Introducing Property Valuation Michael Blackledge Routledge Taylor & Francis Group LONDON AND NEW YORK
Illustrations Cases Acknowledgements Disclaimers x xii xiv xv 1: Background 1 Economic context 3 1.1 Why is a valuation needed? 3 1.2 What types of property value are there? 4 1.3 Important terms and concepts: value, price, worth, cost and market value 5 1.4 Supply and demand as determinants of price and value 8 1.5 Land use principles 11 1.6 The investment and property markets 14 1.7 Taxation and its effects 15 1.8 Influence of town and country planning legislation and policies on property values 16 The property valuation profession 20 2.1 Skills required by and role of the property valuer 20 2.2 Who may require the services of a valuer?. 23 2.3 Difference between a valuation and a building survey 24 2.4 The level of accuracy expected of the valuer 26 2.5 Independence of the valuer 28 2.6 The role of the Royal Institution of Chartered Surveyors (RICS) as a regulatory and unifying body for the profession 28
vi Contents 2.7 The RICS professional groups ' 29 2.8 RICS information resources 29 2.9 International dimensions of the profession 30 2.10 Likely future developments including Automated Valuation Models (AVMs) 31 3 Investment 34 3.1 Types of investment 34 3.2 Types of investor 46 3.3 Nominal and real returns on investments 46 3.4 The 'ideal' investment v ~~" 48 3.5 Risk and yields 49 3.6 The reverse yield gap 51 3.7 Real property as an investment 52 3.8 Investment evaluation and selection 53 3.9 Methods of purchase and sale 57 Part 2: Valuation mathematics 63 4 Compounding and discounting 65 4.1 Simple interest 65 4.2 Compound interest 66 4.3 'Traditional' annually in arrear tables and formulae 68 4.4 Use of calculators and computers 69 4.5 The concepts of compounding and discounting 70 4.6 All risks yields (ARYs) and implied risk/growth allowances 71 4.7 Amount of 1 calculations 73 4.8 Present Value of 1 calculations 73 4.9 Amount of 1 per annum calculations 74 5 Sinking funds and mortgages 78 5.1 Role and relevance of sinking funds 78 5.2 Calculation of sinking funds 79 5.3 Effects of tax and adjustments made 80 5.4 Sinking funds and leaseholds 82 5.5 Mortgages and their repayment calculations 82 6 Capitalisation 88 6.1 Income flows and capital sums 88 6.2 Years purchase in perpetuity 91 6.3 Single rate years purchase for a number of years 92 6.4 Years purchase of a reversion to perpetuity 93 6.5 Years purchase (single rate) deferred 94 6.6 Remunerative and accumulative rates of interest in leasehold valuations 95 6.7 Years purchase dual rate for a number of years 96 6.8 Dual rate years purchase (tax adjusted) 97
Contents vii 6.9 Deferment of dual rate years purchase 99 6.10 Life tables and years purchases based on them 100 7 Alternative valuation tables and formulae 103 7.1 Background and historical development 103 7.2 Annually in advance calculations 106 7.3 Income in advance or in arrear and not receivable annually 106 7.4 Quarterly in advance dual rate tax adjusted years purchases 108 7.5 Rose's Tables 109 7.6 Bowcock's Tables ^ _- 109 7.7 Donaldsons'Investment Tables 110 7.8 Practical effects of using alternative tables and formulae 110 Part 3: Valuation methods 115 8 Methods of measurement 117 8.1 s Overview of RICS Code of Measuring Practice 117 8.2 Gross external area (GEA) 121 8.3 Gross internal area (GIA) 122 8.4 Net internal area (NIA) 122 9 RICS valuation standards: The Red Book 124 9.1 Valuation Standards and Guidance Notes 124 9.2 Valuation Information Papers 128 9.3 Form and content of valuation reports 129 9.4 Loan valuations 131 10 Comparison method 133 10.1 Basis of method 133 10.2 Units of comparison and application of the method to the various property types 137 10.3 Property market evidence and information sources 176 10.4 Making qualitative and quantitative adjustments to comparable evidence 180 10.5 Methods of assessing market rent 184 10.6 Assessing ground rents 186 10.7 Indexed rents 187 10.8 Annual equivalents 188 11 Investment method: traditional 192 11.1 Basis of method 192 11.2 Valuation layout 197 11.3 Choice of all risks yield 198 11.4 Differences between freehold and leasehold all risks yields 199 11.5 Initial yields 199 11.6 Reversionary yields, 201
viii Contents 11.7 Equivalent yields 201 11.8 Equated yields 201 11.9 Analysis of a property yield 202 11.10 Term and reversion valuations using the 'block income' approach 204 11.11 From term and reversion with differential yields to equivalent yield approach 209 11.12 'Hardcore' or 'layer' approach 215 11.13 Gross versus net of tax calculations and effects of tax on leasehold valuations 222 11.14 Different types of lease repairing-and insuring terms and effects of property outgoings on net rental income 225 12 Investment method: discounted cash flow 240 12.1 Discounted cash flow methods 240 12.2 Use of computer spreadsheets and other software 244 N 12.3 Future property rental and capital growth 245 12.4 Equated yield and implied rental growth formulae 250 12.5 Application of the method to property investments, including holding period and exit yield 251 12.6 DCF method compared with 'traditional' property valuation methods 257 12.7 'Short-cut'freehold DCF valuations 259 12.8 Leasehold DCF valuations 260 12.9 Combining the methods in a single valuation appraisal: block income, layer, equivalent yield and equated yield/dcf approaches 263 13 Residual method 269 13.1 Basis of method and when used 269 13.2 Simple and more complex methods 280 13.3 Reliability and limitations of method 286 14 Profits method 289 14.1 Basis and variations of method and when used 289 14.2 Reliability and limitations of method 297 14.3 Turnover rents and leases 303 15 Cost methods 308 15.1 Basis of cost methods and when used 308 15.2 Age, obsolescence and depreciation 310 15.3 Format and content of calculations 313 15.4 Costs in use 317 Part 4 Applied valuations 319 16 Landlord and tenant valuations 321 16.1 Calculation of a premium on the grant of ajease at a reduced rent 322
Contents ix 16.2 Capital payment on assignment of a lease 324 16.3 Lease surrender and renewals 324 16.4 Premium on variation of a condition of a lease 332 16.5 Sale and leaseback 333 16.6 Marriage valuations 335 16.7 Divorce valuations 342 16.8 Effect of improvements and restrictive user clauses on valuations 343 16.9 Constant rent 348 16.10 Rental equivalent on an annual tenancy 352 16.11 Problems with leasehold valuations, including double sinking fund error theory and relevance of 'dual rate' calculations 353 16.12 'Reverse premiums' 357 16.13 Lease inducements 358 16.14 Virtual or equivalent rent and valuation analysis of lease inducements 359 16.15 The problem of overrented property and its valuation 362 Bibliography 372 Index 383