Introducing Property Valuation Second edition Michael Blackledge Routledge R Taylor & Francis Croup LONDON AND NEW YORK
I Contents List of illustrations List ofcases Acknowledgements Disclaimers x xiii xv xvi Part 1: Background 1 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 9 1.5 Land use principles 11 1.6 The Investment and property markets 15 1.7 Taxation and its effects 16 1.8 Influenae of Town and Country Flanning legislation and policies on property values 17 2 The property valuation profession 23 2.1 Skills required by and role of the property valuer 23 2.2 Who may require the services of a valuer? 26 2.3 Difference between a valuation and a building survey 27 2.4 The level of accuracy expected of the valuer 29 2.5 Reflecting uncertainty in valuations for Investment purposes 32 2.6 Independence of the valuer 33
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: www.isurv.com 2.11 International dimensions of the profession 2.12 Automated valuation models (ÄVMs) 2.13. Sustainability and property valuation 34 34 35 35 36 37 38 3 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 46 46 59 59 61 63 64 65 67 72 79 81 81 82 84 85 86 86 88 90 91 96 96 97 98 100 101 107 107 109 111
Contents vii 6.4 Years purchase of a reversion to perpetuity 113 6.5 Years purchase (single rate) deferred 113 6.6 Remunerative and accumulative rates of interest in leasehold valuations 115 6.7 Years purchase dual rate for a number of years 115 6.8 Dual rate years purchase (tax adjusted) 116 6.9 Deferment of dual rate years purchase 118 6.10 Life tables and years purchases based on them 119 7 Alternative valuation tables and formulae 122 7.1 Background 122 7.2 Annually in advance calculations 125 7.3 Historical development of alternative property valuation tables and impact on current Barry's Tables 125 7.4 Income in advance or in arrear and not receivable annually 127 7.5 Quarterly in advance dual rate tax adjusted years purchases 128 7.6 Practical effects of using alternative tables and formulae 129 Part 3: Valuation metbods 133 8 Methods of measurement 135 8.1 RICS Property Measurement and International Property Measurement Standards (IPMS) 135 8.2 Gross External Area (GEA) 140 8.3 Gross Internal Area (GIA) 141 8.4 Net Internal Area (NIA) 141 8.5 Converting from metric to imperial or imperial to metric measurements 141 9 Valuation Standards 144 9.1 International Valuation Standards (IVS) 144 9.2 RICS Valuation - Professional Standards (the 'Red Book') 146 9.3 RICS Information Papers and Guidance Notes 149 9.4 Form and content of valuation reports 150 10 Comparison method or market approach 155 10.1 Basis of method 155 10.2 Units of comparison and application of the method to the various property types 159 10.3 Property market evidence and Information sources 209 10.4 Making qualitative and quantitative adjustments to comparable evidence 213 10.5 Weighting of comparable evidence 218 10.6 Methods of assessing market rent 220 10.7 Assessing ground rents 222 10.8 Indexed rents 224 10.9 Annual equivalents 225
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 11.10 Term and reversion valuations using the 'block income' approach 11.11 From term and reversion with differential yields to equivalent yield approach 11.12 'Hardcore' or 'layer' approach 11.13 Gross versus net of tax calculations and effects of tax on leasehold valuations 11.14 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 232 232 238 239 241 241 241 243 243 244 245 252 258 266 270 288 288 293 299 299 303 309 310 312 315 327 327 343 344 344 354 354 355 365 371
Contents ix 15 Costapproach 378 15.1 Cost approach to valuation 378 15.2 Basis of cost methods and when used 380 15.3 Age, obsolescence and depreciation 381 15.4 Format and content of cost approach calculations 385 15.5 Costsinuse 389 15.6 Valuation of intangible assets 390 Part 4: Applied valuations 39S 16 Landlord and tenant valuations 397 16.1 Calculation of a premium on the grant of a lease at a reduced rent 398 16.2 Capital payment on assignment of a lease 400 16.3 Lease surrender and renewals 401 16.4 Premium on Variation of a condition of a lease 412 16.5 Sale and leaseback 414 16.6 Synergistic or 'marriage' valuations 416 16.7 'Divorce' valuations 427 16.8 Effect of improvements and restrictive user clauses on valuations 429 16.9 Equivalent or constant rent 434 16.10 Rental equivalent on an annual tenancy 438 16.11 Problems with leasehold valuations, including double sinking fund error theory and relevance of 'dual rate' calculations 440 16.12 'Reverse' premiums 445 16.13 Lease incentives or inducements 445 16.14 Effective rent and valuation analysis of lease incentives 446 16.15 The problem of over-rented property and its valuation 452 17 Loan and asset valuations 467 17.1 Loan valuations 467 17.2 Asset valuations for accounting purposes 470 Index 474