Property Investment Appraisal

1. Property Investment Appraisal in its Context 1.1 What is appraisal? 1.2 The appraisal process 1.3 What makes a good appraisal? 1.3.1 Accuracy, bias, smoothing and lagging of valuations 1.3.2 Client Influence on valuations 1.4 Conventional and discounted-cash-flow approaches to appraisal 2. Principles of Investment Analysis 2.1 Introduction 2.2 Types of investments 2.2.1 Cash deposits 2.2.2 Fixed-interest securities 2.2.3 Index-linked securities 2.2.4 Ordinary shares (equities) 2.2.5 Property 2.2.6 Summary of investment types 2.3 Qualities of investments 2.3.1 Income and capital growth 2.3.2 Operating expenses 2.3.3 Liquidity, marketability and transfer costs 2.3.4 Real options 2.3.5 Leverage 2.3.6 Tax efficiency 2.4 Sources of risk 2.5 Comparing investments: NPV and IRR 2.6 Initial yield analysis and construction 2.7 Summary 3. The DCF Appraisal Model 3.1 The cash flow model 3.2 The inputs 3.2.1 The holding period 3.2.2 The lease and lease events 3.2.3 Depreciation, refurbishment and redevelopment 3.2.4 Forecasting rental growth 3.2.5 The resale price 3.2.6 Exit Capitalisation rate 3.2.7 Expenses 3.2.8 Void allowances 3.2.9 Transaction costs 3.2.10Taxes 3.2.11Debt finance 3.3 The discount rate 3.3.1 The risk free rate 3.3.2 The risk premium 3.4 Examples 3.5 Summary Part Two Market Valuation Models 4. The Evolution of Freehold Market Valuation Models 4.1 Introduction 4.2 The evolution of conventional techniques 4.2.1 The changing perception of investors 4.2.2 Historical application of the basic valuation model 4.3 Rationale of the pre-1960 appraisal approach 4.4 The post-1960 conventional market valuation model 4.4.1 The fully let freehold 4.4.2 The reversionary freehold 4.4.3 Over-rented properties 4.5 Conclusion 5. Contemporary Freehold Market Valuations 5.1 Introduction 5.2 Analysing transactions 5.2.1 Implied rental growth rate analysis 5.2.2 Calculation of the implied rental growth rate 5.2.3 Implied Target Rate Analysis 5.3 Full Explicit and Short-cut DCF valuation models 5.3.1 Introduction 5.3.2 An explicit cash-flow model including short cut DCF 5.3.3 DCF by Formula 5. 4 Alternatives to DCF 5.4.1 Introduction 5.4.2 Real value 5.4.3 Arbitrage model 5.5 Reversionary Freehold Valuations 5.5.1 Analysis of transactions 5.5.2 Short Cut DCF 5.5.3 Real Value 5.5.4 Arbitrage. 5.6 Over-rented contemporary model valuations 5.6.1 Analysis of transactions 5.6.2 Short Cut DCF 5.6.3 Real Value 5.6.4 Arbitrage 5.7 Summary 6. Freehold Market Valuations - Applications 6.1 Introduction 6.2 Analysis of Transactions 6.3 Rack Rented or Vacant Property Investments. 6.4 Two-stage reversionary freeholds 6.4.1 Basic two stage reversionary freeholds 6.4.2 Long reversions 6.4.3 Over-rented properties 6. 5 More complex reversionary freeholds 6.5.1 Lease events 6.4.2 Alternative review forms: indexation and fixed increases 6.4.3 Summary 6.5 Comparing conventional and contemporary techniques 6.5.1 Defending conventional techniques 6.5.2 Target-Rate Choice 6.5.3 Fully let freeholds: contemporary versus conventional valuations 6.5.4 Reversionary freeholds contemporary versus conventional valuations 6.6 Taxation and market valuation 6.7 Conclusions 7. Leasehold Valuations 7.1 Introduction 7.2 The evolution of conventional leasehold valuations. 7.3 Contemporary Leasehold Valuations 7.3.1 Fixed leasehold profit rents 7.3.2 Geared leasehold profit rents Reviewable rent received, fixed rent paid 7.4 Conventional versus contemporary techniques 7.7 Conclusions 8. Measurement and Pricing of Risk in Appraisals 8.1 Introduction 8.2 Nature and sources of risk 8.3 Measuring risk 8.3.1 Risk-adjusted discount rate 8.3.2 Sensitivity analysis 8.3.2 Scenarios 8.3.3 Simulations 8.4 Risk Pricing 8.4.1 Assessing the risk premium 8.4.2 Certainty-equivalent cash flows 8.5 Summary 9. Development Appraisal 9.1 Introduction 9.2 Valuation Methods 9.2.1 Basic Residual Method 9.2.2 Discounted Cash Flow Residual Method 9.3 Developers profit 9.4 Changes in costs and values and phasing of developments 9.5 Finance 9.6 Conclusion 10. Bank Lending Appraisals 10.1 Introduction 10.2 Market Value 10.3 Mortgage Lending Value 10.4 Investment value. 10.5 Illustration of the three approaches 10.6 Performance of the three valuation bases over the last two property market downturns in the UK 11. Conclusions Bibliography Index