Property Valuation

Peter Wyatt is a Chartered Valuation Surveyor who has conducted extensive teaching, consultancy and research in land management and valuation.  Currently Director of Undergraduate Programmes for Real Estate & Planning at the University of Reading, he has developed and delivered national and international university programmes at all levels, has published widely in leading real estate journals and has published two text books.  Dr Wyatt has been involved with and lead national, European and international real estate research projects.  Recent projects have investigated the way in which key attributes of the domestic and non-domestic building stock affect value; in particular energy consumption, environmental labelling and public transport accessibility.  Ongoing work with UK Government is investigating the theory and practice of development viability appraisal in planning policy, focusing on the issue of development value and planning gain.

• Preface xiiiAcknowledgements xvPART A PROPERTY VALUE AND PROPERTY VALUATION 11 Microeconomic Concepts 31.1 Supply and demand, markets and equilibrium price determination 31.2 The property market and price determination 61.2.1 Rent for land 61.2.2 Land use rents 81.2.3 Land use intensity 121.3 Location and land use 141.4 The economics of property development 221.4.1 Type and density of property development 221.4.2 The timing of redevelopment 25Notes 28References 292 Macroeconomic Considerations 312.1 The commercial property market 312.2 Property occupation 332.3 Property investment 342.4 Property development 432.5 Property and the wider economy 44References 483 What is Property Valuation 493.1 Introduction 493.2 The need for valuations 503.2.1 Types of property to be valued 523.2.2 Bases of value 573.3 Determinants of value 603.3.1 Property-specific factors 603.3.2 Market-related factors 663.4 Valuation procedures 693.4.1 Terms of engagement 713.4.2 Inspections and investigations 713.4.3 Valuation report 733.5 Measurement 73Appendix – Inspection checklist 76Notes 81References 814 Valuation Mathematics 834.1 Introduction 834.2 The time value of money 844.2.1 Single period investments 854.2.2 Multi-period investments 864.2.3 Tax 934.3 Yields and rates of return 944.3.1 Yields 954.3.2 Rates of return 964.3.3 Yields and rates of return 98References 99PART B VALUATION METHODS 1015 Comparison Method 1035.1 Introduction 1035.2 Sources of data 1045.3 Comparison metrics 1065.3.1 Relative value of retail ground floor ‘zones’ 1075.4 Comparison adjustment 110References 1146 Investment Method 1156.1 Introduction 1156.2 All-risks yield (ARY) methods 1176.2.1 Valuation of rack-rented freehold property investments 1176.2.2 Valuation of reversionary freehold property investments 1196.2.3 Valuation of leasehold property investments 1276.2.4 Example: ARY Investment method 1346.3 Discounted cash-flow (DCF) methods 1356.3.1 A discounted cash-flow valuation model 1366.3.2 Applying the DCF valuation model 142Notes 157References 157Further reading 1587 Profits Method 1617.1 Introduction 1617.2 Method 1627.3 Example of a profits method valuation 1667.4 Summary 169Notes 170References 1708 Replacement Cost Method 1718.1 Introduction 1718.2 Method 1728.3 Application 1788.3.1 Valuation of an owner-occupied property for accounts purposes 1788.3.2 Valuation for insurance purposes 1788.4 Issues 1788.4.1 Definitional problems 1798.4.2 Methodological problems 1818.5 Summary 184Notes 185References 1869 Residual Method 1879.1 Introduction 1879.2 Conventional residual land valuation 1889.3 Problems with the residual method 1999.4 Cash-flow residual model 202References 20610 Automated Valuation Models and Computer-Assisted Mass Appraisal 20710.1 Introduction 20710.2 Method 20710.2.1 Simple linear regression (dependence of one metric variable on another) 20810.2.2 Multiple linear regression (dependence of one variable on two or more variables) 21110.3 Example 21510.3.1 Data 21510.3.2 Descriptive statistics 21610.3.3 Simple linear regression 21610.3.4 Multiple linear regression 22010.4 Multiple regression analysis: Research and applications 22610.4.1 Computer-assisted mass appraisal 22810.4.2 Automated valuation models 22910.5 Advantages and disadvantages of regression-based valuation 230Notes 231References 231PART C VALUATION APPLICATIONS 23311 Lease Pricing 23511.1 Introduction 23511.2 Lease incentives 23611.2.1 Rent-free periods 23711.2.2 Capital contributions 24111.2.3 Premiums and reverse premiums 24211.3 Alternative lease arrangements 24611.3.1 Stepped rents 24611.3.2 Turnover rents 24711.3.3 Short leases and leases with break options 24911.4 Valuations at rent review, lease renewal and lease end 25211.4.1 Rent reviews 25211.4.2 Surrender and renewal of leases 25311.4.3 Compensation for disturbance and improvements 25511.4.4 Example 1 25611.4.5 Example 2 259Notes 262References 26312 Valuations for Financial Statements and for Secured Lending Purposes 26412.1 Valuing property for financial statements 26412.1.1 Financial reporting standards and valuation bases 26512.2 Methods of valuing property assets for financial reporting purposes 27212.2.1 Example valuations 27412.3 Valuations for lending purposes where the loan is secured against commercial property 27912.3.1 Example 281Notes 285References 28613 Valuations for Taxation Purposes 28713.1 Capital gains tax and corporation tax 28713.1.1 Grant of a long lease out of a freehold or long leasehold interest 29413.1.2 Grant of a short lease out of a freehold or long leasehold interest 29513.1.3 Grant of a short lease out of a short leasehold interest 29613.2 Inheritance tax 29713.3 Business rates 29913.3.1 Rental comparison 30213.3.2 Profits method 30313.3.3 Contractor’s method 304Note 306References 30614 Valuations for Compulsory Purchase and Compensation 30714.1 Compensation for land taken (compulsorily acquired) 30814.2 Compensation for severance and injurious affection 31114.2.1 Compensation where part of an owner’s land is acquired 31114.2.2 Compensation where no land is taken 31414.3 Disturbance compensation 31514.3.1 Case study 31614.4 Planning compensation 31714.4.1 Revocation, modification and discontinuance orders 31814.4.2 Purchase notices and blight notices 31814.5 A note on CGT and compensation for compulsory acquisition 319Notes 320References 32115 Specialist Valuations 32215.1 Operational entities or ‘trade-related’ properties 32215.1.1 Hotels, guest houses, bed & breakfast and self-catering accommodation 32215.1.2 Restaurants, public houses and nightclubs 32415.1.3 Care homes 32815.1.4 Petrol filling stations 33015.1.5 Student accommodation 33115.1.6 Serviced offices 33215.1.7 Data centres 33515.2 Valuation of contaminated land 33515.3 Synergistic value 33915.3.1 Physical merger 33915.3.2 Legal merger 33915.4 Special Purpose Valuations 34015.4.1 Charitable Valuations 34015.4.2 Local authority disposals of land for less than best consideration 341Notes 341References 34216 Investment Valuations – Further Considerations 34316.1 Short leases and leases with break clauses 34316.2 Over-rented property investments 34616.3 Valuation accuracy, variance and uncertainty 34916.3.1 Valuation accuracy 34916.3.2 Valuation variance 35016.3.3 Valuation uncertainty 35216.3.4 Sensitivity analysis 35316.3.5 Scenario testing and discrete probability modelling 35616.3.6 Continuous probability modelling and simulation 35916.3.7 Arbitrage (tenant yield approach) 363Notes 368References 369PART D APPRAISAL 37117 Investment Appraisal 37317.1 Introduction 37317.2 Appraisal information and assumptions 37517.2.1 Rent and rental growth 37517.2.2 Target rate of return 37717.2.3 Holding period 38017.2.4 Exit value 38117.3 Appraisal methodology 38117.3.1 Payback method 38117.3.2 Yield 38217.3.3 DCF methods of investment appraisal 38317.3.4 Example 39317.4 Risk analysis in property investment appraisal 39517.5 Financing property investment 398Notes 401References 40118 Development Appraisal 40318.1 Introduction 40318.2 Conventional residual profit appraisal 40318.2.1 Profit as a percentage of cost 40518.2.2 Development yield 40618.2.3 Criticisms 40618.3 Cash-flow profit appraisal 40818.3.1 Criticisms 41218.4 Development risk 41318.4.1 Risk analysis 41418.4.2 Risk management 42718.5 Development finance 42918.5.1 Borrowers of development finance 42918.5.2 Type of finance 43018.5.3 Sources of development finance 43118.5.4 Duration of funding 43218.5.5 Typical development finance structures 43318.5.6 Gearing 43918.5.7 Risk management in property financing 43918.5.8 Finance accounting 44118.5.9 Sales revenue 444Notes 452References 453Glossary 454Index 460