Macmillan Building and Surveying Series

Transcription

1 Macmillan Building and Surveying Series Accounting and Finance for Building and Surveying A. R. Jennings Advanced Building Measurement, second edition Ivor H. Seeley AdvancedValuation Diane Butler and David Richmond Applied Valuation, second edition Diane Butler Asset Valuation Michael Rayner Building Economics, fourth edition Ivor H. Seeley Building Maintenance, second edition Ivor H. Seeley Building MaintenanceTechnology Lee How Son and George C.S.Yuen Building Procurement, second edition Alan E. Turner Building Project Appraisal Keith Hutchinson Building Quantities Explained, fifth edition Ivor H. Seeley Building Services George Hassan Building Surveys, Reports and Dilapidations Ivor H.5eeley Building Technology, fifth edition Ivor H. Seeley Civil Engineering Contract Administration and Control. second edition Ivor H. Seeley Civil Engineering Quantities, fifth edition Ivor H. Seeley Commercial LeaseRenewals - A Practical Guide Philip Freedman and Eric F. Shapiro Computers and Quantity Surveyors A. J. Smith Conl/icts in Construction - Avoiding, Managing, Resolving JeffWhitfield Constructability in Building and Engineering Projects Alan Griffith and Tony Sidwell Construction Contract Claims RegThomas Construction Economics - An Introduction Stephen L. Gruneberg Construction Law Michael F. James Construction Marketing, Richard Pettinger Contract Planning, Programming and Control Brian Cooke and Peter Williams Contract Planning Case Studies B. Cooke Cost Estimation of Structures in Commercial Buildings Surinder Singh Design-Build Explained D. E. L. Janssens Development Site Evaluation N. P. Taylor Economics and Construction Andrew J. Cooke Environmental Management in Construction Alan Griffith Environmental Science in Building, third edition R.McMullan Estimating, Tendering and Bidding for Construction A. J. Smith European Construction - Procedures and Techniques B. Cooke and G.Walker Facilities Management Alan Park Greener Buildings - Environmental Impact of Property Stuart Johnson Housing Associations Helen Cope Housing Management - Changing Practice Christine Davies (Editor) Information and Technology Applications in Commercial Property Rosemary Feenan and Tim Dixon (Editors) Introduction to Building Services, second edition E. F. Curd and C.A. Howard Introduction to Valuation, third edition D. Richmond Marketing and Property People Owen Bevan (continued)

2 Measurement of Building Services George P. Murray Principles of Property Investment and Pricing, second edition W. D. Fraser Project Management and Control David Day Property Development, Appraisal and Finance David Isaac Property Finance David Isaac Property Investment David Isaac Property Management - A Customer Focused Approach Gordon Edington Property Valuation Techniques David Isaac and Terry Steley Public Works Engineering Ivor H. Seeley QualityAssurance in Building Alan Griffith Quantity Surveying Practice, second edition Ivor H. Seeley Real Estatein Corporate Strategy Marion Weatherhead Recreation Planning and Development Neil Ravenscroft Resource Management for Construction M.R. Canter Social Housing Management Martyn Pearl Small Building Works Management Alan Griffith Structural Detailing, second edition P. Newton Sub-Contracting under the]ct Standard Forms of Building Contract Jennie Price Urban Land Economics and Public Policy, fifth edition Paul N. Balchin, Gregory H. Bull and Jeffrey L. Kieve Urban Renewal- Theory and Practice Chris Couch 1980 JCT Standard Form of Building Contract, second edition R. F. Fellows Value Management in Construction Brian R. Norton and William C. McElligott MacmillanBuilding and SurveyingSeries SeriesStandingOrder ISBN You can receivefuture titles in this seriesas they are published by placinga standing order. Please contact you bookseller or, in the case of difficulty, writeto us at the address belowwithyour name and address, the title ofthe series and the ISBN quoted above. CustomerServiceDepartment, Macmillan Distribution ltd Houndmills, Basingstoke, HampshireRC21 6XS, England

3 Property Investment David Isaac Professor of Real Estate Management Head of Propertyand Land Management Universityof Greenwich ~MACMIlLAN

4 David Isaac 1998 All rights reserved. No reproduction,copy or transmission of this publicationmay be made without written permission. No paragraph of this publicationmay be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the CopyrightLicensing Agency, 90 Tottenham Court Road, LondonW1P 9HE Any person who does any unauthorised act in relation to this publicationmay be liable to criminal prosecution and civil claimsfordamages. The author has asserted his rightto be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 199 f)y MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world ISBN DOI / ISBN (ebook) A catalogue record forthis book is available from the British Library. This book is printed on paper suitable for recyclingand made from fully managed and sustained forest sources W ~ ~ M ill W m 00 ~ ~ Copy-edited and typeset by Povey-Edmondson Tavistock and Rochdale, England

5 To Joan

6 Bythe same author TheValuation of PropertyInvestments (with N. Enever) Property Companies: Share Price and Net AssetValue (with N.Woodroffel Property Development, Appraisaland Finance Property Finance Property Valuation Techniques (with 1 Steley)

7 Contents Table of Statutes Preface Acknowledgements List ofabbreviations 1 Property Investment 1.1 Rationale of investment 1.2 Characteristicsof property investment 1.3 Property investment compared to other investments 1.4 Decision-making, risk and inflation 1.5 The property invest ment market 1.6 Indirect investment in property 1.7 Direct investment in property 2 Property Investment Markets 2.1 Introduction 2.2 Property cycles 2.3 Property markets in the UK 2.4 The globalisation of investment 2.5 Market efficiency 2.6 Capital markets 2.7 Leases and leasestructures 2.8 Economic and market analysis 3 Investors 3.1 Types of investor 3.2 Individual and corporate investors 3.3 Overseas investors 3.4 Financialinstitutions 3.5 Property companies 3.6 Authorised property unit trusts 3.7 Investment trusts and unit trusts 4 Types of Investment 4.1 Types of investment 4.2 Design implications and cost 4.3 Retail investments 4.4 Office investments 4.5 Industrial, warehouse and business space investments x xi xii xiii vii

8 viii Contents 4.6 Leisure investments Agricultural investments Residential investments Overseas investment Property Investment Appraisal Techniques: Introduction Capital appraisal techniques Yield and discounted cash flow (DCF) approaches Traditional valuations A critique of UK traditional methods of valuation Market valuation and the 'Red Book' Property Investment Appraisal Techniques: Applications Introduction Reversionary property Leasehold property Over-rented property Growth and inflation Valuation accuracy Contemporary Investment Appraisal Techniques Discounted cash flow models A real value/equated yield hybrid Over-rented freehold properties Treatment of inducements Depreciation Cash FlowApproaches and Risk Use of cash flow methods Computer spreadsheets Sensitivity analysis and risk Investment Risk Individual risk Types of risk Principles of risk Theory of risk Investment Performance and Portfolio Strategy Investment management principles Objectives and strategies Property performance and measurement Portfolio construction 214

9 Con tents ix 10.5 Portfolio strategy Portfolio performance measurement and property indices Portfolio analysis PortfolioTheory 11.1 Introduction: financial theory 11.2 Portfolio analysis 11.3 Modern Portfolio Theory 11.4 Capital Asset Pricing Model 12 Securitisation 12.1 Defin itions 12.2 History 12.3 Problems in the developm ent of securitisation 12.4 The vehicles 12.5 Issues in securitisation 12.6 Example of securitisation 12.7 Liquidity and securitisatio n 13 FinancialManagement 13.1 Property accou nts 13.2 Property accounts: issues 13.3 The regulation of accounts 13.4 O ff-balance sheet funding 13.5 O ff-profit and lossaccount financi ng 14 Forecasting and Research 14.1 Research 14.2 Computer techniques 14.3 Forecasting 14.4 Statistical analysis Bibliography Index

10 Table of Statutes Agricultural Holdings Act Agricultural Tenancies Act 1995 Building Regulations Companies Act 1985 Control of Office and Industrial development Act 1965 Factories Act Financial Services Act 1985 Fire Precautions Act Health and Safety Legislation Housing Acts Landlord and Tenant Act 1954, part 2 Landlord and Tenant (Covenants) Act 1995 Land Registration Act 1988 Law of Property Act 1925 Leasehold Reform Act Offices, Shops and Railway Premises Act Pensions Act 1995 Prevention of Fraud (Investments) Act 1958 Rent Acts Town and Country Planning Acts Town and Country Planning Use ClassesOrder , , , , ,87,102 x

11 Preface This book provides a basis for the study of property investment and will be useful for both students and practitioners. The book has three main sections: principles and markets, appraisal techniques and portfolio analysis. Forstudents it will provide a text at intermediate level (2nd/3rd year undergraduates) in estate management, property, surveying, planning, design and construction disciplines.those in adjacent areas of stud y such as housing and economics will find this a useful introduction to the area of commercial property investment. Practitioners involved with property investment, and this includes a wide area of professionals, including surveyors, builders, construction managers, architects, engineers, estate managers and agents will find this a useful overview, perhaps enlightening them to the range of activities involved in the investment process and updating them on contemporary methods of property investment appraisal. Professional advisors such as bankers, financial advisors, accountants, investors, analysts and lawyers should also find this text useful as an aid to their dealings in the property sector. Where possible I have obtained data and statistics to place property investment appropriately in the wider economic and financial context. I have aimed to reference the material as well as possible but apologise for any omissions. There are relatively few texts in the area of property compared to most other investment sectors and I have tried to reference existing ones as fully as possible to provide additional views and perspectives for the reader in a very complex and difficultarea of activity.the art of property investment including appraisal, valuation and analysis has developed enormously over the last twenty years and this book aims to encourage readers to take the development further and consolidate the innovations in research and practice. Finally, I would like to thank those who have assisted me in writing this book, the late Professor IvorSeeley, the editor who provided ongo ing adv ice for my writing and encouraged many authors in the property and construction area. Professor Seeley died during the production of th is book and he will be sorely missed by both professional and academic colleagues. Hiscontribution to the developmentof teaching, learning and scholarship in the area of building and surveying has been outstanding. In addition Iwould liketo thank Malcolm Stewart, my publisher who is ever patient and supportive. I would also liketo thank Mike Riley and Chesterton International for practical support in my researches. Many colleagues and external organisations have provide me with information and assistance and these are listed in the acknowledgements below. Finally, as ever, I am reliant on the continued support of Professor David Wills, Lewis Anderson and the staff of the School of Land and Construction Management at the University of Greenwich to develop my research and studies and I am grateful for their help. University of Greenwich School of Land and Construction Management David Isaac xi

12 Acknowledgements The author and publishers wish to thank the following for the use of material: journal of Property Finance, journal of Property Valuation and Investment ; journal of Propert y Research; Appraisal journal; CSW-The Property Week, Chartered Surveyor Monthly; Financial Times; S. G. Warburg Securit ies; UBS; Paribas Capital Markets; Chesterton Financial; Savills Research; DTZ Debenham Thorpe Research; IPD; SPR; the RICS; Estates Gazette; and Kogan Page Limited. Every effort has been made to trace all the copyright-holders, but if any have been inadvertently overlooked the publishers will be pleased to make the necessary arrangement at the first opp ortunity. xii

13 List of Abbreviations ASB ALC ALPTs Amt 1 APT APUTs ASF ARY BCIS BPF CAPM CML COV CSO DAV DCF DEFRD DF DHSS DSS DoE DTI EBIT ENPV ER ERP ERV ENPV EU EUV FRI FTSE GDO GLC GRC HITs HP IPD IPF IRFY IRR ISVA Accounting Standards Board Agricultural Land Classification Australian Listed PropertyTrusts Amount of 1 Arbitrage Pricing Theory Authorised Property UnitTrusts Annual sinking fund All risks yield Building Cost Information Service British Property Federation Capital Asset Pricing Model Capital market line Covariance Central Statistical Office Defined accounting value Discounted cash flow Deferred Depreciation factor Department of Health and Social Security Department of Social Security Department of the Environment Department oftrade and Industry Earnings before interest and tax Expected net present value Expected return Estimated realisation price Estimated rental value Expected net present value European Union Existing use value Fully repairing and insuring (lease) Financial Times Stock Exchange (index) General Development Order Greater London Council Gross replacement cost Housing InvestmentTrusts Hillier Parker Investment Property Databank Investment Property Forum Inflation risk free yield Internal rate of return Incorporated Society of Valuers and Auctioneers xiii

14 xiv List ofabbreviations JlW L1BOR MAFF MBS MCS MFR MGl MPT MRA MWRR NAY NNAY NPY NRC OEIC OMY OTC PERP PICs PINCs PPG PUTs PY RADR RE REITs RFR RICS SAPCOs S.D. SIB SMl SPOTs SSAPs TWRR WGS YP YRS Jones lang Wootton london Interbank Offered Rate Ministry of Agriculture, Fisheries and Food Mortgage-backed securities Monte Carlo Simulation Minimum funding requirement Morgan Grenfell laurie Modern Portfolio Theory Multi-regression analysis Money-weighted rate of return Net asset value Net net asset value Net present value Net replacement cost Open-ended investment company Open market value Over-the-counter In perpetuity Property Income Cert ificates Property Income Certificates Planning Policy Guidance note Property UnitTrusts Present value Risk-adjusted discount rate Richard Ellis Real Estate InvestmentTrusts Risk-free rate Royal Institution of Chartered Surveyors Single Asset Property Companies Standard deviation Securities and Investment Board Securit ies market line Single Property OwnersHip Trusts Statements of Standard Accounting Practice Time-weighted rate of return Weatherall Green and Smith Years Purchase Years