Reversionary freehold valuations by spreadsheet: introducing flexibility

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 25 April 2008

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.:

  • 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)

Nick French