Citation
French, N. (2008), "Reversionary freehold valuations by spreadsheet: introducing flexibility", Journal of Property Investment & Finance, Vol. 26 No. 3. https://doi.org/10.1108/jpif.2008.11226cab.001
Publisher
:Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Reversionary freehold valuations by spreadsheet: introducing flexibility
Introduction
In the previous article in this series (Vol. 25 No. 3), I looked at the construction of a flexible valuation spreadsheet model to value a rack-rented property by an implicit and explicit method. I will now amend that model to capture changes in the explicit method when the property is reversionary.
The example
I will amend the example in the previous article. The existing information applies but instead of the property being rack rented, it is reversionary. Thus I need to add the extra reversionary information in addition to the existing information, i.e.:
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market rent: £1m;
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all risk yield (equivalent yield): 8 per cent;
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target rate (equated yield): 10.75 per cent;
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rent review: five years; and
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calculated annual growth: 3.2 percent
Assuming that the property has a passing rent of £750,000 for the next three years, we now have the additional information of:
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rent passing: £750,000; and
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term: three years.
We can therefore amend our INPUT/OUTPUT page as shown in Figure 1 (changes are shown in bold). The existing DCF model can be amended with a few simple changes:
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the first period is for the term, not the rent review;
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the YP for the first period is for the term, not the rent review; and
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the trigger for the “perp” should reflect the point at which the number above equals the lease length minus the years gone. This is ll−(rr−t).
All these changes are shown in bold in Figures 2 and 3.
Figure 1 Spreadsheet input/output page (showing formulae)
Figure 2 Spreadsheet DCF method (years columns as hidden formulae)
Figure 3 Flexible (years columns 3 to 7 as hidden formulae)
Nick French