The Income Approach to Property Valuation

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When appraising complex property, or property which has a risk-adjustment due to unusual factors e.


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If either cash flows or risk levels are expected to change, then direct capitalization fails and a discounted cash flow method must be used. In UK practice, Net Income is capitalised by use of market-derived yields. If the property is rack-rented then the All Risks Yield will be used.

Income Approach to Value & Overhead

In essence, these entail discounting the different income streams - that of the current or passing rent and that of the reversion to the full rental value - at different adjusted yields. However, capitalization rate inherently includes the investment-specific risk premium. Each investor may have a different view of risk and, therefore, arrive at a different capitalization rate for a given investment.

What is the Income Approach to Valuation?

The relationship becomes clear when the capitalization rate is derived from the discount rate using the build-up cost of capital model. The two are identical whenever the earnings growth rate equals 0. The Discounted cash flow model is analogous to net present value estimation in finance.


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The Cap rate equals the discount rate plus-or-minus a factor for anticipated growth. The NOI may be used if market value is the goal, but if investment value is the goal, then some other measure of cash flow is appropriate.

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The GRM is simply the ratio of the monthly or annual rent divided into the selling price. If several similar properties have sold in the market recently, then the GRM can be computed for those and applied to the anticipated monthly rent for the subject property. GRM is useful for rental houses, duplexes, and simple commercial properties when used as a supplement to other more well developed methods.

The RICS have encouraged use of the method in appropriate circumstances. In the Short-cut DCF, the passing rent, which is constant in nominal or real terms for the duration of the rent period, is discounted at an appropriate rate of return possibly derived by reference to the risk-free rate of return obtained on government bonds, to which is added an allowance for risk and an allowance for the illiquidity of property assets.

The Income Approach to Property Valuation : David Mackmin :

The reversion is discounted at the market-derived All Risks Yield ARY , which correctly implies growth in the reversionary income stream. The Income Approach: Freeholds 6.

The Income Approach: Leaseholds 7. The Income Approach: Taxation and Valuation 8.

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Landlord and Tenant Valuations And Negotiations 9. The Effects of Legislation Development Opportunities Profits Approach for Trade Related Properties Investment Analysis show more. Review quote "The sixth edition builds upon its solid foundations as a principle and well-established property valuation textbook for both students and practioners alike. It covers all aspects of investment valuation and makes good use of worked examples to aid the understanding of this complex subject. This edition is further improved with a more detailed explanation together with examples of the Profits Method which has been compiled by a leisure sector specialist and thus gives the book a more rounded feel.

Just buy this book, you will not regret it. Nick Nunnington is Head of Business Development, specialising in corporate real estate and property asset management at Sheffield Hallam University. Rating details. Book ratings by Goodreads.

The Income Approach to Property Valuation

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