Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Reversionary freehold valuations by spreadsheet: introducing flexibility
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.
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.:
market rent: £1m;
all risk yield (equivalent yield): 8 per cent;
target rate (equated yield): 10.75 per cent;
rent review: five years; and
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:
rent passing: £750,000; and
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:
the first period is for the term, not the rent review;
the YP for the first period is for the term, not the rent review; and
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)