Introducing. Property. Valuation. Second edition. Michael Blackledge. Routledge R Taylor & Francis Croup LONDON AND NEW YORK

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1 Introducing Property Valuation Second edition Michael Blackledge Routledge R Taylor & Francis Croup LONDON AND NEW YORK

2 I Contents List of illustrations List ofcases Acknowledgements Disclaimers x xiii xv xvi Part 1: Background 1 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 Influenae of Town and Country Flanning legislation and policies on property values 17 2 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 Reflecting uncertainty in valuations for Investment purposes Independence of the valuer 33

3 vi Contents 2.7 The role of the Royal Institution of Chartered Surveyors (RICS) as a regulatory and unifying body for the profession 2.8. The Valuer Registration Scheme 2.9 The RICS 'professional groups' 2.10 The RICS Information resource: International dimensions of the profession 2.12 Automated valuation models (ÄVMs) Sustainability and property valuation Investment 3.1 Types of Investment 3.2 Types of Investor 3.3 Nominal and real returns on Investments 3.4 The 'ideal' Investment 3.5 Risk, reward and yields 3.6 The reverse yield gap 3.7 Real estate as an Investment 3.8 Investment evaluation and selection 3.9 Methods of purchase and sale Part 2: Valuation matbematics 4 Compounding and discounting 4.1 Simple interest 4.2 Compound interest 4.3 'Traditional' annually in arrear tables and formulae 4.4 Use of calculators and Computers 4.5 The concepts of compounding and discounting 4.6 'All risks yields' (ARYs) and implied risk/growth allowances 4.7 Amount of 1 calculations 4.8 Present value of 1 calculations 4.9 Amount of 1 per annum calculations 5 Sinking funds and mortgages 5.1 Role and relevance of sinking funds 5.2 Calculation of sinking funds 5.3 Effects of tax and adjustments made 5.4 Sinking funds and leaseholds 5.5 Mortgages, loans and their repayment calculations 6 Capitalisation 6.1 Income flows and capital sums 6.2 Years purchase in perpetuity 6.3 Single rate years purchase for a number of years

4 Contents vii 6.4 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) Deferment of dual rate years purchase Life tables and years purchases based on them Alternative valuation tables and formulae Background Annually in advance calculations Historical development of alternative property valuation tables and impact on current Barry's Tables Income in advance or in arrear and not receivable annually Quarterly in advance dual rate tax adjusted years purchases Practical effects of using alternative tables and formulae 129 Part 3: Valuation metbods Methods of measurement RICS Property Measurement and International Property Measurement Standards (IPMS) Gross External Area (GEA) Gross Internal Area (GIA) Net Internal Area (NIA) Converting from metric to imperial or imperial to metric measurements Valuation Standards International Valuation Standards (IVS) RICS Valuation - Professional Standards (the 'Red Book') RICS Information Papers and Guidance Notes Form and content of valuation reports Comparison method or market approach 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 Weighting of comparable evidence Methods of assessing market rent Assessing ground rents Indexed rents Annual equivalents 225

5 Contents Investment method or income approach: traditional 11.1 Basis of method 11.2 Valuation layout 11.3 Choice of all risks yield 11.4 Differences between freehold and leasehold all risks yields 11.5 Initial yields 11.6 Reversionary yields 11.7 Equivalent yields 11.8 Equated yields 11.9 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 or income approach: discounted cash flow 12.1 DCF methods 12.2 Use of Computer spreadsheets and other Software 12.3 Future property rental and capital growth 12.4 Equated yield and implied rental growth formulae 12.5 Application of the method to property Investments, including holding period and exit yield 12.6 DCF method compared with 'traditional' property valuation methods 12.7 'Short-cut' freehold DCF valuations 12.8 Leasehold DCF valuations 12.9 Combining the methods in a single valuation appraisal: block income, layer, equivalent yield and equated yield/dcf approaches Residual method 13.1 Basis of method and when used 13.2 Reliability and limitations of method 13.3 Simple methods and use of Software 13.4 Overview of more complex approaches including discounted cash flow, sensitivity analysis, probability and 'Monte Carlo' Simulation Profits method 14.1 Valuation of individual trade-related properties 14.2 Basis and variations of profits or 'receipts and expenditure' method and when used 14.3 Reliability and limitations of method 14.4 Turnover rents and leases

6 Contents ix 15 Costapproach Cost approach to valuation Basis of cost methods and when used Age, obsolescence and depreciation Format and content of cost approach calculations Costsinuse Valuation of intangible assets 390 Part 4: Applied valuations 39S 16 Landlord and tenant valuations Calculation of a premium on the grant of a lease at a reduced rent Capital payment on assignment of a lease Lease surrender and renewals Premium on Variation of a condition of a lease Sale and leaseback Synergistic or 'marriage' valuations 'Divorce' valuations Effect of improvements and restrictive user clauses on valuations Equivalent or 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 incentives or inducements Effective rent and valuation analysis of lease incentives The problem of over-rented property and its valuation Loan and asset valuations Loan valuations Asset valuations for accounting purposes 470 Index 474

Introducing Property Valuation

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