Preface xiii
Acknowledgements xv
PART A PROPERTY VALUE AND PROPERTY VALUATION 1
1 Microeconomic Concepts 3
1.1 Supply and demand, markets and equilibrium price determination 3
1.2 The property market and price determination 6
1.2.1 Rent for land 6
1.2.2 Land use rents 8
1.2.3 Land use intensity 12
1.3 Location and land use 14
1.4 The economics of property development 22
1.4.1 Type and density of property development 22
1.4.2 The timing of redevelopment 25
Notes 28
References 29
2 Macroeconomic Considerations 31
2.1 The commercial property market 31
2.2 Property occupation 33
2.3 Property investment 34
2.4 Property development 43
2.5 Property and the wider economy 44
References 48
3 What is Property Valuation 49
3.1 Introduction 49
3.2 The need for valuations 50
3.2.1 Types of property to be valued 52
3.2.2 Bases of value 57
3.3 Determinants of value 60
3.3.1 Property-specific factors 60
3.3.2 Market-related factors 66
3.4 Valuation procedures 69
3.4.1 Terms of engagement 71
3.4.2 Inspections and investigations 71
3.4.3 Valuation report 73
3.5 Measurement 73
Appendix - Inspection checklist 76
Notes 81
References 81
4 Valuation Mathematics 83
4.1 Introduction 83
4.2 The time value of money 84
4.2.1 Single period investments 85
4.2.2 Multi-period investments 86
4.2.3 Tax 93
4.3 Yields and rates of return 94
4.3.1 Yields 95
4.3.2 Rates of return 96
4.3.3 Yields and rates of return 98
References 99
PART B VALUATION METHODS 101
5 Comparison Method 103
5.1 Introduction 103
5.2 Sources of data 104
5.3 Comparison metrics 106
5.3.1 Relative value of retail ground floor 'zones 107
5.4 Comparison adjustment 110
References 114
6 Investment Method 115
6.1 Introduction 115
6.2 All-risks yield (ARY) methods 117
6.2.1 Valuation of rack-rented freehold property investments 117
6.2.2 Valuation of reversionary freehold property investments 119
6.2.3 Valuation of leasehold property investments 127
6.2.4 Example: ARY Investment method 134
6.3 Discounted cash-flow (DCF) methods 135
6.3.1 A discounted cash-flow valuation model 136
6.3.2 Applying the DCF valuation model 142
Notes 157
References 157
Further reading 158
7 Profits Method 161
7.1 Introduction 161
7.2 Method 162
7.3 Example of a profits method valuation 166
7.4 Summary 169
Notes 170
References 170
8 Replacement Cost Method 171
8.1 Introduction 171
8.2 Method 172
8.3 Application 178
8.3.1 Valuation of an owner-occupied property for accounts purposes 178
8.3.2 Valuation for insurance purposes 178
8.4 Issues 178
8.4.1 Definitional problems 179
8.4.2 Methodological problems 181
8.5 Summary 184
Notes 185
References 186
9 Residual Method 187
9.1 Introduction 187
9.2 Conventional residual land valuation 188
9.3 Problems with the residual method 199
9.4 Cash-flow residual model 202
References 206
10 Automated Valuation Models and Computer-Assisted Mass Appraisal 207
10.1 Introduction 207
10.2 Method 207
10.2.1 Simple linear regression (dependence of one metric variable on another) 208
10.2.2 Multiple linear regression (dependence of one variable on two or more variables) 211
10.3 Example 215
10.3.1 Data 215
10.3.2 Descriptive statistics 216
10.3.3 Simple linear regression 216
10.3.4 Multiple linear regression 220
10.4 Multiple regression analysis: Research and applications 226
10.4.1 Computer-assisted mass appraisal 228
10.4.2 Automated valuation models 229
10.5 Advantages and disadvantages of regression-based valuation 230
Notes 231
References 231
PART C VALUATION APPLICATIONS 233
11 Lease Pricing 235
11.1 Introduction 235
11.2 Lease incentives 236
11.2.1 Rent-free periods 237
11.2.2 Capital contributions 241
11.2.3 Premiums and reverse premiums 242
11.3 Alternative lease arrangements 246
11.3.1 Stepped rents 246
11.3.2 Turnover rents 247
11.3.3 Short leases and leases with break options 249
11.4 Valuations at rent review, lease renewal and lease end 252
11.4.1 Rent reviews 252
11.4.2 Surrender and renewal of leases 253
11.4.3 Compensation for disturbance and improvements 255
11.4.4 Example 1 256
11.4.5 Example 2 259
Notes 262
References 263
12 Valuations for Financial Statements and for Secured Lending Purposes 264
12.1 Valuing property for financial statements 264
12.1.1 Financial reporting standards and valuation bases 265
12.2 Methods of valuing property assets for financial reporting purposes 272
12.2.1 Example valuations 274
12.3 Valuations for lending purposes where the loan is secured against commercial property 279
12.3.1 Example 281
Notes 285
References 286
13 Valuations for Taxation Purposes 287
13.1 Capital gains tax and corporation tax 287
13.1.1 Grant of a long lease out of a freehold or long leasehold interest 294
13.1.2 Grant of a short lease out of a freehold or long leasehold interest 295
13.1.3 Grant of a short lease out of a short leasehold interest 296
13.2 Inheritance tax 297
13.3 Business rates 299
13.3.1 Rental comparison 302
13.3.2 Profits method 303
13.3.3 Contractors method 304
Note 306
References 306
14 Valuations for Compulsory Purchase and Compensation 307
14.1 Compensation for land taken (compulsorily acquired) 308
14.2 Compensation for severance and injurious affection 311
14.2.1 Compensation where part of an owners land is acquired 311
14.2.2 Compensation where no land is taken 314
14.3 Disturbance compensation 315
14.3.1 Case study 316
14.4 Planning compensation 317
14.4.1 Revocation, modification and discontinuance orders 318
14.4.2 Purchase notices and blight notices 318
14.5 A note on CGT and compensation for compulsory acquisition 319
Notes 320
References 321
15 Specialist Valuations 322
15.1 Operational entities or 'trade-related properties 322
15.1.1 Hotels, guest houses, bed & breakfast and self-catering accommodation 322
15.1.2 Restaurants, public houses and nightclubs 324
15.1.3 Care homes 328
15.1.4 Petrol filling stations 330
15.1.5 Student accommodation 331
15.1.6 Serviced offices 332
15.1.7 Data centres 335
15.2 Valuation of contaminated land 335
15.3 Synergistic value 339
15.3.1 Physical merger 339
15.3.2 Legal merger 339
15.4 Special Purpose Valuations 340
15.4.1 Charitable Valuations 340
15.4.2 Local authority disposals of land for less than best consideration 341
Notes 341
References 342
16 Investment Valuations - Further Considerations 343
16.1 Short leases and leases with break clauses 343
16.2 Over-rented property investments 346
16.3 Valuation accuracy, variance and uncertainty 349
16.3.1 Valuation accuracy 349
16.3.2 Valuation variance 350
16.3.3 Valuation uncertainty 352
16.3.4 Sensitivity analysis 353
16.3.5 Scenario testing and discrete probability modelling 356
16.3.6 Continuous probability modelling and simulation 359
16.3.7 Arbitrage (tenant yield approach) 363
Notes 368
References 369
PART D APPRAISAL 371
17 Investment Appraisal 373
17.1 Introduction 373
17.2 Appraisal information and assumptions 375
17.2.1 Rent and rental growth 375
17.2.2 Target rate of return 377
17.2.3 Holding period 380
17.2.4 Exit value 381
17.3 Appraisal methodology 381
17.3.1 Payback method 381
17.3.2 Yield 382
17.3.3 DCF methods of investment appraisal 383
17.3.4 Example 393
17.4 Risk analysis in property investment appraisal 395
17.5 Financing property investment 398
Notes 401
References 401
18 Development Appraisal 403
18.1 Introduction 403
18.2 Conventional residual profit appraisal 403
18.2.1 Profit as a percentage of cost 405
18.2.2 Development yield 406
18.2.3 Criticisms 406
18.3 Cash-flow profit appraisal 408
18.3.1 Criticisms 412
18.4 Development risk 413
18.4.1 Risk analysis 414
18.4.2 Risk management 427
18.5 Development finance 429
18.5.1 Borrowers of development finance 429
18.5.2 Type of finance 430
18.5.3 Sources of development finance 431
18.5.4 Duration of funding 432
18.5.5 Typical development finance structures 433
18.5.6 Gearing 439
18.5.7 Risk management in property financing 439
18.5.8 Finance accounting 441
18.5.9 Sales revenue 444
Notes 452
References 453
Glossary 454
Index 460.
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