence and legal issues	36	(1)
Summary	36	(3)
Property investment: placing property within the multi-asset investment spectrum	39	(23)
Introduction	39	(1)
A comparative analysis of investment media	39	(4)
An introduction to investment analysis and pricing	43	(1)
Definitions and simple examples of financial return	43	(3)
Property yields and returns	46	(2)
Yield and return distinguished	48	(3)
Compounding and discounting	51	(2)
Discounted cash flow (DCF)	53	(3)
An introduction to the imperfections of the property market as compared with the equities and bonds market	56	(1)
Property as an asset class compared with gilts and equities	57	(1)
The place of property within the multi-asset portfolio	58	(1)
Summary	59	(3)
The market appraisal approach: rental value	62	(27)
Introduction	62	(1)
Types of rent	62	(2)
Assessing rental value	64	(6)
Establishing rental value	70	(1)
The principle of rental value established through comparison	71	(1)
Challenges in assessing with reference to comparison	71	(5)
Non-standard leases	76	(2)
Establishing rental value where headline rents are used	78	(5)
The comparative approach: a reservation	83	(2)
Continental European leases -- an overview of the differences	85	(1)
Conclusion	86	(3)
Assessing capital value: analysing discount rates	89	(25)
Introduction	89	(1)
The valuation yield	89	(2)
The years purchase multiplier	91	(1)
Gilt yields	92	(3)
Index-linked gilts and strips	95	(1)
Property yields relative to gilts yields: the risk premium calculation	96	(6)
Property equity analysts' approach	102	(1)
Risk adjusted discount rate	102	(1)
Unbundling a valuation yield to derive the implied rate of rental growth	103	(1)
The individual investor's required rate of return or choice of discount rate	103	(2)
Pay back and discounted pay back	105	(1)
Certainty equivalent	105	(1)
Risk adjusted discount rate v. certainty equivalent	105	(1)
Freehold valuation approaches	106	(7)
Summary	113	(1)
Issues of leasehold appraisal	114	(20)
The nature of leasehold interests	114	(1)
Leasehold value: the profit rent	115	(1)
Inherent disadvantages of leasehold interest compared to a freehold interest	116	(1)
A wasting asset and the need for replacement of capital	117	(1)
Establishing capital value for a leasehold interest	118	(6)
The conventional or historic perspective	124	(8)
Summary	132	(2)
Structuring investment appraisals to determine investment worth	134	(21)
Introduction	134	(1)
The efficient market hypothesis	135	(1)
The efficient market hypothesis in a property market context	135	(2)
The worth approach -- discounted cash flow analysis	137	(2)
Introduction to property discounted cash flows	139	(1)
Discounted cash flow analysis in practice	140	(7)
The DCF appraisal outputs	147	(1)
A summary of factors affecting cash flow data	147	(1)
Forecasting the variables	147	(3)
Cash flow modelling: useful practical pointers	150	(1)
The DCF appraisal report	151	(1)
Summary	152	(3)
Risk within the appraisal and worth process	155	(35)
Introduction	155	(2)
Quantitative v. qualitative risk approaches	157	(2)
Quantitative risk analysis: building a risk analysis continuum	159	(1)
Risk analysis in a practical context	160	(1)
Sensitivity analysis	161	(2)
Scenarios	163	(3)
Simulation	166	(17)
Prioritising the key variables for risk management	183	(1)
Geared property investments	184	(2)
Decision trees and associated sensitivity analysis	186	(1)
The analysis continuum	187	(1)
Data handling	188	(1)
Summary	188	(2)
Occupational property: decision-making and appraisal	190	(26)
Introduction	190	(1)
Property as a corporate asset	191	(2)
Criteria for purchase or lease	193	(4)
Criteria for building selection	197	(7)
Appraising property for corporate decision-making	204	(1)
Appraising for financial statements	205	(5)
Corporate property: fund managers' and equity analysts' attitudes	210	(1)
Appraisals for corporate decision-making: the hold/sell/finance decision	211	(1)
Summary	212	(4)
Funding and financial structures	216	(34)
Introduction	216	(1)
Debt	217	(1)
Equity	218	(2)
The impact of gearing	220	(4)
Financing property transactions	224	(5)
Lending terminology	229	(2)
Mezzanine finance and participating loans	231	(1)
Interest rates	232	(1)
Management of interest rate risks	232	(3)
Corporate finance	235	(3)
Property investment vehicles and structures	238	(10)
Summary	248	(2)
Measuring return	250	(25)
Introduction	250	(1)
Simple return	250	(2)
Money-weighted returns	252	(3)
Time-weighted returns	255	(3)
Aggregation of individual assets' returns	258	(1)
Further return calculation issues	259	(5)
Indices and return	264	(7)
Establishing benchmarks	271	(1)
Summary	272	(3)
Handling risks within the portfolio	275	(22)
Introduction	275	(1)
The nature of risk in financial assets	276	(2)
Portfolio management under modern portfolio theory (MPT)	278	(5)
The evolution of finance theory	283	(6)
The move towards new finance: expected return factor models	289	(4)
Expected return factor models -- application to property portfolios	293	(1)
Other approaches to portfolio construction	293	(1)
Summary	294	(3)
Forecasting	297	(20)
Introduction	297	(1)
Forecasting and appraisals	298	(1)
Aims of forecasting	298	(1)
Methods of forecasting	299	(1)
Forecasting using linear regression models	300	(5)
Correlation	305	(2)
Ordinary least squares and multiple regression	307	(3)
Diagnostic tests	310	(1)
The use of forecasts	310	(1)
Forecast equations and their calibration	310	(1)
Property market barometers and lead indicators	311	(1)
The role of forecasts in financial and property lending markets -- value at risk	312	(2)
Basle Capital Accord	314	(1)
Summary and conclusions	315	(2)
Appendix A: Valuation and finance formulae	317	(13)
Introduction	317	(1)
The formulae	318	(12)
Appendix B: Worked examples in the chapters: how to download spreadsheets from the web site	330	(1)
Index	331