Property Investment Appraisal

Discover an insightful examination of the property investment appraisal process from leaders in the industry  

This book explains the process of property investment appraisal: the process of estimating both the most likely selling price (market value) and the worth of property investments to individuals or groups of investors (investment value). 

Valuations are important. They are used as a surrogate for transactions in the measurement of investment performance and they influence investors and other market operators when transacting property. Valuations need to be trusted by their clients and valuers need to produce rational and objective solutions.  Appraisals of worth are even more important, as they help to determine the prices that should be paid for assets, even in times of crisis, and they can indicate market under- or over-pricing.  

In a style that makes the theory as well as the practice of valuation accessible to students and practitioners, the authors provide a valuable critique of conventional valuation methods and argue for the adoption of more contemporary cash-flow methods. They explain how such valuation models are constructed and give useful examples throughout.  They also show how these contemporary cash-flow methods connect market valuations with rational appraisals.  

The UK property investment market has been through periods of both boom and bust since the first edition of this text was produced in 1988. As a result, the book includes examples generated by vastly different market states. Complex reversions, over-rented properties and leaseholds are all fully examined by the authors.  

This Fourth Edition includes new material throughout, including brand new chapters on development appraisals and bank lending valuations, heavily revised sections on discounted cash flow models with extended examples, and on the measurement and analysis of risk at an individual property asset level. The heart of the book remains the critical examination of market valuation models, which no other book addresses in such detail. 

ANDREW E. BAUM is Professor of Practice at the Saïd Business School, University of Oxford, where he leads the Future of Real Estate Initiative. He is also Senior Research Fellow at Green Templeton College and Emeritus Professor at the University of Reading. He is Chairman of Newcore Capital Management and advisor to several property organisations. He has held senior positions with Nuveen, CBRE Global Investors, Grosvenor and other investors and fund managers.

NEIL CROSBY is Professor of Real Estate in the Department of Real Estate and Planning at the University of Reading. He is a Fellow of the Academy of Social Sciences, has been awarded life membership of the Investment Property Forum and a fellowship of the Society of Property Researchers, and is a member of the RICS Valuation Standards Board. He originally qualified and practised as a Chartered Valuation Surveyor in the UK before holding academic positions at Nottingham Trent and Oxford Brookes Universities.

STEVEN DEVANEY is an Associate Professor at the Henley Business School, University of Reading, where he teaches both investment appraisal and market valuation methods. He was previously a Lecturer in Real Estate at the University of Aberdeen and worked as an analyst at Investment Property Databank.

1. Property Investment Appraisal in its Context

1.1         What is appraisal?

1.2         The appraisal process

1.3         What makes a good appraisal?

1.3.1      Accuracy, bias, smoothing and lagging of valuations

1.3.2      Client Influence on valuations

1.4         Conventional and discounted-cash-flow approaches to appraisal

2. Principles of Investment Analysis

2.1         Introduction

2.2         Types of investments

2.2.1      Cash deposits

2.2.2      Fixed-interest securities

2.2.3      Index-linked securities

2.2.4      Ordinary shares (equities)

2.2.5      Property

2.2.6      Summary of investment types

2.3         Qualities of investments

2.3.1      Income and capital growth

2.3.2      Operating expenses

2.3.3      Liquidity, marketability and transfer costs

2.3.4      Real options

2.3.5      Leverage

2.3.6      Tax efficiency

2.4         Sources of risk

2.5         Comparing investments: NPV and IRR

2.6         Initial yield analysis and construction

2.7         Summary

3. The DCF Appraisal Model

3.1         The cash flow model

3.2         The inputs

3.2.1      The holding period

3.2.2      The lease and lease events

3.2.3      Depreciation, refurbishment and redevelopment

3.2.4      Forecasting rental growth

3.2.5      The resale price

3.2.6      Exit Capitalisation rate

3.2.7      Expenses

3.2.8      Void allowances

3.2.9      Transaction costs

3.2.10Taxes

3.2.11Debt finance

3.3         The discount rate

3.3.1      The risk free rate

3.3.2      The risk premium

3.4         Examples

3.5         Summary

Part Two Market Valuation Models

4. The Evolution of Freehold Market Valuation Models

4.1         Introduction

4.2         The evolution of conventional techniques

4.2.1      The changing perception of investors

4.2.2      Historical application of the basic valuation model

4.3         Rationale of the pre-1960 appraisal approach

4.4         The post-1960 conventional market valuation model

4.4.1      The fully let freehold

4.4.2      The reversionary freehold

4.4.3      Over-rented properties

4.5         Conclusion

5. Contemporary Freehold Market Valuations

5.1         Introduction

5.2         Analysing transactions

5.2.1      Implied rental growth rate analysis

5.2.2      Calculation of the implied rental growth rate

5.2.3      Implied Target Rate Analysis

5.3         Full Explicit and Short-cut DCF valuation models

5.3.1      Introduction

5.3.2      An explicit cash-flow model including short cut DCF

5.3.3      DCF by Formula

5. 4        Alternatives to DCF

5.4.1      Introduction

5.4.2      Real value

5.4.3      Arbitrage model

5.5         Reversionary Freehold Valuations

5.5.1      Analysis of transactions

5.5.2      Short Cut DCF

5.5.3      Real Value

5.5.4      Arbitrage.

5.6         Over-rented contemporary model valuations

5.6.1      Analysis of transactions

5.6.2      Short Cut DCF

5.6.3      Real Value

5.6.4      Arbitrage

5.7         Summary

6. Freehold Market Valuations - Applications

6.1         Introduction

6.2         Analysis of Transactions

6.3         Rack Rented or Vacant Property Investments.

6.4         Two-stage reversionary freeholds

6.4.1      Basic two stage reversionary freeholds

6.4.2      Long reversions

6.4.3      Over-rented properties

6. 5        More complex reversionary freeholds

6.5.1      Lease events

6.4.2      Alternative review forms: indexation and fixed increases

6.4.3      Summary

6.5         Comparing conventional and contemporary techniques

6.5.1      Defending conventional techniques

6.5.2      Target-Rate Choice

6.5.3      Fully let freeholds: contemporary versus conventional valuations

6.5.4      Reversionary freeholds contemporary versus conventional valuations

6.6         Taxation and market valuation

6.7         Conclusions

7. Leasehold Valuations

7.1         Introduction

7.2         The evolution of conventional leasehold valuations.

7.3         Contemporary Leasehold Valuations

7.3.1      Fixed leasehold profit rents

7.3.2      Geared leasehold profit rents Reviewable rent received, fixed rent paid

7.4         Conventional versus contemporary techniques

7.7         Conclusions

8. Measurement and Pricing of Risk in Appraisals

8.1         Introduction

8.2         Nature and sources of risk

8.3         Measuring risk

8.3.1      Risk-adjusted discount rate

8.3.2      Sensitivity analysis

8.3.2      Scenarios

8.3.3      Simulations

8.4         Risk Pricing

8.4.1      Assessing the risk premium

8.4.2      Certainty-equivalent cash flows

8.5         Summary

9. Development Appraisal

9.1         Introduction

9.2         Valuation Methods

9.2.1      Basic Residual Method

9.2.2      Discounted Cash Flow Residual Method

9.3         Developers profit

9.4         Changes in costs and values and phasing of developments

9.5         Finance

9.6         Conclusion

10. Bank Lending Appraisals

10.1       Introduction

10.2       Market Value

10.3       Mortgage Lending Value

10.4       Investment value.

10.5       Illustration of the three approaches

10.6       Performance of the three valuation bases over the last two property market downturns in the UK

11. Conclusions

Bibliography

Index

The New copy of this book will include any supplemental materials advertised. Please check the title of the book to determine if it should include any access cards, study guides, lab manuals, CDs, etc.

The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.