PROPERTY INVESTMENT

Property Investment

Property Investment

The mathematics of property valuations routinely used in practice exists in several formulations which have been adopted over the years. All are similar in that they represent simple discounted cash flow models equating the estimated future earnings capacity of a property to a snare present (capital) value. The process, whilst appearing somewhat daunting, is in fact accomplished in a manner such that, under normal circumstances, the estimated future cash flow after the next lease reconsider is not specifically expressed. Instead of generating a future earnings flow (assuming some rate of rental growth) and discounting at a cash rate of interest (suitably adjusted for risk), the estimated rental earnings at the next reconsider is capitalized at a relatively reduced investment yield rate which only implies a future rental development rate.

Whilst much has been in writing in latest years regarding methods of property valuation, little has been added to the state of the art. It is realized that many and varying approaches are possible and all will suffer certain disadvantages. However, the form proposed in this paper links simultaneously both a broadly used 'modern' procedure of valuation and the more lately discussed 'rent adjustment factors' relating to the negotiations of lease renewals in the case of long time span (or infrequent) reconsider patterns.

The equivalent yield model

The capital value of a single-tenanted freehold property, using the equivalent yield procedure of valuation, may be expressed as:

 

Where c = gross capital value (ie disregarding costs)

r = present rental earnings

R = estimated present rental value

y = equivalent yield

n = number of years to the next lease reconsider (or reversion)

Figure 1 (see over) illustrates the manner in which the cash flow is assumed to augment under this form whilst Figure 2 (see over) shows how, instead of ...