Introducing Property Valuation

Transcription

1 Introducing Property Valuation Michael Blackledge Routledge Taylor & Francis Group LONDON AND NEW YORK

2 Illustrations Cases Acknowledgements Disclaimers x xii xiv xv 1: Background 1 Economic context Why is a valuation needed? What types of property value are there? Important terms and concepts: value, price, worth, cost and market value Supply and demand as determinants of price and value Land use principles The investment and property markets Taxation and its effects Influence of town and country planning legislation and policies on property values 16 The property valuation profession Skills required by and role of the property valuer Who may require the services of a valuer? Difference between a valuation and a building survey The level of accuracy expected of the valuer Independence of the valuer The role of the Royal Institution of Chartered Surveyors (RICS) as a regulatory and unifying body for the profession 28

3 vi Contents 2.7 The RICS professional groups ' RICS information resources International dimensions of the profession Likely future developments including Automated Valuation Models (AVMs) 31 3 Investment Types of investment Types of investor Nominal and real returns on investments The 'ideal' investment v ~~" Risk and yields The reverse yield gap Real property as an investment Investment evaluation and selection Methods of purchase and sale 57 Part 2: Valuation mathematics 63 4 Compounding and discounting Simple interest Compound interest 'Traditional' annually in arrear tables and formulae Use of calculators and computers The concepts of compounding and discounting All risks yields (ARYs) and implied risk/growth allowances Amount of 1 calculations Present Value of 1 calculations Amount of 1 per annum calculations 74 5 Sinking funds and mortgages Role and relevance of sinking funds Calculation of sinking funds Effects of tax and adjustments made Sinking funds and leaseholds Mortgages and their repayment calculations 82 6 Capitalisation Income flows and capital sums Years purchase in perpetuity Single rate years purchase for a number of years Years purchase of a reversion to perpetuity Years purchase (single rate) deferred Remunerative and accumulative rates of interest in leasehold valuations Years purchase dual rate for a number of years Dual rate years purchase (tax adjusted) 97

4 Contents vii 6.9 Deferment of dual rate years purchase Life tables and years purchases based on them Alternative valuation tables and formulae Background and historical development Annually in advance calculations Income in advance or in arrear and not receivable annually Quarterly in advance dual rate tax adjusted years purchases Rose's Tables Bowcock's Tables ^ _ Donaldsons'Investment Tables Practical effects of using alternative tables and formulae 110 Part 3: Valuation methods Methods of measurement s Overview of RICS Code of Measuring Practice Gross external area (GEA) Gross internal area (GIA) Net internal area (NIA) RICS valuation standards: The Red Book Valuation Standards and Guidance Notes Valuation Information Papers Form and content of valuation reports Loan valuations Comparison method Basis of method Units of comparison and application of the method to the various property types Property market evidence and information sources Making qualitative and quantitative adjustments to comparable evidence Methods of assessing market rent Assessing ground rents Indexed rents Annual equivalents Investment method: traditional Basis of method Valuation layout Choice of all risks yield Differences between freehold and leasehold all risks yields Initial yields Reversionary yields, 201

5 viii Contents 11.7 Equivalent yields Equated yields Analysis of a property yield Term and reversion valuations using the 'block income' approach From term and reversion with differential yields to equivalent yield approach 'Hardcore' or 'layer' approach Gross versus net of tax calculations and effects of tax on leasehold valuations Different types of lease repairing-and insuring terms and effects of property outgoings on net rental income Investment method: discounted cash flow Discounted cash flow methods Use of computer spreadsheets and other software 244 N 12.3 Future property rental and capital growth Equated yield and implied rental growth formulae Application of the method to property investments, including holding period and exit yield DCF method compared with 'traditional' property valuation methods 'Short-cut'freehold DCF valuations Leasehold DCF valuations Combining the methods in a single valuation appraisal: block income, layer, equivalent yield and equated yield/dcf approaches Residual method Basis of method and when used Simple and more complex methods Reliability and limitations of method Profits method Basis and variations of method and when used Reliability and limitations of method Turnover rents and leases Cost methods Basis of cost methods and when used Age, obsolescence and depreciation Format and content of calculations Costs in use 317 Part 4 Applied valuations Landlord and tenant valuations Calculation of a premium on the grant of ajease at a reduced rent 322

6 Contents ix 16.2 Capital payment on assignment of a lease Lease surrender and renewals Premium on variation of a condition of a lease Sale and leaseback Marriage valuations Divorce valuations Effect of improvements and restrictive user clauses on valuations Constant rent Rental equivalent on an annual tenancy Problems with leasehold valuations, including double sinking fund error theory and relevance of 'dual rate' calculations 'Reverse premiums' Lease inducements Virtual or equivalent rent and valuation analysis of lease inducements The problem of overrented property and its valuation 362 Bibliography 372 Index 383